Question:
A 25-room budget motel expects its occupancy next year to be 80 percent. The owners' investment is $402,800. They want an after-tax return on their investment of 15%. Tax rate is 25%. Interest on a long-term mortgage is 10%. Present balance outstanding is $806,400. Depreciation rate on the building is 10% of the present book value of $700,200. Depreciation on the furnishings and equipment is at 20% of the consolidated present book value of $150,400. Other known fixed costs total $141,800 a year. At 80% occupancy rate, the motel's operating expenses, wages, supplies, laundry, etc. are calculated to be $55,400 a year. The motel has other income from vending machines of $5,210 a year.
a. To cover all costs and produce the required net income after tax, what should the motel's average room rate be next year?
b. If the motel operates at 30% double occupancy and has an $8.00 spread between its single and double rates, what will the single- and double-room rates be? Assume only one common room size, all with the same rates.