Question

An investor recently bought a hotel for € 700,000 and then spent a further € 800,000 on renovations, fixtures, fittings and equipment. The hotel has 60 double-bedded rooms, a bar restaurant, and a leisure facility free for hotel guests. The investor estimates the costs of operating the hotel over a year as follows: Business rates € 160,000 € 25,000 € 60,000 Maintenance and repairs Depreciation of fixtures, fittings and equipment Salaries - assistant managers, bar/restaurant and facility managers Wages-full-time staff Electricity and utilities (includes average variable cost of € 1 per guest per night) Administration (includes average variable cost of € 2 per guest per night) Advertising Part-time reception, bar, kitchen and housekeeping staff (average variable cost per guest per night) Other costs (average variable cost per guest per night) € 150,000 € 140,000 € 67,000 € 114,000 € 40,000 €5 €1 Rooms are let on a half-board basis and the average variable cost per meal served is: m Breakfast Dinner 00 Required: 1. Determine the maximum possible number of guest nights' that the hotel can accommodate a. per night, b. per week, and C. per year (assume a 50-week year and twin-bedded occupation). 2. Identify which costs of operating the hotel you would recognize as: a. fixed costs b. variable costs C. semi variable costs. 3. Determine the total fixed costs of operating the hotel for a period of one year. For your calculation use number of guests as calculated in question 1 (c) 4. Determine the variable cost per 'guest night'. 5. Calculate the number of days before the investor reach the point of break-even. 6. Assume that during the year, the hotel averaged 70% guest capacity and that a fixed room rate at € 45 per guest was charged. How much profit in total did the hotel make over a full year? 7. Assume that the investor is running the hotel in 5 years and with the exact same result every year as calculated in question (6). After this period, the investor sells the hotel for € 1,600,000. Using an interest rate of 5% p.a., calculate a. The projects NPV b. The actual interest rate of the project.

Answer 1

Rooms	60 double bedded
1	Maximum possible guest nights
	per night	60*2	120	guest nights
	per week	60*2*7	840	guest nights
	per year	60*2*7*50	42,000	guest nights
2	Particulars	Type of costs
	Business rates	Fixed
	Maintenance and repairs	Fixed
	Depreciation of fixtures, furnitures and equipments	Fixed
	Salaries	Fixed
	Wages - full time staff	Fixed
	Electricity and utilities	Semi variable
	Administration	Semi variable
	Advertising	Fixed
	Part time reception bar	Variable
	Other costs	Variable
	Meal served	Variable
3	Particulars	Type of costs	Total Amount	Fixed	Variable	Remarks
	Business rates	Fixed	160,000	160,000	-
	Maintenance and repairs	Fixed	25,000	25,000	-
	Depreciation of fixtures, furnitures and equipments	Fixed	60,000	60,000	-
	Salaries	Fixed	150,000	150,000	-
	Wages - full time staff	Fixed	140,000	140,000	-
	Electricity and utilities	Semi variable	67,000	25,000	42,000	(42000 guest nights*1 per guest)
	Administration	Semi variable	114,000	30,000	84,000	(42000 guest nights*2 per guest)
	Advertising	Fixed	40,000	40,000	-
			756,000	630,000	126,000
	Total fixed costs for operating the hotel for ones year is 6,30,000
4	Variable cost per guest night
	Particulars	Variable cost per guest night
	Electricity and utilities	1
	Administration	2
	Part time reception bar	5
	Other costs	1
	Meal served	11
		20
	Variable cost per guest night is 20
5	Assuming selling price of 45
	Contribution per guest night would be	45-20	25
	Break Even number of days		630000/25
	Fixed costs/Contribution per guest night		25200	guest nights
6	70% guest capacity
	42000*70%	29400	guest nights
	Contribution from 29400 guest nights	29400*25	735000
	Less: Fixed costs		630000
	Profit		105000
7	Investment
	One time cost	700,000
	Renovation	800,000
		1,500,000
	PV of Income of 105000 for 5 years
	Years	Cash Inflows	PVIF @ 5%	PV
	1	105000	0.952380952	100000
	2	105000	0.907029478	95238.0952
	3	105000	0.863837599	90702.9478
	4	105000	0.822702475	86383.7599
	5	105000	0.783526166	82270.2475
	5	1600000	0.783526166	1253641.87
				1708236.92
		Less: Initial Investment		1500000
		Net Present value		208236.917
	By hit and tral method, the actual interest rate of the project is 8% (IRR of the project).