A proposed budget inn of 150 guestrooms is scheduled to
open. The occupancy is expected to be 70%. The owner seeks
your advice on pricing. Although he knows that he will modify
your recommendation based on revenue management results, he desires
a minimum target room rate. Determine the required ADR (Average
Daily Rate) from the following information.
Owner investment = $2,000,000
Desired ROI = 20%
Tax rate = 20%
Funds borrowed = $3,000,000
Interest rate = 12% annual
Forecasted annual costs
Fixed charges other than interest = $600,000
Management fees = 5% of room sales
Room department expenses = 25% of room sales.
Undistributed operating expenses = $200,000 + 5% of room
sales