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Hubbart Formula Approach - Problem Sum

The document outlines a formula approach to determine the appropriate room rate for the Casa Vana Inn, a 260 room property. It lists the total costs of construction and working capital for the inn as $7.75 million, financed with a $5.7 million loan and $3 million from owners. The owners want a 15% annual return on their investment. Additional expenses including taxes, insurance, depreciation, and operating costs are estimated. The formula calculates the required rooms revenue and average room rate needed to cover costs and provide the desired return on investment.

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Gulzar Ahmed
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2K views2 pages

Hubbart Formula Approach - Problem Sum

The document outlines a formula approach to determine the appropriate room rate for the Casa Vana Inn, a 260 room property. It lists the total costs of construction and working capital for the inn as $7.75 million, financed with a $5.7 million loan and $3 million from owners. The owners want a 15% annual return on their investment. Additional expenses including taxes, insurance, depreciation, and operating costs are estimated. The formula calculates the required rooms revenue and average room rate needed to cover costs and provide the desired return on investment.

Uploaded by

Gulzar Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Hubbart Formula Approach - Room Pricing

The Casa Vana Inn, a 260 room property, is projected to cost


$7,500,000 inclusive of land, building, equipment, and furniture.
An additional $250,000 is needed for working capital, bringing the
total cost of construction and opening to $7,750,000. The hotel is
financed with a loan of $5,700,000 at 12% annual interest and
cash of $3,000,000 provided by the owners. The owners desire a
15% annual return on their investment. 75% occupancy is
estimated; thus, 71,175 rooms will be sold during the year (260 x
0.75 x 365). The income tax rate is 40%. Additional expenses are estimated as follows:
Property tax expenses $350,000
Insurance expenses $ 40,000
Depreciation expenses $400,000
Administrative & General expenses $300,000
Data processing expenses $135,000
Human resources expenses $ 75,000
Transportation expenses $ 50,000
Marketing expenses $300,000
Property operation & maintenance expenses $200,000
Energy & related expenses $200,000

The other operated departments income (loses) are estimated as


follows:
Food & Beverage Department $250,000
Telephone department ($50,000)
Rentals & other departments $200,000

The rooms department estimates direct operating expenses to be


$10 per occupied room.

Contd. in Page 2

Illustration:
1
Item Calculation Amount
Desired Net Income: Owners’ Investment X ROI
---------------------------------
Pretax Income = net income
1 – tax rate
Pretax income = -------------
-----------
Pretax income = ------------------
Plus: Interest expense: Principal x interest rate
= interest expense
---------------------------- + ----------------
Income needed before ---------------
Expense & taxes:
Plus: Estimated Dépréciation, ---------- + ---------- + -----------) + -----------------
Property taxes & insurance

Income before fixed charges: --------------------


Plus: Undistributed operating --------------- + ---------------- + ----------------------
expense: (Admin and General --------------- + ---------------- +
Expenses + Data Processing --------------- + ---------------- +
Expenses + HR Expenses + ----------------)
Transportation Expenses +
Marketing Expenses + Property
Operation and maintenance
Expenses + Energy and Related
Expenses)
Required operated depart- -------------------
-ments income
Less: F & B department income (--------------)
Less: Rentals& other department (--------------)
income
Plus: Telephone department loss --------------
Departmental results……… $ (200,000)
excluding rooms.
Rooms department income -----------------

Plus: Rooms department direct (54,750 X $10 = $547,500) ---------------


expense
Required Rooms Revenue ----------------

Divide by number of rooms sold --------------

Required Average Room Rate ---------------

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