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 ---------------