Question

In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 20,000 room-nights, which cost $80 per room per night to service. You spent $30.00 million on the hotel in 2008, and your cost of capital is 20%. The current going price to sell the hotel is $25 million. If the estimated demand is 20,000 room-nights, the break-even price is $ per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)

Answer 1

Answer:

The break-even price is $330

Explanation:

It is important to note that the break-even price is considered as the average avoidable cost. For each room, it is considered as the addition of marginal cost with the annual cost of avoidable capital/room.

The Break-even price is calculated below:

$P^{BE} =$ $25,000,000 × 20% / 20,000 + $80

= $330.

Therefore, the break-even price is $330.