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 only be able to sell 20,000 room-nights that cost on average $50 per room per night to service. you spent $20 million on the hotel in 2009, and your cost of capital is 10%. the current going price to sell the hotel is $15 million. what is your breakeven price?

Answer 1

To solve this problem, first let us calculate for the total cost:

Total cost = Capital cost + Cost of capital

Total cost = $ 20 M + 0.10* $ 20 M

Total cost = $ 22 M

The breakeven point would be the price in which the total earnings is equal to the total cost. Therefore:

$ 15M + 20,000 * X = $ 22 M

Where X is the breakeven price in dollars per room per night

Calculating for X:

20,000 * X = $ 7 M

X = $ 350

Therefore the break even price is $ 350 per room per night.