Question1 A young entrepreneur is planning to open a budget hotel with a start-u

Question

Question1 A young entrepreneur is planning to open a budget hotel with a start-up capital of RM 300,000. The hotel will have single-bed rooms with an expected rate of RM 80 per room. An average room occupancy rate is about 210 per month. Annual operating expenses for which cover administration, utility and maintenance costs are about RM 80,000. The cash flows will be expected to remain unchanged for the next 10 years. The applicable tax rate is 30% and a total of 10,000 in tax-deductible depreciation are allowed every year a. If he expects the after-tax rate of return is 20%, would his business proposal be economically justifiable? Calculate the payback period if the after-tax rate of return of 20 % is expected. b. C. If the after tax minimum attractive rate of return of 30 % per year is required, what is the new room rate?

Explanation / Answer

Answer for Part A) Answer for Part A) Capital (Initial Cost) 300000 Capital (Initial Cost) 300000 Expected Rate per Room 80 Expected Rate per Room x Occupancy Rate per month per room 210 Occupancy Rate per month per room 210 Revenue per Year 201600 Revenue per Year 2520x Annual Operating Expense 80000 Annual Operating Expense 80000 Net Revenue 121600 Net Revenue 2520x-80000 Depreciation 10000 Depreciation 10000 Profit Before Tax 111600 Profit Before Tax 2520x-90000 Tax Rate 30% Tax Rate 30% Profit After Tax each year 78120 Profit After Tax each year 1764x-63000 Rate 20% Rate 30% Answer for Part b) 30% 1 0.833333333 1 0.833333333 65100 1 0.769230769 2 0.694444444 2 0.694444444 54250 2 0.591715976 3 0.578703704 3 0.578703704 45208.33333 3 0.455166136 4 0.482253086 4 0.482253086 37673.61111 4 0.350127797 5 0.401877572 5 0.401877572 31394.67593 5 0.269329074 6 0.334897977 6 0.334897977 26162.22994 6 0.207176211 7 0.279081647 7 0.279081647 21801.85828 7 0.159366316 8 0.232568039 8 0.232568039 18168.21523 8 0.122589474 9 0.193806699 9 0.193806699 15140.17936 299758.9238 9 0.094299595 10 0.161505583 10 0.161505583 12616.81614 10 0.07253815 4.192472086 327515.9193 3.091539499 PW of Revenue                              327,515.92 Sum of Discounted Revenue equals to Initial Cost after 8 eyars PW of Revenue= (1760x-63000)*(sum of discount factors) PW of Revenue> PW of Cost, hence this project is viable PayBack Period is 8 years PW of Revenue should be equal to cost (1760x-63000)*3.092=300000 x 90.92305657 New Rate is 91

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