The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600mill abou

Question

The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600mill about $800,000 per room, to build. Daily operating expenses average $135 a room if occupied and $80 a room if unoccupied (much of the labor cost of running a hotel is fixed) at an average room rate of $500 a night. A marginal tax of 40%, and a cost of capital of 11%, what year round occupancy rate do the Japanese investors who financed the Grand Hyatt Wailea require to break even in economic terms on their investment over its estimated 40 yr. life? What is the likelihood that this investment will have a positive NPV? Assume that the $450 million expense of building the hotel can be written off straight line over a 30yr period (the other$150 million is for the land which is not depreciable) and that the present value of the hotels terminal value will be $200million

PLEASE SHOW ALL WORKING SO I CAN UNDERSTAND(Also when posting the solution please make sure no wierd symbols like ? or A are attached it makes it impossible to understand and happens when i post the question too)

Explanation / Answer

1. given :

Cost of hotel $ 600 million;

Cost per room = $ 800,000;

Daily espenses

occupied = $135;

un occupied = $ 80;

Average room rate for a night = $ 500;

Marginal tax 40% = $ 200/night;

Cost of capital 11% = $55/night;

total cost of the room for a night = $500;

let r be the occupancy rate per year

revenue generated = $ 500*r ---(1) ;

expenses = 800,000/40 + 135 * r + 80 * (365-r)-----(2) + tax;

for break even revenue generated = expenses;

equatin 1 & 2;

755r = 20000 + 135r + 29200 - 80r + 200r + 55r ;

190r = 49200;

r= 258.9= 259 days ;

% occupancy/year for break even = 70.9 %;

2. NPV

Net present value = Rt/(1+i)^t;

Cash flow per year = 500 *259*40 = 5,180,000;

investment for 40 years = 800,000 + 135*259*40 + 80*106*40+200*259*40 + 55*259*40;

= 5,179,600;

thus the cash flow is more than investment hence it is +ve NPV

Rt = 400;

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.