Jerry is considering building a hotel with a franchise brand. The document provides estimated financial projections for Jerry's new hotel, including construction costs, number of rooms, expenses, revenues, and target investment returns. It then asks to calculate the required average daily room rate (ADR) under different scenarios using the Hubbart room rate formula to meet Jerry's investment return goals.

1. "ickson has been approached by the franchise sales representative of a major hotel chain. The
sales representative is trying to interest Jerry in building one of the franchise brand's fullservice
hotels. Jerry has summarized the hotel's estimated financial projections below:
Jerry's New Hotel
Hotel construction costs
$8,000,000
Number of rooms
200
Mortgage payments
$750,000
Nonoperating expenses
$250,000
Occupancy
60%
Per room expense @ 60% occupancy
$45.00
Undistributed operating expense
$1,000,000

2. F&B operating income
$125,000
All other nonrooms operating income
$50,000
Target investment return
12%
Tax rate
40%
Utilizing the Hubbart room rate formula, what is the room rate required for Jerry to meet his 12%
investment target?
Assume Jerry decided that due to the potentially risky nature of this venture, he required a 15%
(not 12%) return on his investment. What is the room rate required for Jerry to meet this more
aggressive investment target?
Assume that the occupancy rate estimated to be achieved by the franchise sales representative
was 70% and this number was utilized to compute the Hubbart rate (rather than Jerry's more
conservative 60%). What would the sales representative tell Jerry his ADR would have to be to
achieve Jerry's 15% investment goals?
Assume instead that the F&B operating income is estimated at $75,000 per year rather than
$125,000. Using the 15% desired investment return and a 70% occupancy rate, what new room
rate would allow Jerry to meet his investment goals?(Spreadsheet hint: Calculate question (a)
first and type the answer for ADR in the cell provided at the bottom of the spreadsheet. For items
(b), (c), and (d), change only the numbers that are required in each question, and all the other
numbers in the spreadsheet will change accordingly. Then, type the answers for ADR (as you go)
in the cells provided at the bottom of the spreadsheet.)

3. Step 1.
Calculate the hotel's target beforetax net income.
Owner's investment
ROI
AfterTax Net Income

4. AfterTax Net Income
Tax
BeforeTax Net Income

5. Step 2.
Calculate estimated nonoperating expenses.
Mortgage
Other NonOperating Expenses

6. Total NonOperating Expenses
Step 3.
Calculate estimated undistributed operating expenses.

7. Undistributed Operating Expenses
Step 4.
Calculate estimated operated departments income excluding rooms.
F&B Operating Income

8. Other NonRooms Income
Total NonRooms Operating Income
Step 5.
Calculate the operated department income for rooms.

9. BeforeTax Net Income
NonOperating Expenses
Undistributed Operating Expenses
Total NonRooms Operating Income

10. Rooms Operated Department Income
Step 6.
Calculate the estimated rooms department revenues based on estimated occupancy.
Rooms

11. Days in Period
365
Occupancy %
Total Rooms
Total Rooms

12. Expense per Room
Total Room Expenses
Rooms Operated Department Income

13. Total Room Expenses
Rooms Revenue
Step 7.
Calculate the hotel's required ADR.

14. Rooms Revenue
Total Rooms
ADR

15. e.
ADR with 12% ROI
f.
ADR with 15% ROI
g.
ADR with 15% ROI and 70% Occupancy %
h.
ADR with 15% ROI and 70% Occupancy % and $75,000 F&B Operating Income
"
"ickson has been approached by the franchise sales representative of a major hotel chain. The
sales representative is trying to interest Jerry in building one of the franchise brand's fullservice

16. hotels. Jerry has summarized the hotel's estimated financial projections below:
Jerry's New Hotel
Hotel construction costs
$8,000,000
Number of rooms
200
Mortgage payments
$750,000
Nonoperating expenses
$250,000
Occupancy
60%
Per room expense @ 60% occupancy
$45.00
Undistributed operating expense
$1,000,000
F&B operating income
$125,000

17. All other nonrooms operating income
$50,000
Target investment return
12%
Tax rate
40%
Utilizing the Hubbart room rate formula, what is the room rate required for Jerry to meet his 12%
investment target?
Assume Jerry decided that due to the potentially risky nature of this venture, he required a 15%
(not 12%) return on his investment. What is the room rate required for Jerry to meet this more
aggressive investment target?
Assume that the occupancy rate estimated to be achieved by the franchise sales representative
was 70% and this number was utilized to compute the Hubbart rate (rather than Jerry's more
conservative 60%). What would the sales representative tell Jerry his ADR would have to be to
achieve Jerry's 15% investment goals?
Assume instead that the F&B operating income is estimated at $75,000 per year rather than
$125,000. Using the 15% desired investment return and a 70% occupancy rate, what new room
rate would allow Jerry to meet his investment goals?(Spreadsheet hint: Calculate question (a)
first and type the answer for ADR in the cell provided at the bottom of the spreadsheet. For items
(b), (c), and (d), change only the numbers that are required in each question, and all the other
numbers in the spreadsheet will change accordingly. Then, type the answers for ADR (as you go)
in the cells provided at the bottom of the spreadsheet.)
Step 1.
Calculate the hotel's target beforetax net income.

18. Owner's investment
ROI
AfterTax Net Income

19. AfterTax Net Income
Tax
BeforeTax Net Income

20. Step 2.
Calculate estimated nonoperating expenses.
Mortgage
Other NonOperating Expenses

21. Total NonOperating Expenses
Step 3.
Calculate estimated undistributed operating expenses.
Undistributed Operating Expenses

22. Step 4.
Calculate estimated operated departments income excluding rooms.
F&B Operating Income
Other NonRooms Income

23. Total NonRooms Operating Income
Step 5.
Calculate the operated department income for rooms.

24. BeforeTax Net Income
NonOperating Expenses
Undistributed Operating Expenses
Total NonRooms Operating Income

25. Rooms Operated Department Income
Step 6.
Calculate the estimated rooms department revenues based on estimated occupancy.
Rooms
Days in Period
365

26. Occupancy %
Total Rooms
Total Rooms

27. Expense per Room
Total Room Expenses
Rooms Operated Department Income
Total Room Expenses

28. Rooms Revenue
Step 7.
Calculate the hotel's required ADR.

29. Rooms Revenue
Total Rooms
ADR

30. e.
ADR with 12% ROI
f.
ADR with 15% ROI
g.
ADR with 15% ROI and 70% Occupancy %
h.
ADR with 15% ROI and 70% Occupancy % and $75,000 F&B Operating Income
"