Reference no: EM132710808

Cheap Stay Inc. is considering building a budget hotel that offers clean small rooms with bathrooms. They anticipate that the 120 rooms will rent for 36,000 room-nights per year. The market price for equivalent rooms is $60 per night. Cheap Stay estimates that the cost of capital will be $7,900,000 and they would like an annual return on 15%.

Following are the estimated annual operating costs:

Variable operating costs $18 per room night

Fixed Costs:

Salaries and wages $450,000
Building maintenance 86,000
General administration 230,000
Total fixed costs $766,000

REQUIRED:

Problem 1. What is the full cost per room-night?

Problem 2. Can Cheap Stay Inc. meet the targeted return on investment based on the estimated costs and revenue? Show your calculations.

Problem 3. A tour operator has offered $30 per room per night for 20 rooms during a time of the year that there is likely to be at least that many rooms vacant. Should Cheap Stay Inc. accept this offer?