Matt Mona is in the process of purchasing a motel near a college town. Themotel costs $3,500,000. The lot costs $500,000. Furniture and furnishings cost $700,000 and should be recovered in seven years (seven-year MACRS property), while the cost of the motel building should be recovered in 39 years (39-year MACRS real property placed in service on January 1). The land will appreciate at an annual rate of 5% over the project period, but the building will have zero salvage value after 25 years. When the motel is full (100% capacity), it takes in (receipts) $6,000 per day for 365 days per year. The motel has fixed operating expenses, exclusive of depreciation, of $430,000 per year. The variable operating expenses are $220,000 at 100% capacity and vary directly with percent capacity down to $0 at 0% capacity. If the interest rate is 10% compounded annually, at what percentage capacity must this motel operate in order to break even? (Assume that Matt's tax rate is 30% and the project life is 25 years.)

Matt Mona is in the process of purchasing a motel near a college town. Themotel costs $3,500,000. The lot costs $500,000. Furniture and furnishings cost $700,000 and should be recovered in seven years (seven-year MACRS property), while the cost of the motel building should be recovered in 39 years (39-year MACRS real property placed in service on January 1). The land will appreciate at an annual rate of 5% over the project period, but the building will have zero salvage value after 25 years. When the motel is full (100% capacity), it takes in (receipts) $6,000 per day for 365 days per year. The motel has fixed operating expenses, exclusive of depreciation, of $430,000 per year. The variable operating expenses are $220,000 at 100% capacity and vary directly with percent capacity down to $0 at 0% capacity. If the interest rate is 10% compounded annually, at what percentage capacity must this motel operate in order to break even? (Assume that Matt's tax rate is 30% and the project life is 25 years.)

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter11: Simulation Models

Section: Chapter Questions

Problem 68P

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