Evaluating Break-Even Pricing in a Challenging Market Scenario
Considering the circumstances surrounding the hotel investment, including the initial cost, forecasted demand, servicing costs, and cost of capital, we will calculate the break-even price per room per night based on the estimated demand of 10,000 room-nights. This analysis will help determine the pricing strategy required to cover costs and achieve the break-even point.
Given Information:
– Initial Investment in the Hotel: $30.00 million
– Estimated Demand: 10,000 room-nights
– Cost to Service per Room per Night: $50
– Cost of Capital: 10%
– Current Selling Price of the Hotel: $25 million
Calculating Break-Even Price per Room per Night:
The break-even price per room per night should cover both the servicing costs and the opportunity cost (cost of capital) associated with the investment. The total costs to be covered are the servicing costs and the opportunity cost on the initial investment.
1. Total Cost to Service 10,000 Room-Nights:
Total Servicing Costs = Cost to Service per Room per Night * Number of Room-Nights
Total Servicing Costs = $50 * 10,000
Total Servicing Costs = $500,000
2. Opportunity Cost on the Initial Investment:
Opportunity Cost = Initial Investment * Cost of Capital
Opportunity Cost = $30.00 million * 10%
Opportunity Cost = $3.00 million
3. Total Break-Even Cost:
Total Break-Even Cost = Total Servicing Costs + Opportunity Cost
Total Break-Even Cost = $500,000 + $3.00 million
Total Break-Even Cost = $3.50 million
4. Break-Even Price per Room per Night:
Break-Even Price = Total Break-Even Cost / Number of Room-Nights
Break-Even Price = $3.50 million / 10,000
Break-Even Price ≈ $350
Therefore, to break even considering the estimated demand of 10,000 room-nights and the associated costs and capital investment, the break-even price per room per night should be approximately $350. This pricing strategy aims to ensure that all costs and opportunity costs are covered, allowing for a sustainable operation in a challenging market environment.
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