The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 mill about $800,000 per...

Question

The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 mill 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 30 yr 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 $200 million.

David · Accepted Answer

Break even analysis 
Total room in the hotel = Cost of building the hotel/Cost per room = 600,000,000/800.000 = 750 
Per night variable cost for each room = Per night total cost for each room – Per night fixed cost for 
each room = 135-80 = $ 55 
Further annual fixed cost for the hotel = 80*750*365 = $ 21,900,000 
Irrespective of the occupancy of the hotel, the above cost would need to be incurred.

The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 mill about $800,000 per room, to build. Daily operating expenses average $135 a room if occupied and $80 a room if unoccupied...

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