The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 million,

Question

The recently opened Grand Hyatt Wailea Resort and Spa on Maui cost $600 million, 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 rate of 40 percent, and a cost of capital of 11 percent, 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-year 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-year period (the other $150 million is for the land which is not depreciable) and that the present value of the hotel’s terminal value will be $200 million.

Explanation / Answer

Answer: The total cost of project $600 million

Cost of one room $800,000

Number of rooms to build 750 ($600,000,000 / 800,000)

Fixed cost Operating cost of unoccupied room $80

Number of days 365

Number of rooms 750

Fixed Operating cost per year $21,900,000 ($80x365x750)

Add: Cost of capital (11%).

BEP=Fixed cost/Contribution per unit

=21900000/(500-135)

=60000

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