Aberdeen’s Thrifty hotel has forty rooms and has historically achieved an average occupancy of 55%. The hotel’s assets have a book value of Pounds 450,000 and the owners believe the assets should generate a 15% return after tax. Assume tax is charged at the rate of 50%. The hotel has several fixed costs which include 9% interest charged on a Pounds 250,000 bank loan, Pounds 40,000 of equipment and fittings depreciation, and other fixed costs of Pounds 65,000 per year.
The hotel’s manager believes that the 55% occupancy level will again be achieved next year, and estimates that this level of activity will result in Pounds 85,000 of operating expenses.