Tutorial - Cost Benefit Calculations

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Tutorial - Cost/Benefit Calculations - Week 5
Tutorial - Cost/Benefit Calculations - Week 5
Hotel Example: ROI Analysis
Hotel Example: ROI Analysis
The ROI Analysis needs to be done on all design options considered in a Feasibility
Study.
Average Time to Perform One Update: 2 hours
Option 1: Stay with Current System
Updates per Day: 2
Background Information
Expansion in Year 2
Note: For this hypothetical example we have made up reasonable background numbers
We assume that the hotel expansion corresponds with some sort of beneficial event,
in order to perform the analysis. However, for your assignment, you should try and get
like a new tourist attraction, which would result in the occupancy rate remaining at 60%,
as much of this information as possible from the real organization, (it’s probably easier
even though the number of rooms are doubled (effectively the number of customers is
to ask simple questions than to try and make up reasonable numbers anyway).
then doubled by this new event).
Current Information - some facts
New Number of Rooms: 100
Discount rate:
Here we use the discount rate from the lecture notes: 12%
Occupancy Rate: 60%
Reminder:
Present_value(n) = 1/(1 + i)^n where n = year, i = 0.12
Average Time to Perform One Update: 4 hours
Lifetime of System: 6 years
All other information remains the same.
Definition:
Hotel Customer: The occupants of a room are together considered
Cost/Benefit Calculations
as one “customer”.
Current Situation
Error Frequency:
On average one in every five customer checkouts results in a billing
error.
Average Billing
$20 per customer/(1 in every 5 customers) = $2/customer
§
Error/Customer:
Half of these errors are over-billing errors, and we always assume
that the hotel is honest and returns all over-billed money to the
Average Number of Rooms
60% of 50 Rooms = 30 customers
customers.
§
Occupied per Day:
Half of these errors are under-billing errors, and we always assume
Average Number of
1/3 of 30 customers check out = 10 checkouts
that the hotel does not pursue customers to correct under-billing
Checkouts per Day:
errors, as the damage in customer satisfaction and hotel employee
Average Loss in Under-
10 checkouts * Average Billing Error/Customer $2 = $20
work load is not worth the potential money recovered.
billing Errors Per Day:
Yearly Loss from Under-
$20 * 365 = $7,300
Average Amount of Billing Error:
$20 per customer
billing Errors:
Employee Costs of
2hrs/update * 2 updates per day * $15/hr wage *365 days
Current Number of Rooms in the Hotel: 50
Updates per year:
= $21,900
Daily Costs of Over-billing:
Loss of 5% in occupancy * 50 rooms * $100 average room
Average Occupancy Rate:
60%
cost = $250
Yearly Costs of Over-
$250 * 365 = $91,250
Check-ins/Check-outs: Each day 1/3 of customers check in, 1/3 of customers check out
billing:
and 1/3 of customers remain unchanged.
Total Yearly Current Costs
$7,300 + $21,900 + $91,250 = $120,450
of Current System:
Average Customer Charges (Room Cost + Extras) per Day: $100
Customer Loyalty Loss Due to Over-billing: Let’s assume that the occupancy rate of the
hotel would actually be 65% were it not for the loss of return
customers due to overbilling.
Average Hotel Employee Wage: $15/hour
pg. 1
pg. 2

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