Some UCLA Campus Investment Algebra

In 2011, Meyer and Renee Luskin made an extremely generous gift to UCLA.  Roughly 1/2 of this gift was allocated to the UCLA Luskin School of Public Policy.  This was a very wise investment.   The other 1/2 has been allocated to a new conference and guest center.

In this blog post, I would like to review some algebra focused on university investment of finite capital.

According to this website,  the project will have a total cost of 152 million in upfront construction.

Assuming it is finished on time, and UCLA construction usually has a 1 year lag, in 2016 there will be a new hotel with the following dimensions;  250 rooms that will be rented out at $185 each.  I will ignore the parking to keep the algebra simple.

SCENARIO #1

So, under best case assumptions -- let's assume that this hotel is fully booked 365 days a year;
total revenue = 365*250*185 =  $16.88 million a year
Let's assume a zero percent interest rate (again best case).
Let's assume that the hotel's worker all work for free so there are no labor costs
Let's assume that water and electricity are provided for free by LADWP
.
Under these assumptions the payback period for this investment =   152 million/16.88 =  9 years .


SCENARIO #2:

Let's assume that that the occupancy rate is 75% over the course of the entire year and that the interest rate is 3%. Let's assume that the hotels's workers are paid $2 million a year in total (I am making up this number).  I am also ignoring utility bills for electricity and water and security and insurance and maintenance.

Annual profits =  .75*16.88 - 2 =  10.66 and the payback period is now 18 years.

Assuming the hotel will live for 40 years , this works out to a 7% IRR  .  Interest rates are likely to go up sharply in the medium term as the U.S will pay a risk premium for borrowing for the deficit.

I look at this and say that UCLA should invest the generous Luskin gift in hiring new faculty.

Human capital rather than physical capital!