Sputnik, Inc. has the opportunity to acquire the Space Station Hotel and assume operations immediately following the closing of the transaction. The initial investment in the 200-room hotel project is estimated to be $8,000,000. The holding period for this asset is 5 full operating years following the closing of the transaction, after which the hotel will be sold based on the trailing 12 months operating cash flow. The hotel has a useful life of 10 years. Part 1: Forecast the prospective results The relevant competitive market comprises 1,500 hotel rooms (including the subject hotel) with an average annual occupancy in the year preceding your purchase of 68% and an average annual ADR of $125. The first full year following the transaction, demand is expected to grow at 1% per year and average rate is expected to grow at 0.5% per year. There is no other supply expected to enter the market during the five-year holding period. Your hotels competitive attributes warrant a market share of occupancy of 102% per year and a yield on market ADR of 105% per year. This is an all-inclusive operation, so all food, beverage and amenities are included in the room rate. Cost of sales is 30% of revenues. Payroll is 35% of revenues. Other expenses are 15%. These are the margins on the base level (i.e. year one) of revenues, however incremental revenue flow through following the base year is 35%. The operating period is a calendar year of 365 days. Estimate the 5-year EBITDA (NET INCOME/ NET PROFIT) of the hotel following the closing of the transaction.

Based on the above excel sheet and below information need to answer the part 2 as following:

- The project will be financed by 55% debt, and 45% equity. The interest rate on the debt is 12%. The required rate of return is 15%. Tax rate is 40% in income and 25% on capital gains.

- The depreciation methodology is straight line depreciation and there will be a salvage value of the asset upon sale. Additional working capital of $300,000 will be required at the opening date.

Calculate the NPV and IRR of the project and comment whether it is a good investment.

Year 1 Year 2 Year 3 Year 4 Year 5 1.500 rooms 68% Market Forecast Supply Demand Revenues 547,500 376,023 $47,237,889 547,500 379,783 $47,948,820 547,500 383,581 $48,670,449 547,500 387,417 $49,402,940 547,500 391,291 $50,146,454 $125 Subject Occupancy Subject ADR 70.1% $132 70.8% $133 71.5% $133 72.2% $134 22.9% $135 6 7 Hotel Forecast 8 9 Supply 10 Market Occupancy 11 ADR 12 13 Demand Growth 14 Revenue Growth 15 Subject Occupancy Penetration 16 Subject ADR Yield 17 Subject #rooms 18 19 20 21 22 Cost of Sales 23 Payroll Cost 24 Other Expenses 25 Incremental Flow Through 1.0% 0.50% 102% 105% 200 Room Revenues $6,745,571 $6,847,091 $6,950,140 $7,054,740 $7,160,914 30% 35% 15% 35% Total Revenues Cost of Sales Payroll Other Expenses Total Expenses Incremental Adjustment EBITDA Margin S6,745,571 $2,023,671 $2,360,950 $1,011,836 $5,396,456 SO $1,349,114 20.0% 56,847,091 $2,054,127 $2,396,482 $1,027,064 $5,477,673 $35,532 $1,404,951 20.5% $6,950,140 $2,085,042 $2,432,549 $1,042,521 $5,560,112 $36,067 $1,426,095 20.5% 57,054,740 $2,116,422 $2,469,159 $1,058,211 $5,643,792 $36,610 $1,447,558 20.5% $7,160,914 $2,148,274 $2,506,320 $1,074,137 $5,728,731 $37,161 $1,469,344 20.5% Year 1 Year 2 Year 3 Year 4 Year 5 1.500 rooms 68% Market Forecast Supply Demand Revenues 547,500 376,023 $47,237,889 547,500 379,783 $47,948,820 547,500 383,581 $48,670,449 547,500 387,417 $49,402,940 547,500 391,291 $50,146,454 $125 Subject Occupancy Subject ADR 70.1% $132 70.8% $133 71.5% $133 72.2% $134 22.9% $135 6 7 Hotel Forecast 8 9 Supply 10 Market Occupancy 11 ADR 12 13 Demand Growth 14 Revenue Growth 15 Subject Occupancy Penetration 16 Subject ADR Yield 17 Subject #rooms 18 19 20 21 22 Cost of Sales 23 Payroll Cost 24 Other Expenses 25 Incremental Flow Through 1.0% 0.50% 102% 105% 200 Room Revenues $6,745,571 $6,847,091 $6,950,140 $7,054,740 $7,160,914 30% 35% 15% 35% Total Revenues Cost of Sales Payroll Other Expenses Total Expenses Incremental Adjustment EBITDA Margin S6,745,571 $2,023,671 $2,360,950 $1,011,836 $5,396,456 SO $1,349,114 20.0% 56,847,091 $2,054,127 $2,396,482 $1,027,064 $5,477,673 $35,532 $1,404,951 20.5% $6,950,140 $2,085,042 $2,432,549 $1,042,521 $5,560,112 $36,067 $1,426,095 20.5% 57,054,740 $2,116,422 $2,469,159 $1,058,211 $5,643,792 $36,610 $1,447,558 20.5% $7,160,914 $2,148,274 $2,506,320 $1,074,137 $5,728,731 $37,161 $1,469,344 20.5%