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.