analyzing a new development opportunity for a 125 room hotel to be operated for 5 years and sold at the end of the 5th year of operation.
Construction costs (including land) are expected to be $120,000 per-room.
We will be able to finance the construction of the hotel under the following terms:
• 75.00% Loan to cost
• 5.25% interest Rate
• Interest only payments during construction and the first year of operation (assume interest during construction is included in the $120,000/room cost).
• The loan will be amortized over 25 years.
We believe that the hotel will perform accordingly:
• 65% Occupancy in the first year, increasing by 2.50%/year
• $100 Average Daily Rate, increasing by 3.00%/year
• The Net Operating Income (NOI) will be 35.00% of room revenues
When the hotel sells we believe it will sell under the following Assumptions:
• 8.50% Capitalization rate on 5th year NOI
• 2.00% Cost of Sales
Using this information please answer the following Questions:
1) What is the Unlevered Internal Rate of Return (IRR) for the project?
2) What is the levered IRR for the project?
3) What is the average Cash-on-Cash (ROE) over the 5 years of operation?
4) Assuming a 10% Discount Rate, what is the Net Present Value of the Project?
5) What is the greatest cost per room that can be supported if first year occupancy is 55% and only increases by 1.50% per year assuming a required 5 year ROE average of 10% (round to the closest $500.00).
