Question

The Alston Inn is managed by Inns, Inc. The management contract requires 6 percent of total revenue to be transferred to the replacement reserves to cover future renovations and equipment replacements. Alston Inn's debt service payment is $10,000 per month. The lodging property has 200 guestbooks, an ADR of $100, and a paid occupancy of 70 percent. Its room revenue is 70 percent of its total revenue and its net operating income is 15 percent of its total revenue. 1.) Determine the Inn's annual total revenue. 2.) Determine the Inn's annual net operating income. 3.) Determine the Inn's debt service coverage ratio for the year.

Answer 1

Answer:

1.) Inn's annual total revenue = $7,300,000

2.) Inn's annual net operating income = $1,095,000

3.) Inn's debt service coverage ratio for the year = 9.13

Explanation:

The room revenue is first calculated as follows:

Room revenue = Number of guestrooms * ADR * Percentage of occupancy * 365 days = 200 * $100 * 70% * 365 = $5,110,000

We can now proceed as follows:

1.) Determine the Inn's annual total revenue.

Annual total revenue = Room revenue / Paid occupancy percentage = $5,110,000 / 70% = $7,300,000

2.) Determine the Inn's annual net operating income

Annual net operating income = Total revenue * 15% = $7,300,000 * 15% = $1,095,000

3.) Determine the Inn's debt service coverage ratio for the year.

Debt service coverage ratio = Net operating income / Annual debt service = $1,095,000 / ($10,000 * 12) = 9.13