The comparison of costs and benefits regarding the construction of a new hotel is called a feasibility study. When developers approach a financial institution for funding, the lender requires an economic study to determine the feasibility of the proposed project.

Hundred thousands of dollars are invested in this project, and it would be foolish to undertake such a development without a proper cost justification study.

This feasibility study includes a five-year projection of operating revenues. From this amount, associated expenses for the profit centers (rooms, food and beverages, telephone) and undistributed operating overhead expenses, including the management fee, are deducted to equal income before fixed charges. The income before fixed charges is used as a surrogate for cash flow before fixed charges and debt service. There is no rent included because the land is Alumni Center’s.

Operations to fixed charges is a five year projection of operating results for our 40 room Alumni Hotel. Notice that the occupancy percentage is expected to be 69% and increases to a stabilized level of 74% by 20X3, and the average room rate in 20X1 is $67.25 and increases to 78.25 by 20X5.