Question

The Green Shingle purchased a parcel of land 6 years ago for $299,500. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Shingle is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $347,500. The firm has no loans or mortgages secured by the property but would need to spend $64,000 to improve the land for construction. What value should be included in the initial capital cost of the hotel project for the use of this land?

2. Rock Haven has a proposed project that will generate sales of 1,680 units annually at a selling price of $42 each. The fixed costs are $12,700 and the variable costs per unit are $5.95. The project requires $28,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 4-year life of the project. The project requires an initial investment of $2,900 in net working capital which will be recovered at the end of the year 4. If the tax rate is 21 percent, what is the operating cash flow for the project?

Answer 1

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Current value of land = $347,500

Amount spent to improve the land for construction = $64,000

The initial capital cost of the hotel project for the use of this land = Current value of land + Amount spent to improve the land for construction

= $347,500 + $64,000

= $411,500

The initial capital cost of the hotel project for the use of land is $411,500

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Calculation of operating Cash Flows
Particulars	Year 1-4
Annual Sales (A = 1,680*$42)	70560
Variable Costs (B = 1,680 * $5.95)	9996
Fixed Costs (C )	12700
Depreciation (D) $28,000 / 4 years	7000
Profit Before Tax (E = A-B-C-D)	40864
Tax @ 21% (F = E*21%)	8581.44
Profit After Tax (G = E-F)	32282.56
Add back Depreciaiton (H = D)	7000
Net Operating Cash Flows (I = G+H)	39282.56
Therefore, operating cash flow for the project is $39,282.56