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Patrick Clark is a young entrepreneur who wants to open a restaurant in San Francisco, California. Because real estate prices are very high, he is not able to secure enough equity to present to lenders to convince them of the viability of his project. A friend of his, Jack Rosse, owns an auto parts store and the land where the store is located. Jack tells Patrick he will write a note for him to take to the bank that states that he is going to close his store, contribute the land to Patrick, and become a part owner of Patrick’s new restaurant. Jack, however, really has no intention of closing his store and contributing the land to Jack’s restaurant project. Can Jack still write the note for Patrick to bring to the bank? Should Patrick use this letter? What may be some of the consequences?

 

 
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Frank Douglas, a real estate developer, just finalized a major deal with Turner County to develop a major hotel/luxury condominium/golf/conference center/ residential mixed-use development on land owned by Turner County. The development is proposed to include a 150-room five-star hotel, 75 luxury 2,500 sq. ft. condominium units, an eighteen-hole championship golf course, and 360 residential golf course lots. The total development cost, exclusive of the cost of land and financing expenses, is projected to be $250,000 per room for the hotel, $200 per square foot for the luxury condominium units, $6 million for the golf course, and 10% of the current selling price of $500,000 for each residential lot. The county has agreed to contribute the land to Mr. Douglas, the developer, at no cost. The county’s justification for this contribution is the new jobs, taxes, and new visitors to the area generated by the mixed-use development. 1. Calculate the total project cost for this mixed-use development from the information provided. 2. If lenders are willing to provide 55% of the project cost in the form of debt, calculate the dollar amount of debt and equity that Frank Douglas must raise. 3. What sources of loans are available to Mr. Douglas? What sources of equity are available? Which sources of loans and equity are the best options for this development, and why?

 

 
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Joseph just finished talking to five different bankers regarding a loan for his limited-service hotel. He needs $100,000 for a renovation project. However, with his current credit rating, he can only secure a loan of $75,000. Knowing that he has future contracts coming in with a few long-time corporate customers, he hopes he will be able to achieve higher sales next year. With that in mind, he is thinking about increasing his sales numbers to make his cash flow look better. Of course, in time value of money calculations, higher cash flows yield a higher present value, which would allow him to borrow more money. Is Joseph right in doing this?

 

 
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Powell Hospitality Ltd. is proposing the redevelopment of the spa at its Whispering Winds Resort. Currently the spa space is leased to a spa management company, but Powell Hospitality Ltd. wants to bring the operation in-house to have more control. The spa facility will also be expanded from its current 5,000 square feet to 10,000 square feet, with 8,000 square feet of indoor space and 2,000 square feet of outdoor treatment space. Powell Hospitality Ltd. believes it is time to expand its facility because the health and fitness industry has experienced rapid growth due to increasing health awareness. The goal of the spa facility will be to offer guests of the resort, visitors to the area, members, and people living and working nearby the opportunity to experience a world-class spa facility. The spa will provide an additional revenue stream for the resort and should increase occupancy during the slow periods by offering spa conference packages. On average, it is estimate 180 guests will visit the facility throughout the day. The spa will offer services including massage, herbal wraps, facials, mind/body programs, fitness activities, and alternative health treatments. Here are some financial projections for the spa: 1. Based on the projections, how much is this stream of uneven cash flows worth today if the discount rate is 10%? First, compute the present value of each year’s cash flow individually and add the results. Then, check your answer utilizing the cash flow function. 2. Given the present value calculated in question 1, what will this be worth in 4 years’ time?

Powell Hospitality Ltd. is proposing the redevelopment of the spa at its Whispering Winds Resort....

 

 
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