1) Suppose you work for Meijer, a large grocer headquartered in Michigan. 20 years ago, Meijer bought a parcel of land on the outskirts of Lafayette, Indiana. It is currently being rented to a farmer. They intended to build a new store on the lot after a proposed new highway was complete. However, when the new highway was built it went in a different direction and now they must decide whether to build the new store. You ask around and find the following information from the following departments (all numbers are in thousands of dollars): The sales department tells you: Annual Revenue: The operations department tells you: Inventory Required on Shelves: Annual Cost of Goods Sold: Annual Cost of Running Store: Annual Allocated Overhead from HQ: The forecasting department tells you: Loan to fund construction: Interest Rate: Weighted Average Cost of Capital: Depreciation Schedule: Tax Rate: $2400 $140 $1500 $500 $80 $300 4%, loan is interest only (no principle payments) 13% Straight-line depreciation over 40 years 30% for income, 15% for capital gains The construction department tells you: Cost of environmental review (already completed): Purchase Price of Land 20 years ago: Current Market Value of Land: Current Pre-Tax Income from renting land out: Cost of Construction (Labor & Materials): $65 $1000 (hint: land is not depreciated) $1100 (hint: land is not depreciated) $75/year $1800 1a) Your boss tells you to find the unleveraged incremental cash flow of the project for the next four years. Write your answer in the form of a pro forma statement on the next page. 1b) Should you approve this project? Why or why not?
1) Suppose you work for Meijer, a large grocer headquartered in Michigan. 20 years ago, Meijer bought a parcel of land on the outskirts of Lafayette, Indiana. It is currently being rented to a farmer. They intended to build a new store on the lot after a proposed new highway was complete. However, when the new highway was built it went in a different direction and now they must decide whether to build the new store. You ask around and find the following information from the following departments (all numbers are in thousands of dollars): The sales department tells you: Annual Revenue: The operations department tells you: Inventory Required on Shelves: Annual Cost of Goods Sold: Annual Cost of Running Store: Annual Allocated Overhead from HQ: The forecasting department tells you: Loan to fund construction: Interest Rate: Weighted Average Cost of Capital: Depreciation Schedule: Tax Rate: $2400 $140 $1500 $500 $80 $300 4%, loan is interest only (no principle payments) 13% Straight-line depreciation over 40 years 30% for income, 15% for capital gains The construction department tells you: Cost of environmental review (already completed): Purchase Price of Land 20 years ago: Current Market Value of Land: Current Pre-Tax Income from renting land out: Cost of Construction (Labor & Materials): $65 $1000 (hint: land is not depreciated) $1100 (hint: land is not depreciated) $75/year $1800 1a) Your boss tells you to find the unleveraged incremental cash flow of the project for the next four years. Write your answer in the form of a pro forma statement on the next page. 1b) Should you approve this project? Why or why not?
Chapter9: Acquisitions Of Property
Section: Chapter Questions
Problem 93TPC
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Transcribed Image Text:1) Suppose you work for Meijer, a large grocer headquartered in Michigan. 20 years ago, Meijer bought
a parcel of land on the outskirts of Lafayette, Indiana. It is currently being rented to a farmer. They
intended to build a new store on the lot after a proposed new highway was complete. However, when
the new highway was built it went in a different direction and now they must decide whether to build
the new store. You ask around and find the following information from the following departments (all
numbers are in thousands of dollars):
The sales department tells you:
Annual Revenue:
The operations department tells you:
Inventory Required on Shelves:
Annual Cost of Goods Sold:
Annual Cost of Running Store:
Annual Allocated Overhead from HQ:
The forecasting department tells you:
Loan to fund construction:
Interest Rate:
Weighted Average Cost of Capital:
Depreciation Schedule:
Tax Rate:
$2400
Current Market Value of Land:
Current Pre-Tax Income from renting land out:
Cost of Construction (Labor & Materials):
$140
$1500
$500
$80
$300
4%, loan is interest only (no principle payments)
13%
Straight-line depreciation over 40 years
30% for income, 15% for capital gains
The construction department tells you:
Cost of environmental review (already completed):
Purchase Price of Land 20 years ago:
$65
$1000 (hint: land is not depreciated)
$1100 (hint: land is not depreciated)
$75/year
$1800
1a) Your boss tells you to find the unleveraged incremental cash flow of the project for the next four
years. Write your answer in the form of a pro forma statement on the next page.
1b) Should you approve this project? Why or why not?
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