The Hillside Hotel’s owners have decided to have Managers Supreme, Inc. (MSI)

manage their hotel. The management fee arrangement would be as follows:

1. Basic fee: 4% of gross sales 2. Incentive fee: 15% of IAUOE. The payment of this fee is subject to the owners making their debt payments. Any incentive fee not paid is accumulated until paid. Assume incentive fees are paid on the last day of each year.
The expected sales of the Hillside Hotel are $5,000,000 for 20X1 and are expected to increase by 20% each year. All operating expenses of the hotel total 60% of total revenue. Fixed charges equal $800,000 annually, while the pay- ments on debt, excluding interest expense already included in fixed charges, total $300,000 annually. All interest incurred is included in the fixed charges of $800,000 annually. Assume the Hillside Hotel’s average tax rate is 30%. MSI expects to incur operating expenses exclusive of income taxes equal to 80% of its total management fees earned each year. Further, assume its tax rate is 30%. Assume that all fees earned are taxed when earned, regardless of when received. MSI's cost of capital is 12%.
Required:
Calculate the present value of the cash flows from this management contract to MSI for the years 20X1—20X3.