The L & V Inn’s owner-manager, Sally Van, has been approached by an investor interested in buying her hotel for $2,000,000. The existing mortgage is $500,000. The investor would like Ms. Van to continue managing the property for a period of 5 years under a management contract arrangement. Her management com- pany would be Van Management.

The L& V Inn has a net book value of $1,000,000 today and has forecasted operations and other expenditures over the next 5 years as follows:

Year 1 Year 2 Year 3 Year 4 Year 5 IAUOE $400,000 $450,000 $500,000 $550,000 $600,000 Depreciation 100,000 100,000 100,000 100,000 100,000 Interest expense 50,000 45,000 40,000 35,000 30,000 Other fixed expenses 100,000 110,000 120,000 130,000 140,000 Mortgage reduction 50,000 50,000 50,000 50,000 50,000 Assume the tax rates are 30% for ordinary income and 25% for capital gains for the existing owner for this property. The management contract operating fees for Van Management would be as follows:

@ Basic fee of 4% of sales. [AUOE equals 25% of total sales.

# Incentive fee of 15% of IAUOE less the basic fee.

Assume Van Management would incur annual pre-tax operating expenses of $75,000.

Required:
1. Calculate the existing hotel’s cash flow for years one and two, assuming there is no sale.
2. Calculate the existing owner’s cash flow from the proposed sale of L& V Inn.
3. Calculate Van Management's cash flow from operating the L & V Inn for years one and two.