You have been hired by Childers Associates to help its finance department prepare a cash budget for a hotel they just purchased. They have provided the following information to assist you.

20X1 20X2 20X3 20X4 20X5 A. Budgeted pretax income (loss) ($100,000) ($20,000) $40,000 $100,000 $200,000 B. Operating expenses—cash $600,000 $675,000 $700,000 $750,000 $800,000 C. The cost of building and furnishings totals $3,500,000 and is depreciated using straight-line over a 40-year period. Assume a zero salvage value and that the expenditure is prior to 20X1.

D. Assume a tax rate of 30% and that any net operating losses can be carried forward for 5 years. Further assume all income taxes are paid in the year to which they relate.

E. In order to operate the property, $1,000,000 will have to be used for renovations; this expenditure will be capitalized and amortized over 10 years. The expense for 20X1 will be $100,000. Assume this expenditure is prior to year 20X1.

F. The $250,000 of pre-opening expenses is amortized over 5 years beginning in 20X1.

G. Assume the cash balance on January 1, 20X1, is $25,000.

H. Assume accounts receivable and inventories are expected to increase by a total of

$10,000 each year.

I. Assume accounts payable and other short-term payables will increase by $5,000 per year.

J. Assume a debt reduction payment for years 20X1—20X5 of $100,000 per year.

Required:

1. Prepare a 5-year cash budget using the adjusted net income approach.

2. Comment on the dividend opportunities for Childers Associates over the 5-year period.