5. a. What is the gross sales price for the property at the end of time 5? Show your calculations.

b. How much is the capital gains tax? Show your calculations.

c. How much is the recaptured depreciation tax? Show your calculations.

d. Calculate the net sales price (after taxes) using a, b & c above.

Financing Parameters

You are to analyze each project using the WACC (Weighted Average Cost of Capital) approach to project evaluation. The managers have determined that the debt used to finance the Hotel will have an interest rate (KDBT) of 7%. In order to estimate the owner's required rate of return, KE, for the projects, management uses the Security Market Line (SML). They estimate that the return on the market portfolio (KM) is 10% and the risk-free rate, (RF) is 3%. The beta of the Hotel is estimated to be 1.8.

Net Working Capital Requirements

Net working capital is needed for any hospitality operation. If you are unsure of what net working capital is, feel free to peruse Chapter 3 in our 420 text. The following table indicates the net working capital needs under each option.

Year	Year 1	Year 2
Net Working Capital Needed	$100,000	$200,000

You are to assume that working capital is to remain the same from year 2 onward. Assume that working capital needs are for all "other current assets," not including cash. Current liabilities will be $100,000 in year 1 and $200,000 from year two onward for the project.

Financing Conditions

Long-term Debt to fixed asset ratio	Interest Rate	Dividend Payout Ratio
70%	7%	10%

It is important to note that after the initial investment of capital, no new equity capital or long-term debt will be raised. Management also assumes that the total amount of long-term debt will be in the form of bonds so that the book value of the debt will be constant over the 5-year period (i.e., no principal repayments will be made). All remaining earnings will be put back into the business. No additional investment will be made and all excess funds will be held as cash.