Jim's Budding Gardens Part 1 It is the beginning of April, 2018 and you are entering into a legal "percentage" contract with "Jim" to build a "Legal Micro Cannabis" growing facility just outside City limits. The current location for this project is an old, large, unkept and unused greenhouse located on farm land about 20km southeast of Calgary. The client will be leasing the land and existing 3 adjacent buildings from a farmer on a 6-year contract for $6,000 per month for 2018; this amount is to be adjusted every year with the cost of inflation. Inflation rates are expected to average 1.9% in the forceable future. To make the client's business feasible, the present structures needs to be retrofitted and expanded (all buildings connected to each other and closed off from the rest of the property) to accommodate all license requirements to grow Cannabis as per Health Canada and Cannabis Act regulations. The customer, has as of April 1st, $4M liquid cash available on a bank account earning 4% yearly; He also has access to an extra $2.3M from a secured line of credit that charges 6% simple interest per year on a monthly basis (6% of balance/12). He plans to pay off this line of credit with $200,000 monthly payments until paid in full once a full crop has been sold and the money starts to flow into the business. During construction activities and approval time, interest on the line of credit will accumulate until payments start flowing in. Project details: There is a review process from the time of initial application for a legal license for all Cannabis growing facilities which takes 4 months and ALL facilities / construction has to be fully completed before the review process in order to get a license. If approved, full payment for the license is expected at the end of the 4th month review period Processing and obtaining the physical license will take about 1 month; this is in addition to the review process. License fee is $25,000 (initial one-time application fee). Renewal license fee is $5,000 per year to be paid on every anniversary of the original License payment fee. Regulations dictate that only 40% of total sqft in the building can be used to grow the product. The client wants to build a 20,000 Sqft facility which will cost approximately 6M The license being applied for only allows a maximum of 2000 square footage of plants to be harvested every month A full crop takes 4 months to go from seed to the harvesting stage. Harvesting, processing, sorting, packaging, shipping / distribution and payment takes 1 month in addition to the 4 months previously mentioned It will cost 6M to retrofit / teardown / rebuild the greenhouse to accommodate all structural requirements as per the Cannabis Act, fire, provincial and federal code requirements. Assume this amount will be paid out to the contractor evenly during construction activities starting at the end of the 1* month of construction with 10% being withheld until one month after all construction has been finished; all held up funds can be released at that point. The cost of commissioning the new facilities will be 0.5% of the original cost f the project and will happen right at the end of construction activities. This service is contracted out to a 3rd party consultant on a lump sum contract. It will take approximately 10 months to complete this project. Start date is May 19, 2018; The contractor has projected 10% of the work to be done every month. Once operational, facility operations + salaries + maintenance and utilities are expected to be about 17,000/ month for 2018 and adjusted with the cost of inflation every year thereafter. This does not include the lease amount to the farmer. It is expected that this facility will be able to produce about 95 kilos per crop once fully operational Current federal and provincial corporate taxes are 21% per year for both combined, for all incorporated businesses within Alberta Canada Revenue Agency (CRA) has also imposed an additional 2.3% tax on all legal Cannabis producers in the country. The market for Legal Cannabis: As of mid-2018, Jim (the client) believed that the average spot price per gram of legally grown Cannabis would be around $4.9 dollars / gram. This number is the result of extensive research he performed on other markets and his beliefs that demand would quickly rise, outpacing supply. This price projection is reliable based on information provided by experts as of early-to-mid-2018. The current economic situation the province has experienced over many years and the fact that a lot competition has popped up all over the province has had a downward pressure on marked prices. This has resulted in a price adjustment of about 20% to the spot price per gram from Jim's price forecast starting January 14, 2019 and continue with 2 more years of 7% adjustment (downward pressure on prices) every year (2020 & 2021). Experts are also predicting a 5% downward adjustment on Jan 1, 2022 and the same for Jan 1, 2023 before prices settle. A further 5% downward adjustment on Jan 1, 2024 may also be a possibility. Assuming all revenues / costs / payments happen at the end of each month (except for the lease payments which happen at the beginning of the month or the last day of the previous month), calculate the following: Owners' monthly cash flow for the first 4 years starting from the month before beginning of the construction phase. When is the line of Credit paid off? On what month and year; What is the amount of the last payment? When will the client breakeven? How many years and months from the beginning of construction? Jim's Budding Gardens Part 1 It is the beginning of April, 2018 and you are entering into a legal "percentage" contract with "Jim" to build a "Legal Micro Cannabis" growing facility just outside City limits. The current location for this project is an old, large, unkept and unused greenhouse located on farm land about 20km southeast of Calgary. The client will be leasing the land and existing 3 adjacent buildings from a farmer on a 6-year contract for $6,000 per month for 2018; this amount is to be adjusted every year with the cost of inflation. Inflation rates are expected to average 1.9% in the forceable future. To make the client's business feasible, the present structures needs to be retrofitted and expanded (all buildings connected to each other and closed off from the rest of the property) to accommodate all license requirements to grow Cannabis as per Health Canada and Cannabis Act regulations. The customer, has as of April 1st, $4M liquid cash available on a bank account earning 4% yearly; He also has access to an extra $2.3M from a secured line of credit that charges 6% simple interest per year on a monthly basis (6% of balance/12). He plans to pay off this line of credit with $200,000 monthly payments until paid in full once a full crop has been sold and the money starts to flow into the business. During construction activities and approval time, interest on the line of credit will accumulate until payments start flowing in. Project details: There is a review process from the time of initial application for a legal license for all Cannabis growing facilities which takes 4 months and ALL facilities / construction has to be fully completed before the review process in order to get a license. If approved, full payment for the license is expected at the end of the 4th month review period Processing and obtaining the physical license will take about 1 month; this is in addition to the review process. License fee is $25,000 (initial one-time application fee). Renewal license fee is $5,000 per year to be paid on every anniversary of the original License payment fee. Regulations dictate that only 40% of total sqft in the building can be used to grow the product. The client wants to build a 20,000 Sqft facility which will cost approximately 6M The license being applied for only allows a maximum of 2000 square footage of plants to be harvested every month A full crop takes 4 months to go from seed to the harvesting stage. Harvesting, processing, sorting, packaging, shipping / distribution and payment takes 1 month in addition to the 4 months previously mentioned It will cost 6M to retrofit / teardown / rebuild the greenhouse to accommodate all structural requirements as per the Cannabis Act, fire, provincial and federal code requirements. Assume this amount will be paid out to the contractor evenly during construction activities starting at the end of the 1* month of construction with 10% being withheld until one month after all construction has been finished; all held up funds can be released at that point. The cost of commissioning the new facilities will be 0.5% of the original cost f the project and will happen right at the end of construction activities. This service is contracted out to a 3rd party consultant on a lump sum contract. It will take approximately 10 months to complete this project. Start date is May 19, 2018; The contractor has projected 10% of the work to be done every month. Once operational, facility operations + salaries + maintenance and utilities are expected to be about 17,000/ month for 2018 and adjusted with the cost of inflation every year thereafter. This does not include the lease amount to the farmer. It is expected that this facility will be able to produce about 95 kilos per crop once fully operational Current federal and provincial corporate taxes are 21% per year for both combined, for all incorporated businesses within Alberta Canada Revenue Agency (CRA) has also imposed an additional 2.3% tax on all legal Cannabis producers in the country. The market for Legal Cannabis: As of mid-2018, Jim (the client) believed that the average spot price per gram of legally grown Cannabis would be around $4.9 dollars / gram. This number is the result of extensive research he performed on other markets and his beliefs that demand would quickly rise, outpacing supply. This price projection is reliable based on information provided by experts as of early-to-mid-2018. The current economic situation the province has experienced over many years and the fact that a lot competition has popped up all over the province has had a downward pressure on marked prices. This has resulted in a price adjustment of about 20% to the spot price per gram from Jim's price forecast starting January 14, 2019 and continue with 2 more years of 7% adjustment (downward pressure on prices) every year (2020 & 2021). Experts are also predicting a 5% downward adjustment on Jan 1, 2022 and the same for Jan 1, 2023 before prices settle. A further 5% downward adjustment on Jan 1, 2024 may also be a possibility. Assuming all revenues / costs / payments happen at the end of each month (except for the lease payments which happen at the beginning of the month or the last day of the previous month), calculate the following: Owners' monthly cash flow for the first 4 years starting from the month before beginning of the construction phase. When is the line of Credit paid off? On what month and year; What is the amount of the last payment? When will the client breakeven? How many years and months from the beginning of construction