Ms. Rose originally approached the company, Peterson Accounting, when she discovered problems with her faulty title to the vacant land. She hired the company to value the hotel property so she could provide lenders an independent appraisal of the collateral value of the property. Peterson Accounting researched valuation approaches used to determine most banks collateral value of bed and breakfast Inns in the Springfield area and discovered that most bank appraisers calculate the collateral value using the expected value approach. They place weights on appraisals that result from two methods. First, many bed and breakfast operations are valued at four times the past two years' average gross margin. Appraisers assume that this appraisal is correct about 40% of the time, and accordingly place a 40% weight on the number derived from this method. Second, many properties are valued by taking the present value of the average of the past three years' cash flows discounted at an 8% discount rate for 10 years. (Appraisers assume that the past cash flows are a good estimate of future cash flows and those cash flows should continue for 10 years in the future.) Appraisers place a weight of 60% on the number derived from this method. Using the income statement and footnotes for Motel 365 for the past three years provided by the existing owner's accountant to help in the appraisal process, verify the value of the hotel determined by Peterson Accounting by using:

c. Combine the values calculated in a) and b) using the weights provided. What is the appraised value of the Bed and Breakfast? Assume the appraised value is the total amount that the bank will loan Ms. rose unless Ms. Warren either pays 25% of the purchase in cash or pledges to the bank a first priority lien on the vacant land as collateral. If Ms. Rose has $500,000 available as a down payment, could she have borrowed enough money based on this appraisal without pledging the vacant land as collateral? Should Peterson Accounting have relied on the income statement and footnote information provided by Ms. Martinezs accountant? Why or why not?

		For the years ended December 31,
		2004	2003	2002
Rental Revenue		$892,513	$796,500	$759,656
Other Revenues (note 1)		212,432	183,195	171,923
Total Revenues		$1,104,945	$979,695	$931,579
Cost of Revenue (note 2)		441,978	411,472	419,211
Gross Profit		$662,967	$568,223	$512,368
Marketing		110,495	97,970	93,158
General and Administrative (note 3)		287,286	254,721	242,211
Operating Income		$265,187	$215,533	$177,000
Notes to Income Statement
Note 1: Other Revenues
Other revenues consist of charges to guests for charges for other goods and services.
Note 2: Cost of Revenue
Cost of revenue includes all payroll related costs of employees; depreciation on the
property, improvements, and furniture; linen service charges; utilities; and bed taxes.
Depreciation in cost of revenue		2004	2003	2002
Building (40 year life, Straight line)		$50,000	$50,000	$50,000
Property Improvements (various)		72,000	68,500	65,000
Furniture (5 year life, Straight line)		88,000	82,000	82,000
Note 3: General and Administrative Expenses
General and administrative expenses do not include a salary for S. Martinez, the owner
of the hotel, since this is a sole proprietorship and not a corporation. Ms. Martinez took
drawings of $75,000 in 2004; $72,000 in 2003; and $70,000 in 2002 in addition to the
expenses listed above. These amounts approximate what a manager would be paid.
General and administrative expenses also include depreciation on equipment
of $22,000 in 2004; $23,000 in 2003, and $27,000 in 2002.