1. What is the maximum amount of loan Jose Luis can obtain if projected cash flows from his proposed project for the next five years are as follows and the lender is requesting a 12.5% interest rate?

Year Cash Flow

1 5,000

2 5,800

3 6,900


5 12,650

2. What is the monthly debt service payment on Marco’s loan if Enrique lends him $15,000 for four years at 8% interest?

3. Tanya is trying to prepare her loan amortization schedule for the renovation of her bed-and breakfast facility. Her banker is quoting her an interest rate of 12% for four years. The loan amount is $25,000. Prepare the loan amortization schedule.

4. Juan would like to add a shuttle service for his hotel guests to nearby shopping centers. The van has a price tag of $35,000. His bank will give him a loan for $25,000 at only 6% interest, compounded monthly, if Juan pays $10,000 as a down payment. What is Juan’s loan amortization schedule for the first five months?

5. What will be the total interest expense that Tanya (exercise 4) and Juan (exercise 5) will have to pay for their loans over the entire term?

6. Efren is considering buying some new equipment for his restaurant for $30,000. However, the restaurant supply store says they also lease equipment. The supply store will offer him a five-year lease with no down payment, four annual lease payments of $6,000 per year, and a final payment of $10,000. If Efren’s cost of capital is 8%, should he select the lease or purchase option? If there is a salvage value of $1,000 if he buys the equipment but no salvage value with the lease option, will his decision change?

7. Mary has been approached by Ian to invest $75,000 of equity in a project that projects the following cash flow. If Mary’s hurdle rate is 15%, should she invest in the deal?

Year Cash Flow





8. Milton is offering Bernard an opportunity to invest in his deal. He is asking for an equity investment of $125,000 and promises to pay Bernard the following cash flow:

Year Cash Flow


2 30,000

3 35,000

4 40,000

5 20,000

Bernard’s hurdle rate is 14%. Does Milton’s proposal meet Bernard’s investment goal?

9. ETHICS. Cathy is an accountant with a major corporation that is on the list of corporations to be audited under the new Sarbanes-Oxley law. She knows that one of the directors, Aaron, wants to start a hotel business of his own but is having a hard time coming up with the needed funds. She overhears another director suggesting to Aaron that he take out a personal loan from the company and pay it back later. Aaron trusts Cathy’s judgment and asks her opinion. If you were Cathy, what would you tell Aaron?



The sales, income from operations, and invested assets for each division of Winston Company are as follows:




Income from




Division C $5,000,000 $630,000 $3,900,000
Division D 6,800,000 760,000 4,300,000
Division E 3,750,000 750,000 7,250,000

Management has established a minimum rate of return for invested assets of 8%.


(a) Determine the residual income for each division.
(b) Based on residual income, which of the divisions is the most profitable?


11. EXPLORING THE WEB. Visit the American Institute of Certified Public Accountants (AICPA) website at and view the information regarding Sarbanes-Oxley, especially Sections 401 to 404. Compose a 1,000-word document on how these four sections attempt to regulate financial reporting in the hospitality industry. Does Sarbanes-Oxley affect subsidiaries of American firms?

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