Chinook Resorts is considering building 10 new cabins. The cabins will cost $1,200,000 to build and furnishings for all 10 units are expected to cost about $82,500. Alternatively, Chinook
Could sell 40 acres of its land to a new developer for $12,000 an acre, in which case there would
Not be enough land to build any new cabins. Chinook paid $3,000 an acre for the land several
Years ago. Chinook pays taxes at a marginal rate of 34%. What is the net initial cash outflow to
Chinook if it undertakes the construction of the new cabins?
A)-$1,640,100
B)-$ 802,500
C)-$1,282,500
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The net initial cash outflow is the cost of building the cabins and furnishings minus the proceeds from selling the land. The cost of building the cabins is $1,200,000 and the cost of furnishings is $82,500, for a total of $1,282,500. The proceeds from selling the land would be $40 acres x $12,000 per acre = $480,000. Since Chinook paid $3,000 per acre for the land, the taxable gain on the sale would be $480,000 - (40 acres x $3,000 per acre) = $240,000. The taxes on this gain would be $240,000 x 34% = $81,600. Therefore, the net initial cash outflow would be $1,282,500 - $480,000 + $81,600 = $802,500.

Chinook Resorts Is Considering Building 10 New Cabins