Assume the role of Lindsay Kay. Prepare notes to summarize your analysis in preparation for a meeting between Lindsay and Michael.
Exhibit A Forgivable Loan from Ministry of Agriculture and Education
Clause 1: Lindsay Kay will receive a forgivable loan of $ 500,000 for the development and operation of W& K Gardens as described in the attached business plan.
Clause 2: The government will provide $ 500,000 on May 20, 20X6, which is forgivable on May 20, 20X11, if the following conditions are met:
• Three university students are hired for the period June 1 to August 31 each year;
• All produce is grown on- site or purchased from local growers; and
• Audited financial statements are provided to the government three months after year-end.
Clause 3: If any of the above terms is not met, the loan is repayable with interest of 10% by the end of the fiscal year in which the term is broken.
Clause 4: The government has the right to inspect the premises and financial records to ensure that all conditions of the loan have been met at any time.
Exhibit B Terms of the Lease
Addison Ltd. agrees to rent to W& K the land site and building that it requires in starting up its new business. The lease agreement calls for five annual lease payments of $ 300,000 (including executor costs of $ 19,506) at the beginning of each year; the details surrounding the agreement are as follows:
Commissions and legal fees (incurred by Addison)……….. $ 60,000
Addison’s carrying value of building………………………………………… $ 340,000
Fair value of the building…………………. $ 400,000 Economic life of building…………………………… 6 years
Guaranteed residual value at end of lease term…………… $ 75,000 Land:
Addison’s carrying value of land………………. $ 375,000
Fair value of the land…………………. $1,000,000
Residual value at end of lease term……………… $ 1,000,000
Rate implicit in the lease (known by W& K) ………….. 10%
Addison contacted its building contractor, who promised to have the renovations completed on time at a price very close to the estimated amount of $ 125,000. The renovation work would have a useful life of approximately eight years.
Addison stated that the lease will be non- cancellable but is willing to provide an option to renew the lease at the end of the five- year term.
Exhibit C Inventory Requirements
W& K would be open for business all year but the amount and type of inventory would fluctuate depending on the time of the year. The garden centre would consist of a greenhouse, outdoor tents, a store, and a small out-door nursery. The storefront would be open year- round and would sell fertilizers, planters, garden tools, and accessories. Gift baskets would be brought in for special occasions such as Mother’s Day, Halloween, Thanksgiving, and Christmas.
To attract customers to the store, Michael would provide customized landscape designs for a flat fee of $ 500. The customer would then receive a credit for the same amount at the store. The credit would have no cash value, but could be used for the purchase of shrubs, flowers, etc., at the store over the next two years.
Annual plants (such as geraniums, petunias, and many more varieties) would be purchased from local growing farms each spring. These plants would all have to be sold before the end of summer. Perennial plants (including bellflowers, day lilies, and hostas) would be grown in W& K’s greenhouse and transferred to the outdoor store protected by large tents. Those plants not sold by September 30 would be returned to the greenhouse for winter storage and care. It was expected that most perennial plants would be sold, especially if Lindsay discounted the price to encourage customers to buy and plant in the fall instead of waiting for the following spring.
Shrubs and trees would be purchased from local nurseries early in the spring. It was expected that about 80% of these purchases would be sold during the growing season. The remaining 20% would be transferred to the outdoor nursery to be replanted and would remain there until the next season. To be competitive with the other two garden centers, Lindsay thought that they should offer a one- year warranty on all shrubs and trees returned by customers with a valid sales receipt.
The outdoor nursery would be used primarily for Christmas trees, which would be grown from seedling stock and could remain in the ground for a number of years. In the initial years, mature trees would be bought from a local supplier. Exhibit D Capital Asset Requirements Michael estimated that the following capital assets would be required for the first year of operations. Part of the government loan would be used to purchase these items. Three small used trucks (in addition to the one contributed by Michael) $ 40,000 Landscaping equipment (backhoe, rototiller, etc.) $ 60,000 Small power tools $ 15,000 Display shelves for the store $ 12,000
Exhibit D Capital Asset Requirements
Michael estimated that the following capital assets would be required for the first year of operations. Part of the government loan would be used to purchase these items.
Three small used trucks (in addition to the one contributed by Michael) …. $ 40,000
Landscaping equipment (backhoe, rototiller, etc.) ………….. $ 60,000
Small power tools……………………… $ 15,000 Display shelves for the store …………………. $ 12,000