The Dallas Project

1. I would allocate the purchase price based on the fair market value of the assets on the date of acquisition. FASB standard 141R establishes the acquisition-date fair value as the measurement objective for all assets acquired. I would tell Nella to allocate 89% to the undeveloped acreage, 1% to the 500 finished lots and 10% to the recreation facility (see schedule below.) The $33,000,000 acquisition costs would be allocated as follows:
Undeveloped Acreage- $ 29,370,000
500 Finished Lots- $ 330,000
Recreation Facility- $ 3,300,000 $ 33,000,000

Fair Value on Acquisition Date | 24,500 Undeveloped Acreage | $ 89,000,000 | 89% | 500 Finished Lots | $ 1,000,000 | 1% | Recreation Facility | $ 10,000,000 | 10% | | $ 100,000,000 | 100% |

Allocation of Purchase Price | per unit | Undeveloped Acreage | $ 29,370,000 | 89% | $ 1,199 | 500 Finished Lots | $ 330,000 | 1% | $ 660 | Recreation Facility | $ 3,300,000 | 10% | $ 3,300,000 | | $ 33,000,000 | 100% | |

2. The projected NPV of the project is $142,336,356 (calculated on following pages.) The NPV includes the initial purchase price in 1991, revenue from the sale of lots each year, revenue from the sale of the recreation facility in 1999, construction costs each year, and taxes each year.

3. The project is a slam-dunk for the corporation because they are yielding an internal rate of return of 80%. The NPV of the future cash flows is significantly larger than the purchase costs of the assets.

NPV Calculation | | Cash Flows | PV Table | | Yr 0 | (33,000,000) | 1 | (33,000,000) | Yr 1 | 22,330,776 | 0.893 | 19,941,383 | Yr 2 | 23,038,531 | 0.797 | 18,361,709 | Yr 3 | 26,998,531 | 0.712 | 19,222,954 |