Your client is a biochemist who has discovered a technique to create a new biofu
ID: 2653251 • Letter: Y
Question
Your client is a biochemist who has discovered a technique to create a new biofuel. He estimates it will take him 2 years to make it economically feasible at a cost of $2,000,000. He is willing to put in $400,000 of his own money and has secured a line of credit for 2 years at 12% to cover the rest.
a. Assume that loan is set up as interest-only (meaning any accrued interest is paid monthly) and interest is accrued monthly based on average daily balance. Assume further that the $1,600,000 is withdrawn ratably over the 2 year period, with withdrawals taken out on the 15th of every month. What is total cost of the line of credit?
b. He estimates that there’s an 80% chance that at the end of the 2 year period, he can sell the patent of the process for $10,000,000. Assume that all of the costs incurred were capitalized as costs of the patent, he has a combined federal and state tax rate of 30% and he has an expected rate of return of 8%. What is the present value of his expected payoff?
Explanation / Answer
Ans a
b)Caculation of Present Value of Pay-Off
Details
Workings
Period Withdrawal Cum Balance OS OS for First Half-Month*No of Days OS for Second Half-Month * No of Days Total No of Days Average Daily Balance Monthly Interest rate Monthly Interest Amount a b a+b c (a+b)/c Month 1 66,667.00 66,667.00 - 10,00,005.00 10,00,005.00 30.00 33,333.50 0.01 333.34 Month 2 66,667.00 1,33,334.00 10,00,005.00 20,00,010.00 30,00,015.00 30.00 1,00,000.50 0.01 1,000.01 Month 3 66,667.00 2,00,001.00 20,00,010.00 30,00,015.00 50,00,025.00 30.00 1,66,667.50 0.01 1,666.68 Month 4 66,667.00 2,66,668.00 30,00,015.00 40,00,020.00 70,00,035.00 30.00 2,33,334.50 0.01 2,333.35 Month 5 66,667.00 3,33,335.00 40,00,020.00 50,00,025.00 90,00,045.00 30.00 3,00,001.50 0.01 3,000.02 Month 6 66,667.00 4,00,002.00 50,00,025.00 60,00,030.00 110,00,055.00 30.00 3,66,668.50 0.01 3,666.69 Month 7 66,667.00 4,66,669.00 60,00,030.00 70,00,035.00 130,00,065.00 30.00 4,33,335.50 0.01 4,333.36 Month 8 66,667.00 5,33,336.00 70,00,035.00 80,00,040.00 150,00,075.00 30.00 5,00,002.50 0.01 5,000.03 Month 9 66,667.00 6,00,003.00 80,00,040.00 90,00,045.00 170,00,085.00 30.00 5,66,669.50 0.01 5,666.70 Month 10 66,667.00 6,66,670.00 90,00,045.00 100,00,050.00 190,00,095.00 30.00 6,33,336.50 0.01 6,333.37 Month 11 66,667.00 7,33,337.00 100,00,050.00 110,00,055.00 210,00,105.00 30.00 7,00,003.50 0.01 7,000.04 Month 12 66,667.00 8,00,004.00 110,00,055.00 120,00,060.00 230,00,115.00 30.00 7,66,670.50 0.01 7,666.71 Month 13 66,667.00 8,66,671.00 120,00,060.00 130,00,065.00 250,00,125.00 30.00 8,33,337.50 0.01 8,333.38 Month 14 66,667.00 9,33,338.00 130,00,065.00 140,00,070.00 270,00,135.00 30.00 9,00,004.50 0.01 9,000.05 Month 15 66,667.00 10,00,005.00 140,00,070.00 150,00,075.00 290,00,145.00 30.00 9,66,671.50 0.01 9,666.72 Month 16 66,667.00 10,66,672.00 150,00,075.00 160,00,080.00 310,00,155.00 30.00 10,33,338.50 0.01 10,333.39 Month 17 66,667.00 11,33,339.00 160,00,080.00 170,00,085.00 330,00,165.00 30.00 11,00,005.50 0.01 11,000.06 Month 18 66,667.00 12,00,006.00 170,00,085.00 180,00,090.00 350,00,175.00 30.00 11,66,672.50 0.01 11,666.73 Month 19 66,667.00 12,66,673.00 180,00,090.00 190,00,095.00 370,00,185.00 30.00 12,33,339.50 0.01 12,333.40 Month 20 66,667.00 13,33,340.00 190,00,095.00 200,00,100.00 390,00,195.00 30.00 13,00,006.50 0.01 13,000.07 Month 21 66,667.00 14,00,007.00 200,00,100.00 210,00,105.00 410,00,205.00 30.00 13,66,673.50 0.01 13,666.74 Month 22 66,667.00 14,66,674.00 210,00,105.00 220,00,110.00 430,00,215.00 30.00 14,33,340.50 0.01 14,333.41 Month 23 66,667.00 15,33,341.00 220,00,110.00 230,00,115.00 450,00,225.00 30.00 15,00,007.50 0.01 15,000.08 Month 24 66,659.00 16,00,000.00 230,00,115.00 240,00,000.00 470,00,115.00 30.00 15,66,670.50 0.01 15,666.71 Total Interest 1,92,000.92 Total Cost line of credit 192000.92 Average Daily Balance (D1B1+…..D30B30)/30Related Questions
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