Question 16 5 pts You purchased land 3 years ago for $75,000 and believe its mar
ID: 2657667 • Letter: Q
Question
Question 16 5 pts You purchased land 3 years ago for $75,000 and believe its market value is now $120,000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will nitially cost you $205,000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $334,000 each year, while expenses will be a mere $75,000 each year. The initial working capital requirement will be $14,000 which will be recovered in the last year. The tax rate is 28%. Your estimated cost of capital is 15%, what is the net present value of this project? O $831,000.00 O $186,089.94 O $139,666.75 O $192,149.88 O $80.929.67Explanation / Answer
Year
0
1
2
3
Market value of land
-120000
cost of hotel
-205000
investment in working capital
-14000
sales
334000
334000
334000
less expenses
75000
75000
75000
less depreciation =205000/3
68333.33
68333.33
68333.33
PBT
190666.7
190666.7
190666.7
less tax 28%
53386.67
53386.67
53386.67
after tax profit
137280
137280
137280
add depreciation
68333.33
68333.33
68333.33
add recovery of working capital
14000
net cash flow
-339000
205613.3
205613.3
219613.3
present value of net cash flow = cash flow/(1+r)^n r= 15%
-339000
178794.2
155473.2
144399.3
NPV =sum of preset value of cash flow
139666.8
Year
0
1
2
3
Market value of land
-120000
cost of hotel
-205000
investment in working capital
-14000
sales
334000
334000
334000
less expenses
75000
75000
75000
less depreciation =205000/3
68333.33
68333.33
68333.33
PBT
190666.7
190666.7
190666.7
less tax 28%
53386.67
53386.67
53386.67
after tax profit
137280
137280
137280
add depreciation
68333.33
68333.33
68333.33
add recovery of working capital
14000
net cash flow
-339000
205613.3
205613.3
219613.3
present value of net cash flow = cash flow/(1+r)^n r= 15%
-339000
178794.2
155473.2
144399.3
NPV =sum of preset value of cash flow
139666.8
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.