\"You are thinking about opening a car dealership. You bought some real estate l
ID: 2708166 • Letter: #
Question
"You are thinking about opening a car dealership. You bought some real estate last year for $700,000 which you will use for the dealership. The market value of this real estate today is $1,200,000. To build the necessary showroom and shop it will cost you $600,000, a cost which you will depreciate over 3 years. You estimate an increased need for net working capital in year zero in the amount of $40,000 which will be recovered at the end of the project. From your dealership you expect to generate annual revenues of $700,000 and have operating expenses of $200,000, and you have a 30% tax rate. Bank of America has offered to lend you $850,000 at an interest rate of 6% to be repaid over 5 years. If your cost of capital (discount rate) is 10% what is the net present value of this project? " 1049662 -790338 -570000 -850443 359662 -616258 "You are thinking about opening a car dealership. You bought some real estate last year for $700,000 which you will use for the dealership. The market value of this real estate today is $1,200,000. To build the necessary showroom and shop it will cost you $600,000, a cost which you will depreciate over 3 years. You estimate an increased need for net working capital in year zero in the amount of $40,000 which will be recovered at the end of the project. From your dealership you expect to generate annual revenues of $700,000 and have operating expenses of $200,000, and you have a 30% tax rate. Bank of America has offered to lend you $850,000 at an interest rate of 6% to be repaid over 5 years. If your cost of capital (discount rate) is 10% what is the net present value of this project? " 1049662 -790338 -570000 -850443 359662 -616258 1049662 -790338 -570000 -850443 359662 -616258Explanation / Answer
INITIAL INVESTMENT = COST OF SHOP + NET INCREASE IN WORKING CAPITAL
= 600000 + 40000
= 640000
LET THE ANNUAL INSTALLMENT OF THE LOAN BE X
850000 = X*PVIFA(6%,5)
4.2124X = 850000
X = 201785
YEARS
AMOUNT OUTSTANDING
INTEREST PORTION
PRINCIPAL PORTION
INTEREST TAX SHIELD
[INTEREST*30%]
INSTALLMENT
P.V OF ITS @ 15%
1
850000
51000
150785
15300
201785
13304.35
2
699215
41953
159832
12586
201785
9516.82
3
539383
32363
169422
9709
201785
6383.83
4
369961
22198
179587
6660
201785
3773.57
5
190374
11422
190363
3427
201785
1703.82
34683
DEPRECIATION PER YEAR = 600000/3 = 200000
ANNUAL CASHFLOW EXCLUDING INTEREST TAX SHIELD = (REVENUE
YEARS
AMOUNT OUTSTANDING
INTEREST PORTION
PRINCIPAL PORTION
INTEREST TAX SHIELD
[INTEREST*30%]
INSTALLMENT
P.V OF ITS @ 15%
1
850000
51000
150785
15300
201785
13304.35
2
699215
41953
159832
12586
201785
9516.82
3
539383
32363
169422
9709
201785
6383.83
4
369961
22198
179587
6660
201785
3773.57
5
190374
11422
190363
3427
201785
1703.82
34683
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