You purchased land 3 years ago for $40000 and believe its market value is now $7

Question

You purchased land 3 years ago for $40000 and believe its market value is now $75000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $165000, 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 $200000 each year, while expenses will be a mere $25000 each year. The initial working capital requirement will be $10000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 11%. What is the net present value of this project?

Explanation / Answer

Discount rate 11% Year 0 1 2 3 4 Initial investment-Land -75000 Initial investment-hotel -165000 Revenue 200000 200000 200000 200000 cost -25000 -25000 -25000 -25000 Networking capital -10000 10000 Loan repayment -18115 -18115 -18115 -18115 EMI yearly Depretiation for tax benefit -55000 -55000 -55000 0 Net CF -250000 156885 156885 156885 166885 Tax@35% 0 29319.5 29319.5 29319.5 52069.5 Taken benefit of loan repayment and depretiation exemption Post Tax CF -250000 127565.5 127565.5 127565.5 114815.5 Discounted at 11% -250000 114923.9 103535 93274.79 75632.53 NPV 137366.2

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.