You purchased land 3 years ago for $55000 and believe its market value is now $1
ID: 2376006 • Letter: Y
Question
You purchased land 3 years ago for $55000 and believe its market value is now $105000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $132500, 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 $175000 each year, while expenses will be a mere $24000 each year. The initial working capital requirement will be $9000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%. What is the net present value of this project?
$60,548 $12,385 $33,294 $42,788.94please exaplain why~thank you
Explanation / Answer
flows
175000-24000-44167-4800=102033
less tax 35711.55
flow after tax 66321.45
add. depreciation 44167
total flow 110488.45
PV of flow 110488.45*2.48=274011.35
pv of working capital 9000*0.7513=6761.7
total inflow = 274011.35+6761.7=280773.056
NPV= 280773.056-132500-9000-105000=33294
so answer will be 33294
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