1.Acme, Inc. is considering buy a new building to rent out to college students.

Question

1.Acme, Inc. is considering buy a new building to rent out to college students. The building will cost $1M today, and Acme is assuming a salvage value of $800,000 at t=10, with straight-line depreciation. Acme expects annual revenues from the building rental to be $100,000 every year and costs to upkeep the building to be $50,000 per year from t=1 to t=10. Assume the building does not require any change in Acme's net working capital, that Acme will sell the building at t=10 for $950,000, and that the tax rate is 40%. What is the cash flow from this project in year 3 (i.e. for t=3)? Enter your answer as a number with no commas or dollar signs.

2.Using the same numbers as the "Acme, Inc." project from the previous question, what is the cash flow in year 10 (t=10)? Enter your answer as a number with no commas or dollar signs.

3.Use the same numbers as the "Acme, Inc." project from the previous problem. This is the first investment in the college rental market that Acme, Inc. is making. Acme, Inc.'s core line of business is in shipping and storage. The beta of shipping and storage companies is 1.8, while the beta of investments in the rental market is 1.25. Assume the risk-free rate is 2%, the market return is 10%. What is the NPV of the project described in the previous problem(s)? Enter your answer as a whole number (no decimal points, no commas, or dollar signs).

Explanation / Answer

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