You purchased land 3 years ago for $55000 and believe its market value is now $8

Question

You purchased land 3 years ago for $55000 and believe its market value is now $80000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $145000, 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 $220000 each year, while expenses will be a mere $22000 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 10%. What is the net present value of this project?
Answer


$134,640.25
OR
$29,935.11

Explanation / Answer

$134,640.25

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