You purchased land 3 years ago for $60000 and believe its market value is now $9

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You purchased land 3 years ago for $60000 and believe its market value is now $90000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $150000, 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 $165000 each year, while expenses will be a mere $30000 each year. The initial working capital requirement will be $7000 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?

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Solution.

ii.

Particulars Amount Revenue          165,000.00 Opereting Cost          (30,000.00) Depreciation          (70,000.00) EBIT            65,000.00 Interest            (4,800.00) EBT            60,200.00 Tax 35%          (21,070.00) EAT            39,130.00 Depreciation            70,000.00 Cash Inflow          109,130.00

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