You are thinking about opening a car dealership. You bought some real estate las
ID: 2728463 • Letter: Y
Question
You are thinking about opening a car dealership. You bought some real estate last year for $700,000 which you will use for the dealership. The market value of this real estate today is $1,200,000. To build the necessary showroom and shop it will cost you $600,000, a cost which you will depreciate over 3 years. You estimate an increased need for net working capital in year zero in the amount of $40,000 which will be recovered at the end of the project. From your dealership you expect to generate annual revenues of $700,000 and have operating expenses of $200,000, and you have a 30% tax rate. Bank of America has offered to lend you $850,000 at an interest rate of 6% to be repaid over 5 years. If your cost of capital (discount rate) is 10% what is the net present value of this project?You are thinking about opening a car dealership. You bought some real estate last year for $700,000 which you will use for the dealership. The market value of this real estate today is $1,200,000. To build the necessary showroom and shop it will cost you $600,000, a cost which you will depreciate over 3 years. You estimate an increased need for net working capital in year zero in the amount of $40,000 which will be recovered at the end of the project. From your dealership you expect to generate annual revenues of $700,000 and have operating expenses of $200,000, and you have a 30% tax rate. Bank of America has offered to lend you $850,000 at an interest rate of 6% to be repaid over 5 years. If your cost of capital (discount rate) is 10% what is the net present value of this project?
Explanation / Answer
Initial Investment = Market Value of real estate + Showroom construction cost + Increase in working capital
= > $1,200,000 + $600,000 + $40,000 = $1,840,000
Depreciation every year = $600,000/3 = $200,000
Interest per month on loan = $850,000 x 6% = $51,000
Year 1
Year 2
Year 3
Revenue
$700,000
$700,000
$700,000
Less: Operating Expenses
$200,000
$200,000
$200,000
Less: Depreciation
$200,000
$200,000
$200,000
Less: Interest
$51,000
$51,000
$51,000
EBT
$249,000
$249,000
$249,000
Less: Tax @30%
$74,700
$74,700
$74,700
Net Income
$174,300
$174,300
$174,300
Add: Depreciation
$200,000
$200,000
$200,000
Add: Recovery of NWC
$0
$0
$40,000
Add: Recovery of Real asset
$0
$0
$1,200,000
Operating Cash Flow
$374,300
$374,300
$1,614,300
NPV = -$1,840,000 + [($374,300)/(1.10)] + [($374,300)/(1.10)2] + [($1,614,300)/(1.10)3] = $22,459.05
Year 1
Year 2
Year 3
Revenue
$700,000
$700,000
$700,000
Less: Operating Expenses
$200,000
$200,000
$200,000
Less: Depreciation
$200,000
$200,000
$200,000
Less: Interest
$51,000
$51,000
$51,000
EBT
$249,000
$249,000
$249,000
Less: Tax @30%
$74,700
$74,700
$74,700
Net Income
$174,300
$174,300
$174,300
Add: Depreciation
$200,000
$200,000
$200,000
Add: Recovery of NWC
$0
$0
$40,000
Add: Recovery of Real asset
$0
$0
$1,200,000
Operating Cash Flow
$374,300
$374,300
$1,614,300
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.