8. Your client is a biochemist who has discovered a technique to create a new bi
ID: 2769677 • Letter: 8
Question
8. Your client is a biochemist who has discovered a technique to create a new biofuel. He estimates it will take him 2 years to make it economically feasible at a cost of $2,000,000. He is willing to put in $400,000 of his own money and has secured a line of credit for 2 years at 12% to cover the rest. a) Assume that loan is set up as interest-only (meaning any accrued interest is paid monthly) and interest is accrued monthly based on average daily balance. Assume further that the $1,600,000 is withdrawn ratably over the 2 year period, with withdrawals taken out on the 15th of every month. What is total cost of the line of credit? (5 points) b) He estimates that there’s an 80% chance that at the end of the 2 year period, he can sell the patent of the process for $10,000,000. Assume that all of the costs incurred were capitalized as costs of the patent, he has a combined federal and state tax rate of 30% and he has an expected rate of return of 8%. What is the present value of his expected payoff?
Explanation / Answer
Total withdrawal =1600000
No of withdrawal period = 12*2*2=48
Per period rate = 12%/24/2 = 0.50%
Per period withdrawal = 1600000/48 = 33333.33
Answer a. Cost of line of credit is $294000.
Expected rate of return 8%
Per period expected rate of return = 8/12=0.667%
80% chance of selling patent at $10000000 hence inflow = 10000000*80%=8000000
Capital gain tax = (8000000-2000000-294000)*30% = 1711800
Answer b. NPV is 2770093.92
Workings:-
Interest
periods
Opening balance
withdawal
interest @0.50% (A)
closing balance
0
1
0
33333.33
250.00
33333.33
2
33333.33
33333.33
500.00
66666.66
3
66666.66
33333.33
750.00
99999.99
4
99999.99
33333.33
1,000.00
133333.32
5
133333.32
33333.33
1,250.00
166666.65
6
166666.65
33333.33
1,500.00
199999.98
7
199999.98
33333.33
1,750.00
233333.31
8
233333.31
33333.33
2,000.00
266666.64
9
266666.64
33333.33
2,250.00
299999.97
10
299999.97
33333.33
2,500.00
333333.3
11
333333.3
33333.33
2,750.00
366666.63
12
366666.63
33333.33
3,000.00
399999.96
13
399999.96
33333.33
3,250.00
433333.29
14
433333.29
33333.33
3,500.00
466666.62
15
466666.62
33333.33
3,750.00
499999.95
16
499999.95
33333.33
4,000.00
533333.28
17
533333.28
33333.33
4,250.00
566666.61
18
566666.61
33333.33
4,500.00
599999.94
19
599999.94
33333.33
4,750.00
633333.27
20
633333.27
33333.33
5,000.00
666666.6
21
666666.6
33333.33
5,250.00
699999.93
22
699999.93
33333.33
5,500.00
733333.26
23
733333.26
33333.33
5,750.00
766666.59
24
766666.59
33333.33
6,000.00
799999.92
25
799999.92
33333.33
6,250.00
833333.25
26
833333.25
33333.33
6,500.00
866666.58
27
866666.58
33333.33
6,750.00
899999.91
28
899999.91
33333.33
7,000.00
933333.24
29
933333.24
33333.33
7,250.00
966666.57
30
966666.57
33333.33
7,500.00
999999.9
31
999999.9
33333.33
7,750.00
1033333.23
32
1033333.23
33333.33
8,000.00
1066666.56
33
1066666.56
33333.33
8,250.00
1099999.89
34
1099999.89
33333.33
8,500.00
1133333.22
35
1133333.22
33333.33
8,750.00
1166666.55
36
1166666.55
33333.33
9,000.00
1199999.88
37
1199999.88
33333.33
9,250.00
1233333.21
38
1233333.21
33333.33
9,500.00
1266666.54
39
1266666.54
33333.33
9,750.00
1299999.87
40
1299999.87
33333.33
10,000.00
1333333.2
41
1333333.2
33333.33
10,250.00
1366666.53
42
1366666.53
33333.33
10,500.00
1399999.86
43
1399999.86
33333.33
10,750.00
1433333.19
44
1433333.19
33333.33
11,000.00
1466666.52
45
1466666.52
33333.33
11,250.00
1499999.85
46
1499999.85
33333.33
11,500.00
1533333.18
47
1533333.18
33333.33
11,750.00
1566666.51
48
1566666.51
33333.33
12,000.00
1599999.84
2,93,999.97
NPV
Own cost
Interest cost
Loan payment
Sales value
Tax on capital gain
Net cashflow
Disco @0.667% (B)
Discounted cashflow
-400000
-
-4,00,000.00
1
-4,00,000.00
-250.00
-250.00
0.993377483
-248.34
-500.00
-500.00
0.986798825
-493.40
-750.00
-750.00
0.980263733
-735.20
-1,000.00
-1,000.00
0.97377192
-973.77
-1,250.00
-1,250.00
0.9673231
-1,209.15
-1,500.00
-1,500.00
0.960916986
-1,441.38
-1,750.00
-1,750.00
0.954553298
-1,670.47
-2,000.00
-2,000.00
0.948231753
-1,896.46
-2,250.00
-2,250.00
0.941952072
-2,119.39
-2,500.00
-2,500.00
0.935713979
-2,339.28
-2,750.00
-2,750.00
0.929517198
-2,556.17
-3,000.00
-3,000.00
0.923361455
-2,770.08
-3,250.00
-3,250.00
0.917246478
-2,981.05
-3,500.00
-3,500.00
0.911171998
-3,189.10
-3,750.00
-3,750.00
0.905137747
-3,394.27
-4,000.00
-4,000.00
0.899143457
-3,596.57
-4,250.00
-4,250.00
0.893188864
-3,796.05
-4,500.00
-4,500.00
0.887273706
-3,992.73
-4,750.00
-4,750.00
0.881397722
-4,186.64
-5,000.00
-5,000.00
0.875560651
-4,377.80
-5,250.00
-5,250.00
0.869762236
-4,566.25
-5,500.00
-5,500.00
0.864002221
-4,752.01
-5,750.00
-5,750.00
0.858280352
-4,935.11
-6,000.00
-6,000.00
0.852596376
-5,115.58
-6,250.00
-6,250.00
0.846950042
-5,293.44
-6,500.00
-6,500.00
0.841341102
-5,468.72
-6,750.00
-6,750.00
0.835769306
-5,641.44
-7,000.00
-7,000.00
0.83023441
-5,811.64
-7,250.00
-7,250.00
0.824736169
-5,979.34
-7,500.00
-7,500.00
0.81927434
-6,144.56
-7,750.00
-7,750.00
0.813848682
-6,307.33
-8,000.00
-8,000.00
0.808458956
-6,467.67
-8,250.00
-8,250.00
0.803104923
-6,625.61
-8,500.00
-8,500.00
0.797786347
-6,781.18
-8,750.00
-8,750.00
0.792502994
-6,934.40
-9,000.00
-9,000.00
0.78725463
-7,085.29
-9,250.00
-9,250.00
0.782041023
-7,233.88
-9,500.00
-9,500.00
0.776861943
-7,380.19
-9,750.00
-9,750.00
0.771717162
-7,524.24
-10,000.00
-10,000.00
0.766606453
-7,666.06
-10,250.00
-10,250.00
0.761529589
-7,805.68
-10,500.00
-10,500.00
0.756486346
-7,943.11
-10,750.00
-10,750.00
0.751476503
-8,078.37
-11,000.00
-11,000.00
0.746499838
-8,211.50
-11,250.00
-11,250.00
0.74155613
-8,342.51
-11,500.00
-11,500.00
0.736645162
-8,471.42
-11,750.00
-11,750.00
0.731766717
-8,598.26
-12,000.00
-16,00,000.00
80,00,000.00
-1711800
46,76,200.00
0.72692058
33,99,226.02
NPV
27,70,093.92
periods
Opening balance
withdawal
interest @0.50% (A)
closing balance
0
1
0
33333.33
250.00
33333.33
2
33333.33
33333.33
500.00
66666.66
3
66666.66
33333.33
750.00
99999.99
4
99999.99
33333.33
1,000.00
133333.32
5
133333.32
33333.33
1,250.00
166666.65
6
166666.65
33333.33
1,500.00
199999.98
7
199999.98
33333.33
1,750.00
233333.31
8
233333.31
33333.33
2,000.00
266666.64
9
266666.64
33333.33
2,250.00
299999.97
10
299999.97
33333.33
2,500.00
333333.3
11
333333.3
33333.33
2,750.00
366666.63
12
366666.63
33333.33
3,000.00
399999.96
13
399999.96
33333.33
3,250.00
433333.29
14
433333.29
33333.33
3,500.00
466666.62
15
466666.62
33333.33
3,750.00
499999.95
16
499999.95
33333.33
4,000.00
533333.28
17
533333.28
33333.33
4,250.00
566666.61
18
566666.61
33333.33
4,500.00
599999.94
19
599999.94
33333.33
4,750.00
633333.27
20
633333.27
33333.33
5,000.00
666666.6
21
666666.6
33333.33
5,250.00
699999.93
22
699999.93
33333.33
5,500.00
733333.26
23
733333.26
33333.33
5,750.00
766666.59
24
766666.59
33333.33
6,000.00
799999.92
25
799999.92
33333.33
6,250.00
833333.25
26
833333.25
33333.33
6,500.00
866666.58
27
866666.58
33333.33
6,750.00
899999.91
28
899999.91
33333.33
7,000.00
933333.24
29
933333.24
33333.33
7,250.00
966666.57
30
966666.57
33333.33
7,500.00
999999.9
31
999999.9
33333.33
7,750.00
1033333.23
32
1033333.23
33333.33
8,000.00
1066666.56
33
1066666.56
33333.33
8,250.00
1099999.89
34
1099999.89
33333.33
8,500.00
1133333.22
35
1133333.22
33333.33
8,750.00
1166666.55
36
1166666.55
33333.33
9,000.00
1199999.88
37
1199999.88
33333.33
9,250.00
1233333.21
38
1233333.21
33333.33
9,500.00
1266666.54
39
1266666.54
33333.33
9,750.00
1299999.87
40
1299999.87
33333.33
10,000.00
1333333.2
41
1333333.2
33333.33
10,250.00
1366666.53
42
1366666.53
33333.33
10,500.00
1399999.86
43
1399999.86
33333.33
10,750.00
1433333.19
44
1433333.19
33333.33
11,000.00
1466666.52
45
1466666.52
33333.33
11,250.00
1499999.85
46
1499999.85
33333.33
11,500.00
1533333.18
47
1533333.18
33333.33
11,750.00
1566666.51
48
1566666.51
33333.33
12,000.00
1599999.84
2,93,999.97
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