You purchased land 3 years ago for $84000 and believe its market value is now $93000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $128000, 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 $240000 each year, while expenses will be a mere $163405 each year. The initial working capital requirement will be $23000 which will be recovered in the last year. The tax rate is 32%. Your estimated cost of capital is 9%. What is the net present value of this project?
Market value 93,000
Hotel investment 128,000
Depreciation 3 years
Interest rate 8%
Payment 4 years
Working capital 23,000
Tax rate 32%
Cost of capital 9%
1. Estimate yearly payment for the loan
Use the present value approach - that is the $60,000 should be equal
to the present value fo 4 payments at 8%
You can compute using trial and error OR Goal ...
The following posting helps calculate net present value. The answers are given in an Excel spreadsheet.