Purchase Solution

# Calculating Net Present Value in Excel

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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?

1. (\$59,838)
2. \$84,213
3. \$80,495
4. \$38,294
5. \$90,372
6. \$(67,340)

##### Solution Summary

The following posting helps calculate net present value. The answers are given in an Excel spreadsheet.

##### Solution Preview

Cost 84,000
Market value 93,000
Hotel investment 128,000
Depreciation 3 years
Loan 60,000
Interest rate 8%
Payment 4 years
revenues 240,000
Expenses 163,405
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 ...

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