Problem:
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)