Problem:
You purchased land 3 years ago for $65000 and believe its market value is now $80000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $100000, 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 $215000 each year, while expenses will be a mere $25000 each year. The initial working capital requirement will be $6000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%.
Required:
What is the net present value of this project?
Note: Be sure to show how you arrived at your answer.