Problem:

You purchased land 3 years ago for $75,000 and believe its market value is now $120,000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $205,000, 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 $334,000 each year, while expenses will be a mere $75,000 each year. The initial working capital requirement will be $14,000 which will be recovered in the last year. The tax rate is 28%. Your estimated cost of capital is 15%.

Required:

Question 1: What is the net present value of this project?

• $186,089.94
• $80,929.67
• $192,149.88
• $831,000.00
• $139,666.75

Note: Please provide reasons to support your answer.