Reference no: EM13200191
You have a contractor make improvements to a business rental for a fixxed price of $64,000. With this improvement you can obtain additional rent payments of $1,200 per month. You estimate the improvements will cause extra monthly expenses of $50 for property taxes, $45 for insurance, and $100 and $200
per month, respectively, in utility and maintenance costs. The life of this project is 15 years at which point the salvage value to the improvement is exactly $16,000. The improvements are depreciated on straight depreciation schedule (15 years). There is no income tax in Wyoming, so the only tax is Federal. Assume a marginal Federal tax rate of 33%.
(a) Assume that you pay cash of $64,000 for the project. Use an MARR of 15% and calculate a net present value for this cash stream after taxes.
(b) Assume that you borrow $50,000 (of the needed $64,000) for the project at a nominal interest rate of 9%. The interest on this loan is tax deductable. Use an MARR of 15% and calculate a net present value for this cash stream after taxes.
(Hint: The interest paid is not the same each year;so part b) will probably require Excel to make the calculation easy. You can do it by hand, but it will take a few calculations. The principal payments on the loan are not tax deductable.)
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