What is total cost of the line of credit

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Reference no: EM13813427

Your client is a biochemist who has discovered a technique to create a new biofuel. He estimates it will take him 2 years to make it economically feasible at a cost of $2,000,000. He is willing to put in $400,000 of his own money and has secured a line of credit for 2 years at 12% to cover the rest.

a. Assume that loan is set up as interest-only (meaning any accrued interest is paid monthly) and interest is accrued monthly based on average daily balance. Assume further that the $1,600,000 is withdrawn ratably over the 2 year period, with withdrawals taken out on the 15th of every month. What is total cost of the line of credit?

b. He estimates that there’s an 80% chance that at the end of the 2 year period, he can sell the patent of the process for $10,000,000. Assume that all of the costs incurred were capitalized as costs of the patent, he has a combined federal and state tax rate of 30% and he has an expected rate of return of 8%. What is the present value of his expected payoff?

Reference no: EM13813427

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