Question

Tiger Towers, Inc. is considering an expansion of their existing business, student apartments. The new project will be built on some vacant land that the firm has just contracted to buy. The land cost $1,000,000 and the payment is due today. Construction of a 20-unit office building will cost $3 million; this expense will be depreciated straight-line over 30 years to zero salvage value; the pretax value of the land and building in year 30 will be $18,000,000. The $3,000,000 construction cost is to be paid today. The project will not change the risk level of the firm. The firm will lease 20 office suites at $20,000 per suite per year; payment is due at the start of the year; occupancy will begin in one year. Variable cost is $3,500 per suite. Fixed costs, excluding depreciation, are $75,000 per year. The project will require a $10,000 investment in net working capital.

rdebt = 10.0%	rwacc = 11.20%	DE = 3DE = 3
rasset = 15.0%	tax rate = 34%
requity = 24.9	rfree = 2%

Assume that the firm will partially finance the project with a $3,000,000 interest-only 30-year loan at 10.0 percent APR with annual payments.

What is the levered after-tax incremental cash flow for year 1?

Answer 1

Depreciation per year -

Land is not Depreciable so cost of land will be excluded from Depreciation calculation.

Construction Cost = 3000000

Year of Uses = 30 Years

Book Value at end of 30 years = 0

Depreciation per year = (3000000 - 0) /30 = 100000

	Year 1
Total Suites	20
Revenue per suite	20000
Total Revenue	400000
Variable cost per suite	3500
Total Variable cost	70000
Total Flxed Cost	75000
Depreciation	100000
EBIT	155000
Interest @10%	300000
EBT	-145000
Tax at 34%	49300
Profit After Tax	-95700
Cash Flow (Pat + Dep)	4300