Question

The additional dining space will occupy space next to Olaf’s that was recently rented to a tenant. By claiming the space for the project, the firm will no longer be able to rent the space at $1,000 per month. Kristoff wants to evaluate this project over a four year time period. The after-tax operating profit margin on the renting the space is 30%. If Kristoff wants a 9% APR on Olaf cash flows, what is the present value of this opportunity cost? (rent is paid as the beginning of the month)

Question 12 options:

	$15,263
	$14,560
	$12,713
	$15,595
	$12,146

Answer 1

Solution :-

Net After tax Operating Profit Per month = $1,000 * 30% = $300

As the Project is for 4 Years

Therefore total months = 4 *12 = 48 Months

Interest Rate Per month = 9% / 12 = 0.75%

As the Rent is Received at the start of the month

So Present Value of this opportunity cost = $300 [ 1 + PVAF ( 0.75% , 47 ) ]

= $300 * ( 1 + 39.486 )

= $12,145.85

= $12,146

Therefore Correct Answer is ( E )

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