8. Assume you are studying the possibility of a nightclub as the best use of land. Consider the following information. The building must be built from scratch. Construction expenses are 100,000 dollars and must be paid now (t-0). However, the construction will only be ready, and start generating income, two years from now (t-2).

The income it will generate at t-2 is 300,000

The operating expenses will be 45% of the income generated. Therefore, the operating expenses are:

9. The net operating income is:

10.The depreciation is assumed to be 50,000 a year. Therefore, the taxable income is:

11.The developer is in the 30% marginal tax bracket. Thus , the amount of taxes will be:

12. Cash flow after taxes at t-2 is:

13. The discount rate is 10%. Thus, the present value of the cash flow (t-0) is:

14. The economical life of a night club is extremely short! They go out of fashion in only one year. That is the club will only generate income at t-2, the year of its inauguration. After that the building will become obsolete and hard to sell because it will require many renovations to be used for anything else. Three years from now (at t-3) the building will be sold by the scrap value of 50,000 dollars.

Adding the present value of the cash flow to the present value of the scrap value result is:

15. Subtracting from your sum just above the cost of construction results in the value of the land, which is: