Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Let us say Mr. Davis wants to buy truck for $100,000. He expects to rent it for $40,000 per year and expects that the incurred
Let us say Mr. Davis wants to buy truck for $100,000. He expects to rent it for $40,000 per year and expects that the incurred cost in maintaining (including property taxes paid to the local government) it will be $18,000 per year. He expects to keep it for 3 years and then sell it at a price of $20,000. He can put down $40,000 for it now and borrow the rest (that is $60,000) at an interest rate of 5% (interest payment is to be made at the end of the year, in one lump sum payment - not the usual monthly payments that you get with standard loans. Also assume that it is "interest only" loan - where you pay just the interest only - no part of your payment goes towards the principal. These are simplifying assumptions - but I am still explaining these in detail so you know a little bit more about investments). Of course, he will have to pay an income tax @30% on revenues less expenses and interest. After three years, he will have to pay the loan in full before selling the truck.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
To calculate the annual cash flow from this proposition we need to consider the revenues expenses in...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started