3 October 2003 QUESTION 3 Tipsy Ltd is considering build ing a new hotel that will cost $5 million to establish. It is estimated that the new hotel will generate before-tax annual sales of $2 million The costs of goods sold will be 40% of sales revenue and the company will incur annual marketing and administrative costs of $400 000 before tax. These cash flows are in perpetuity The cost of debt is 11%, the opportunity cost of capital for an all-equity financed firm is 14%, and the firms cost of equity(ks)is 16%. Tipsy has a tax rate of 30% and a target debt-to-value ratio of 0.35 Using the flow-to-equity method, calculate the net present value of the proposed new3 October 2003 QUESTION 3 Tipsy Ltd is considering building a new hotel that will cost $5 million to establish. It is estimated that the new hotel will generate before-tax annual sales of $2 million. The costs of goods sold will be 40% of sales revenue and the company will incur annual marketing and administrative costs of $400 000 before tax. These cash flows are in perpetuity. The cost of debt is 11%, the opportunity cost of capital for an all-equity financed firm is 14%, and the firm’s cost of equity (ks) is 16%. Tipsy has a tax rate of 30% and a target debt-to-value ratio of 0.35. Using the flow-to-equity method, calculate the net present value of the proposed new hotel