The Hannibal homers minor league baseball club is considering an expansion of it

Question

The Hannibal homers minor league baseball club is considering an expansion of its stadium to increase capacity by 2000 seats. Management estimates increased revenue from ticker and concession sales to be $600,000 per year for the next 5 years. The cost of expansion is $750,000 with an additional $50,000 in working capital. The working capital increase is permanent (will not be recovered after 5 years). Annual costs are expected to increase by $200,000 per year, the clubs cost of capital is 14%, and its tac rate is 30%. IF the stadium addition is depreciated in a straight line to a value of $0.00 over 5 years, what is the IRR of this project? (ignore any revenue or costs associated with a terminal value of the project after 5 years.) Show work please.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = -750000 (Cost of Expansion) - 50000 (Working Capital) = -800000

Depreciation = Cost of Expansion/Estimated Life = 750000/5 = 150000

Annual Cash Inflows = (Revenues - Expenses - Depreciation)*(1 - Tax Rate) + Depreciation = (600000 - 200000 - 150000)*(1-30%) + 150000 = 325000

To calculate IRR, you need to the put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -800000 + 325000/(1+r)^1 + 325000/(1+r)^2 + 325000/(1+r)^3 + 325000/(1+r)^4 + 325000/(1+r)^5

Solving for r, we get IRR as 29.45%

Answer is 29.45%

Thanks.

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