This season Barcel International Football Club (BIFC), a local team of Barcel ci

Question

This season Barcel International Football Club (BIFC), a local team of Barcel city, has advanced from the second division to the first divi5,on This has generated a huge excitement and enthusiasm among residents of Barce1 city to support their local team an the next season games As results, president of BIFC has decided to build new bleachers for the football field to accommodate new tans, Total costs are estimated to be $1 million, and financing will be through a bond issue of the same amount The bond will have a maturity of 20 years. a coupon rate of 8 percent and has annual payments In addition the BIFC must set up a reserve to pay off the loan by making 20 equal annual payments into an account which pays 8 percent. annual Compounding The interest-accumulated amount in the reserve will be used to retire the entire issue at its maturity 20 years hence BIFC plans to meet the payment requirements by selling season tickets at a $7 net profit per ticket How many tickets must be sold each year to service the debt, i.e. to meet the interest and principal repayment requirements?

Explanation / Answer

We need to first calculate what will be the annual cash flow,which shall be calculated by following formula as we know the pv of annuity which is 1 million and pvaf shall be calculated for 20 years by 8% discount rate.

Present value of annuity= Annual cash flow * Present value annuity factor

1,000,000$=ACF*9.818

ACF=101853$

Now ,total payment in 20 years given equal installment every year shall be 101853*20=2037074.

There foe tickets required to be sold every year at $7 profit shall be =2037074/20*7 i.e 2037074/140

= 14550

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