Outdoor Sports is considering adding a miniature golf course to its facility. Th

Question

Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight line basis over its 5-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

Explanation / Answer

Answer: OCF = (Sales – Costs) x (1 – T) + Depreciation x T

= ($72,000 – $24,000 – $11,600 + $14,000) x (1 – 0.34) + ($138,000/5) x 0.34 =$42,648

NPV = –$138,000 – $3,000 + ($42,648/1.12) + ($42,648/1.12^2) + ($42,648/1.12^3) + ($42,648/1.12^4) + ($42,648+ $3,000/1.12^5)

= $14,439

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