The University Center for Student Life is trying to decide whether it should inv

Question

The University Center for Student Life is trying to decide whether it should invest in a fastfood court. The cost of setting up the court and attracting nationallyknown vendors is estimated at $200,000. Annual maintenance and cleaning costs are estimated at $15,000 Each of the five vendors selected to operate concessions in the food court will pay the university $20,000 per year plus 2.25% of their gross revenues. Gross revenues will depend on student use. Based on what has happened at other schools with food courts, the director of the center thinks that each enrolled student will spend an average of $200 per year in the food court. On average, the university enrolls 10,000 students. The managers of the Student Life Center expect the food court to last five years before they will have to start the whole process over again. If the university has a cost of capital of 12%, should they build the food court?

A. Yes. The NPV is greater than 0.

B. No. The NPV is less than 0.

Explanation / Answer

No The NPV is less than 0

Particulars Year Cash Flows PVF PV Cost of setting food court 0 -200000 1 -200000 Annual Operating cost 1 to 5 -15000 3.6047 -54070.5 Amount paid to university 1 to 5 20000 3.6047 72094 2.25% of gross revenues 1 to 5 45000 3.6047 162211.5 Net Present Value -19765

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