a) Net Present Value (NPV) = (I - O)*(P/A,8%,20) + S*(P/F,8%,20) - A*(P/F,8%,0)
ID: 373717 • Letter: A
Question
a) Net Present Value (NPV) = (I - O)*(P/A,8%,20) + S*(P/F,8%,20) - A*(P/F,8%,0)
where A is initial investment, I is annual cash inflow, O is annual cash outflow and S is salvage value.
Discounting factors,
(P/A,8%,20) = 9.81815
(P/F,8%,20) = 0.21455
(P/F,8%,0) = 1.00000
NPV = (923680-843360)*9.81815 + 1506000*0.21455 -(301200+602400)*1.00000 = $ 208,106
b) NPV is positive, therefore project should be accepted.
c) Annual net cashflow = I - O = 808220 - 753000 = 55220
NPV = (808220-753000)*9.81815 + 1506000*0.21455 -(301200+602400)*1.00000 = $ - 38,330
d) NPV is negative, therefore, project should not be accepted.
e) For 10% discount rate, discounting factors are
(P/A,10%,20) = 8.51356
(P/F,10%,20) = 0.14864
(P/F,10%,0) = 1.00000
NPV = (923680-843360)*8.51356 + 1506000*0.14864 -(301200+602400)*1.00000 = $ 4,061
f) NPV is positive, therefore, project should be accepted.
Explanation / Answer
blem 12-5A
blem 12-5A
Coolplay Corp. is thinking about opening a soccer camp in southern California. To start the camp, Coolplay would need to purchase land and build four soccer fields and a sleeping and dining facility to house 150 soccer players. Each year, the camp would be run for 8 sessions of 1 week each. The company would hire college soccer players as coaches. The camp attendees would be male and female soccer players ages 12–18. Property values in southern California have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Coolplay can sell the property for more than it was originally purchased for. The following amounts have been estimated.Cost of land $301,200 Cost to build soccer fields, dorm and dining facility $602,400 Annual cash inflows assuming 150 players and 8 weeks $923,680 Annual cash outflows $843,360 Estimated useful life 20 years Salvage value $1,506,000 Discount rate 8% Calculate the net present value of the project. (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Net present value $
Should the project be accepted?
The project
shouldshould not
be accepted. To gauge the sensitivity of the project to these estimates, assume that if only 125 players attend each week, annual cash inflows will be $808,220 and annual cash outflows will be $753,000.What is the net present value using these alternative estimates? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Net present value $
Should the project be accepted?
The project
shouldshould not
be accepted. Assuming the original facts, what is the net present value if the project is actually riskier than first assumed and a 10% discount rate is more appropriate? (If the net present value is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)Net present value $
Should the project be accepted?
The project
shouldshould not
be accepted. Assume that during the first 5 years, the annual net cash flows each year were only $40,160. At the end of the fifth year, the company is running low on cash, so management decides to sell the property for $1,337,328. What was the actual internal rate of return on the project? (Round answer to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)Actual internal rate of return %
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