Question

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		$331,200
Cost to build soccer fields, dorm and dining facility		$662,400
Annual cash inflows assuming 150 players and 8 weeks		$1,015,680
Annual cash outflows		$927,360
Estimated useful life		20 years
Salvage value		$1,656,000
Discount rate		8%

a. Calculate the net present value of the project.

Answer 1

Calculation of Net Present Value (NPV):-

Net Present Vale (NPV) = Present value of Cash Inflows - Initial cost of Investment

=  $1,222,346.59 - $993,600

= $228,746.59

* The project should be accepted because of the positive NPV.

Note 1 - Initial Cost of Investment -

Cost of land		$331,200
Cost to build soccer fields, dorm and dining facility		$662,400
Total		$993,600

Note 2 - Present value of Cash Inflows -

(Net annual cash inflows * PV of annuity factor @8% for 20 years) + (Salvage value * PV factor @8% for 20th year)

= ($88,320 * 9.8181) + ($1,656,000 * 0.2145)

= $867,134.59 + $355,212.00

= $1,222,346.59

Annual cash inflows	$1,015,680
Less: Annual cash outflows	$927,360
Net Annual cash inflows	$88,320