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		$324,000
Cost to build soccer fields, dorm and dining facility		$648,000
Annual cash inflows assuming 150 players and 8 weeks		$993,600
Annual cash outflows		$907,200
Estimated useful life		20 years
Salvage value		$1,620,000
Discount rate		8%

PART ONE: 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.)

PART TWO: To gauge the sensitivity of the project to these estimates, assume that if only 125 players attend each week, annual cash inflows will be $869,400 and annual cash outflows will be $810,000.
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.)

PART THREE: 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.)

PART FOUR: Assume that during the first 5 years, the annual net cash flows each year were only $43,200. At the end of the fifth year, the company is running low on cash, so management decides to sell the property for $1,438,560. 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.)

Answer 1

Part a)

Net annual cash flow (year 1 to 20) = $993600 - $907200 = $86,400

NPV = -324000 – 648000 + 86400 * ((1-(1+8%)^-20)/8%) + 1620000/(1+8%)^20

NPV = -972000 + 848287.94 + 347568.10 = $223,856.04

Part b)

Net annual cash flow (year 1 to 20) = $869400 - $810000 = $59,400

NPV = -324000 – 648000 + 59400 * ((1-(1+8%)^-20)/8%) + 1620000/(1+8%)^20

NPV = -972000 + 583197.96 + 347568.10 = -$41,233.96

Part c)

NPV = -324000 – 648000 + 86400 * ((1-(1+10%)^-20)/10%) + 1620000/(1+10%)^20

NPV = -972000 + 735571.91 + 240802.68 = $4,374.58

Part d)

Net annual cash flow (year 1 to 5) = $43200

Value from sale of property = $1438560

For IRR ’i’

V = -972000 + 43200 * ((1-(1+i)^-5)/i) + 1438560/(1+i)^5

For i = 12%, V = 3.91

Since Value of the above equation is approx. ‘0’, IRR in this case is 12%.