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 | $330,600 | ||
Cost to build soccer fields, dorm and dining facility | $661,200 | ||
Annual cash inflows assuming 150 players and 8 weeks | $1,013,840 | ||
Annual cash outflows | $925,680 | ||
Estimated useful life | 20 years | ||
Salvage value | $1,653,000 | ||
Discount rate | 8% |
1. Calculate the net present value of the project (round to 0 decimal places). Should the project be accepted?
2. To gauge the sensitivity of the project to these estimates, assume that if only 125 players attend each week, annual cash inflows will be $812,245 and annual cash outflows will be $756,750. What is the new present value of these alternate estimates, and should the project be accepted?
3. Assuming the original facts, what is the NPV if the project is actually riskier than first assumed and a 10% discount rate is more appropriate. Should it be accepted?
4. Assume that during the first 5 years, the actual net cash flows for each year were only $40,360. At the end of the fifth year, the company is running low on cash, so management decides to sell to property of $1,343,988. What is the actual internal rate of return on the project?
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