Question

1. Net Present Value (NPV) and Internal Rate of Return (IRR) (question)

The City and County of Denver is completing a $45 million renovation of City Park Golf Course. To complete the renovation, the course has been closed to the public for 2.5 years (planned re-opening is Spring 2020). The project updated the course, built a new clubhouse that can accommodate golf and community events, resulted in a “net gain of 500 trees”, and reduced flood risk “for thousands of homes”.[1] All of these updates are expected to provide either increased revenue or reduced costs. Assume the $45 million cost was paid upfront by Denver and the following are the estimated cash receipts and disbursements associated with the project.[1] If the cost of capital is 6%, does the project make sense based on NPV and IRR over a 30-year useful life? Does your finding change if the cost of capital is actually 4%?

Year	Disbursements ($)	Receipts ($)	Net Cash Flow ($)
0	45000000	0	-45000000
1	0	0	0
2	0	0	0
3	13000000	15500000	2500000
4	13390000	15965000	2575000
5	13791700	16443950	2652250
6	14205451	16937269	2731818
7	14631615	17445387	2813772
8	15070563	17968748	2898185
9	15522680	18507811	2985131
10	15988360	19063045	3074685
11	16468011	19634936	3166925
12	16962051	20223984	3261933
13	17470913	20830704	3359791
14	17995040	21455625	3460585
15	18534892	22099294	3564402
16	19090938	22762273	3671334
17	19663666	23445141	3781474
18	20253576	24148495	3894919
19	20861184	24872950	4011766
20	21487019	25619138	4132119
21	22131630	26387712	4256083
22	22795579	27179344	4383765
23	23479446	27994724	4515278
24	24183829	28834566	4650736
25	24909344	29699603	4790259
26	25656625	30590591	4933966
27	26426323	31508309	5081985
28	27219113	32453558	5234445
29	28035686	33427165	5391478
30	28876757	34429980	5553223

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Answer 1

NPV at 6%	-4029578.48
NPV at 4%	9786350.41
IRR	5.33%

The project has negative NPV at 6% and should not be undertaken. However if the cost of capitral is 4%, the NPV is positive and the project is profitable.

Workings