Question

Outdoor Sports is considering adding a putt putt golf course to its facility. The course would cost $182,000, would be depreciated on a straight-line basis over its 6-year life, and would have a zero salvage value. The sales would be $87,100 a year, with variable costs of $28,150 and fixed costs of $12,750. In addition, the firm anticipates an additional $21,300 in revenue from its existing facilities if the putt putt course is added. The project will require $3,350 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 11 percent and a tax rate of 40 percent?

Answer 1

Initial Cost	$182,000		Depreciation	30333.33	(182000/6)
NWC	3,350
Total initial cost	185,350
Sales Revenue	87100			Year	Cash flow	x DF at 11%	= Prsent Value
Additional revenue	21300			0	-185350	1	(185,350.00)
- Variable Cost	28150			1	52633.33	0.900900901	47,417.41
- Fixed Cost	12750			2	52633.33	0.811622433	42,718.39
-Depreciation	30333.33			3	52633.33	0.731191381	38,485.04
EBT	37166.67			4	52633.33	0.658730974	34,671.20
- Tax at 40%	14866.67			5	52633.33	0.593451328	31,235.32
EAT	22300			6	55983.33	0.534640836	29,930.97
Add back depreciation	30333.33					NPV	39,108.34
CFAT	52633.33
Year 6 cash flow	55983.33
(52633.33+3350)