In: Accounting
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 $300,000 Cost to build soccer fields, dorm and dining facility $600,000 Annual cash inflows assuming 150 players and 8 weeks $920,000 Annual cash outflows $840,000 Estimated useful life 20 years Salvage value $1,500,000 Discount rate 8%
The above Case Law relates to calculation of Net Present Value of the Business Model of opening a Soccer Camp.
a. Initial Investment | |||||||
Cost: | |||||||
Land | $ 3,00,000 | ||||||
Building Cost | $ 6,00,000 | ||||||
TOTAL | $ 9,00,000 | ||||||
b. Present Value of Annual Cashflows | |||||||
Annual Cash Inflow | $ 9,20,000 | ||||||
Annual Cash Outflow | $ 8,40,000 | ||||||
Net Annual Inflow | $ 80,000 | ||||||
Number of years | 20 | ||||||
Discounting Rate | 8% | ||||||
Annuity Factor of 8% for 20 Years | 5.75 | ||||||
Present Value of Annual Inflow | =$80000*9.82 | ||||||
$ 7,85,452 | |||||||
c. Present Value of Salvage | |||||||
Salvage value | $ 15,00,000 | ||||||
Present Value factor of 8% for 20Years | 0.21 | ||||||
Present Value of Salvage | $ 3,21,822 | ||||||
d. Net Present Value(NPV) | |||||||
= Initial Investment + Present value of Annual CashFlows + Present value of salvage | |||||||
= -900000+785452+321822 | |||||||
$ 207274 | |||||||
Since the NPV is positive, the Project Shall be accepted. |