Question

1. The Williamston Wingnuts minor league hockey team is considering building a new arena in Downtown Williamston. They have decided they will only build the arena if it will be Net Present Value positive based on 5 years of cash flows. The team’s accounting department has compiled the following costs: $2,000,000 for the land the arena would be built on. They bought this land in 2010. Construction costs of $28,000,000 $50,000 for a marketing study conducted last year to determine whether more fans would come to the games if they built a new arena. $50,000 for new signage in front of the building and around the city that will only be needed if the arena is built. $500 for a trip taken by team management to see the Portland (Mich.) Puckheads’ new arena at a game last season to gather design ideas. $50,000 for street lights in the parking lot and on Grand River Ave. that will only be needed if the arena is built. $100,000 in additional Net Working Capital will be needed at the beginning of the project, 60% of which will be recovered at the end of the project. What is the Total Year 0 cash flow for this project?

2.

Hole-in-One Inc. is considering expanding its golf ball business. Each pack of golf balls contains 3 balls. The company has projected the following information:

• Sales of 2,000,000 packs per year at $6 per pack.
• Total costs per pack is $4.  
• The project has a 5 year life.
• The required new equipment costs $15,000,000. This equipment will be depreciated straight line to zero over the life of the project. Another firm has made an offer to purchase the equipment at the end of the project for $790,000 after-taxes (i.e., do not adjust this amount for taxes), which the company plans to accept.
• Initial change in net working capital is $1,000,000 and 50% will be recovered in the terminal year.
• The firm’s required rate of return is 8%.
• The firm’s tax rate is 21%.

What is the Total Cash Flow in Year 5?

What is the amount of the annual operating cash flow?

Answer 1