Question

the sunland recreation center is considering adding a miniature golf course to its facility. the course would cost $150000, would be depreciated on a straight line basis over its 6 years life, and would have a zero salvage value. the estimated income from the golfing fees would be 95000 a year. variable costs would be 32000 per year and fixed cost would be 25000 per year. since the miniature golf course would attract more customers to the center, the firm anticipates an additional 24000 in revenue from its existing facilities every year if the course is added.the project will require an initial investment in net working capital of $18000,which would be recovered at the end of the project’s life. what is the net present value of this project if discount rate is 16% and the tac rate is 21%? what is the internal rate of return? what is the payback period? should the company proceed with the project? why or why not?

Answer 1

i) Payback period will be between 3- 4 years. If you look at cumulative CF, after 3 years balance amount will be $28620 which will be recovered in year 4 by 28620/46460 = 0.61 years.

Total Payback = 3+.616 = 3.62 Years

Depriciation/ Year = (Initial Value - Salvage Value )/ No of years	Deprication Effect
150000/6	$              25,000.00
Year	0	1	2	3	4	5	6
Revenue from Gold Course	0	$        95,000.00	$         95,000.00	$         95,000.00	$                  95,000.00	$                  95,000.00	$                  95,000.00
Revenue from Existing Setup	0	$        24,000.00	$         24,000.00	$         24,000.00	$                  24,000.00	$                  24,000.00	$                  24,000.00
Total Revenue (Rev from Gold course + Rev from existing Setup)	0	$     1,19,000.00	$      1,19,000.00	$      1,19,000.00	$              1,19,000.00	$              1,19,000.00	$              1,19,000.00
- Variable Cost	0	$       -32,000.00	$        -32,000.00	$        -32,000.00	$                -32,000.00	$                -32,000.00	$                -32,000.00
-Fixed Cost	0	$       -25,000.00	$        -25,000.00	$        -25,000.00	$                -25,000.00	$                -25,000.00	$                -25,000.00
EBITDA ( Rev - Var Cst - Fixed Cost)	$                              -	$        62,000.00	$         62,000.00	$         62,000.00	$                  62,000.00	$                  62,000.00	$                  62,000.00
-Depriciation	0	$       -25,000.00	$        -25,000.00	$        -25,000.00	$                -25,000.00	$                -25,000.00	$                -25,000.00
EBIT	0	$        37,000.00	$         37,000.00	$         37,000.00	$                  37,000.00	$                  37,000.00	$                  37,000.00
-Tax@ 21% [ 21% x EBIT]	$                              -	$         -7,770.00	$          -7,770.00	$          -7,770.00	$                  -7,770.00	$                  -7,770.00	$                  -7,770.00
EBIT	$                              -	$        29,230.00	$         29,230.00	$         29,230.00	$                  29,230.00	$                  29,230.00	$                  29,230.00
Operational Free Cashflow
EBIT	$                              -	$        29,230.00	$         29,230.00	$         29,230.00	$                  29,230.00	$                  29,230.00	$                  29,230.00
+Depriciation	$                              -	$        25,000.00	$         25,000.00	$         25,000.00	$                  25,000.00	$                  25,000.00	$                  25,000.00
-Tax	$                              -	$         -7,770.00	$          -7,770.00	$          -7,770.00	$                  -7,770.00	$                  -7,770.00	$                  -7,770.00
Total Operational Cashflow (A)	$                              -	$        46,460.00	$         46,460.00	$         46,460.00	$                  46,460.00	$                  46,460.00	$                  46,460.00
CAPEX -
Initial Spending	$         -1,50,000.00
Salvage - after Tax							$                                 -
TOTAL CAPEX CF (B)	$         -1,50,000.00	$                        -	$                         -	$                         -	$                                 -	$                                 -	$                                 -
[Aftertax Salvage Value = (13000-0)*(1-0.31)]
NWC
At the Beginning of Project	$             -18,000.00
NWC Recovery							$                  18,000.00
Total NWC Cashflow ©	$             -18,000.00	$                        -	$                         -	$                         -	$                                 -	$                                 -	$                  18,000.00
Total Project Cashflow (A + B + C)	$         -1,68,000.00	$        46,460.00	$         46,460.00	$         46,460.00	$                  46,460.00	$                  46,460.00	$                  64,460.00
(Operational Free CF + CAPEX CF + NWC CF)
Cumulative Cashflow (CF of = CF of T-1 + Cf of T)	$         -1,68,000.00	$   -1,21,540.00	$        -75,080.00	$        -28,620.00	$                  17,840.00	$                  64,300.00	$              1,28,760.00
Rate of Return	16%
NPV	$              10,580.79	[Note using NPV function - NPV(Interest Rate, cashflow 1-6)+ CF at t=0
IRR	18.26%	[Using IRR function - IRR( Cashflow 0-6)]
Payback Period
	3.616

NPV is positive and also, IRR > cost of caital and payback in halfway of the project life. Hence, proposal sounds good and should be accepted.