Question

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		$331,200
Cost to build soccer fields, dorm and dining facility		$662,400
Annual cash inflows assuming 150 players and 8 weeks		$1,015,680
Annual cash outflows		$927,360
Estimated useful life		20 years
Salvage value		$1,656,000
Discount rate		8%

a. To gauge the sensitivity of the project to these estimates, assume that if only 125 players attend each week, annual cash inflows will be $888,720 and annual cash outflows will be $828,000.

What is the net present value using these alternative estimates?

Answer 1

Caluclation of Net Present value of Original Sittuation

PRESENT VALUE OF project = annual net cash flow   * PVAF (8%,20) + Salvage value * PVF(8%,20) - cost of land - cost to build soccer field

=((1015680-927360)*9.81815 )+ (1656000* 0.21455) -(331200+662400)

228,834

NPV = $228834

The project should be Accepted

Caluclation of Net Present value of when ony 125 players attend

PRESENT VALUE OF project = annual net cash flow   * PVAF (8%,20) + Salvage value * PVF(8%,20) - cost of land - cost to build soccer field

=((888720-828000)*9.81815 )+ (1656000* 0.21455) -(331200+662400)

(42,147)

NPV = -$42147

The project should not be Accepted