Pine Village council proposes to construct new recreation fields. Construction will cost $350,000 and annual O&M...

Pine Village council proposes to construct new recreation fields. Construction will cost $350,000 and annual O&M expenses are $80,000. The city council estimates that the value of added youth leagues is about $125,000 annually. In year 6 another $90,000 will be needed to refurnish the fields. the city council agrees to transform the ownership of the fields to a private company for $150,00 at the end of year 10.

a. Draw the cash flow diagram.

b. If the MARR for the Pine Village city is 5%, calculate the NPV of the new recreation field project.

Expert Solution

(a): Net cash flows in year 1- 5 = -80,000 + 125,000 = 45,000

Net cash flow in year 6 = -80,000+125,000-90,000 = -45,000

Cash flows in year 7 - 9 = 45,000 (just like years 1-5)

Cash flow in 10th year = -80,000+125,000+150,000 = 195,000

The cash flow diagram is shown below:

In the above cash flow diagram the first column is for the year 0 cash flow and the last column is for the year 10 cash flow.

(b): NPV = $22,405.67

Year	Cash flow	1+r	PVIF	PV
0	- 350,000	1.05	1.0000	- 350,000.00
1	45,000		0.9524	42,857.14
2	45,000		0.9070	40,816.33
3	45,000		0.8638	38,872.69
4	45,000		0.8227	37,021.61
5	45,000		0.7835	35,258.68
6	- 45,000		0.7462	- 33,579.69
7	45,000		0.7107	31,980.66
8	45,000		0.6768	30,457.77
9	45,000		0.6446	29,007.40
10	195,000		0.6139	119,713.08

			*Total*	*22,405.67*

jeff jeffy answered 2 years ago

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