Question

Pine Village City council proposes to construct new recreation fields. Construction will cost $350,000 and Annual expenses are $80,000. The city council estimates that the valve of added youth leagues is about $125,000 annually. In year 6 another $90,000 will be needed to refurbish the fields. The city council agrees to transform the ownership of the field to a private company for $150,000 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.

Answer 1

a]

cash outflow in year 0 = construction cost = $350,000

cash inflow in years 1 to 5 = value of leagues - expenses = $125,000 - $80,000 = $45,000

cash outflow in year 6 = refurbish cost - (value of leagues - expenses) = $90,000 - $45,000 = $45,000

cash inflow in year 10 = $150,000

b]

NPV = sum of present values of all cash flows

PV of each cash flow = cash flow / (1 + MARR)ⁿ

where n = number of years after which the cash flow occurs

NPV = -$96,666