Question

Please Calculate the WACC, the discounted payback period, and the net present value for the following scenario. Show all work and clearly show how you came to your answers.

A municipal stadium owned by a city stadium authority is thinking about updating it's grass field to turf. New turf will cost $750,000. A local company has offered to give you $100,000 to put their logo on the turf, which you will happily take if you decide to go forward with the project.

In order to raise the remaining funds for the project, the stadium authority would issue $450,000 worth of bonds that pay 6% interest. They would borrow the remaining funds at a rate of 12.5%.

Your current leases on the field bring in $750,000 per year, but with the turf and the ability to host more events on the field, you project lease earnings of $975,000 per year. Assume the turf has a useful life of 6 years.

Answer 1

Solution:

a)Calculation of WACC

Remaining Fund Requirement=$750,000-$100,000

=$650,000

Fund raised through Bond=$450,000

Fund raised through loan=$650,000-$450,000=$200,000

WACC=Cost of bond*Bond Value/Total fund raised+Cost of loan*Loan value/Total fund raised

=6%*450,000/650,000+12.50%*200,000/650,000

=8%

b)Calculation of discounted pay back period

Initial Cash outlay=$750,000-$100,000=$650,000

Annual incremental cash inflows=$975,000-$750,000

=$225,000

Statement showing present value and cummulative present value of cash flows

Year	Cash flows	Present value factor @8%	Present value	Cummulative Cash flows
0	-$650,000	1	-$650,000	-$650,000
1	$225,000	0.925926	$208,333.35	-$441,666.65
2	$225,000	0.857339	192,901.28	-$248,765.37
3	$225,000	0.793832	$178,612.20	-$70153.17
4	$225,000	0.735030	$165,381.75	$95228.58
5	$225,000	0.680583	$153,131.18
6	$225,000	0.630170	$141,788.25

Discounted pay back period=A+B/C

A=Last year with negative cummulative cash flows

B=Absolute cash flows in year A

C=Discounted cash inflows in Year following year A

Payback period=3+($70153.17/165,381.75)

=3+0.42=3.42 Years

c)Calculation of Net Present value

NPV=Present value of cash inflows-Initial cash outflows

=$225000*Present value annuity factor @8% for 6 year-$650,000

=$225000*4.62288-$650000

=$1040148-$650,000

=$390,148