Benjamin Corp. is thinking about opening a hockey camp in Barrie, Ontario. In order to start the camp, the company would need to purchase land, and build four ice rinks and a dormitory-type sleeping and dining facility to house 110 players. Each year, the camp would be run for eight sessions of one week each. The company would hire university hockey players as coaches. The camp attendees would be male and female hockey players aged 12 to 18. Property values in this area have enjoyed a steady increase in recent years. Benjamin Corp. expects that after using the facility for 20 years, the rinks will have to be dismantled, but the land and buildings will be worth more than they were originally purchased for. The following amounts have been estimated:
Cost of land.....................................................................$200,000
Cost to build rinks, dorm, and dining hall...................................$350,000
Annual cash inflows assuming 110 players and eight weeks.............$700,000
Annual cash outflows..........................................................$570,000
Estimated useful life............................................................20 years
Salvage value...................................................................$700,000
Discount rate.........................................................................12%
Instructions
(a) Calculate the project's net present value.
(b) To evaluate how sensitive the project is to these estimates, assume that if only 90 players attend each week, revenues will be $570,000 and expenses will be $508,000. What is the net present value using these alternative estimates? Discuss your findings.
(c) Assuming the original facts, what is the net present value if the project is actually riskier than first assumed, and a 15% discount rate is more appropriate?
(d) Assume that during the first five years the annual net cash flows each year were only $65,000. At the end of the fifth year, the company is running low on cash, so management decides to sell the property for $668,000. What was the actual internal rate of return on the project? Explain how this return was possible given that the camp did not appear to be successful.