Brandon Corp. is thinking about opening a basketball camp in Texas. In order to start the camp, the company would need to purchase land and build eight basketball courts and a dormitory-type sleeping and dining facility to house 110 basketball players. Each year the camp would be run for 8 sessions of 1 week each. The company would hire college basketball players as coaches. The camp attendees would be male and female basketball players ages 12 to 18. Property values in Texas have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Brandon can sell the property for more than it was originally purchased for. The following amounts have been estimated.

Cost of land ................... $200,000

Cost to build dorm and dining facility ........ $350,000

Annual cash inflows assuming 110 players and 8 weeks . $700,000

Annual cash outflows ................ $560,000

Estimated useful life ................ 20 years

Salvage value ................... $700,000

Discount rate ..................... 12%

Instructions

(a) Calculate the net present value of the project.

(b) To gauge the sensitivity of the project to these estimates, assume that if only 90 campers attend each week, annual cash inflows will be $570,000 and annual cash outflows will be $510,000. 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 5 years the annual net cash inflows each year were only $70,000. At the end of the fifth year, the company is running low on cash, so management decides to sell the property for $635,000. 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.