Coolplay Corp. is thinking about opening a soccer camp in southern California. To start the camp, Coolplay

Question:

Coolplay Corp. is thinking about opening a soccer camp in southern California. To start the camp, Coolplay would need to purchase land and build four soccer fields and a sleeping and dining facility to house 150 soccer players. Each year, the camp would be run for 8 sessions of 1 week each. The company would hire college soccer players as coaches. The camp attendees would be male and female soccer players ages 12-18. Property values in southern California have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Coolplay can sell the property for more than it was originally purchased for. The following amounts have been estimated.

Cost of land...............................................................................................$ 300,000

Cost to build soccer fields, dorm and dining facility.............................$ 600,000

Annual cash inflows assuming 150 players and 8 weeks.....................$ 920,000

Annual cash outflows...............................................................................$ 840,000

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

Salvage value...........................................................................................$1,500,000

Discount rate...................................................................................................8%


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 125 players attend each week, annual cash inflows will be $805,000 and annual cash outflows will be $750,000. 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 an 10% discount rate is more appropriate?

(d) Assume that during the first 5 years, the annual net cash flows each year were only $40,000. At the end of the fifth year, the company is running low on cash, so management decides to sell the property for $1,332,000. 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.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Related Book For  book-img-for-question

Financial and Managerial Accounting

ISBN: 978-1118334263

2nd edition

Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso

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