Lewis Corp. is thinking about opening a basketball camp in Texas. In order to start the camp,

Question:

Lewis 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, Lewis can sell the property for more than it was originally purchased for. The amounts shown on the next page 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 .....................$570,000
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 $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 5 years the annual net cash inflows 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.

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...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Managerial Accounting Tools for business decision making

ISBN: 978-1118096895

6th Edition

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

Question Posted: