The Hannibal Homers minor league baseball club is considering an expansion of its stadium to increase capacity by 2,000 seats.Management estimates increased revenue from ticket and concession sales to be $600,000 per year for the next 5 years.The cost of expansion is $750,000,with an additional $50,000 in working capital.The working capital increase is permanent (will not be recovered after 5 years).Annual costs are expected to be $200,000 per year,the club's cost of capital is 14%,and its tax rate is 30%.If the stadium addition is depreciated in a straight line to a value of $0.00 over 5 years,what is the NPV of this project (rounded to the nearest dollar)? (Ignore any revenues or costs associated with a terminal value of the project after five years.)

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to find the present value of the cash inflows and outflows using the cost of capital of 14% and the tax rate of 30%.

The initial outflow is $800,000 ($750,000 + $50,000). The annual cash inflows are $600,000, and the annual cash outflows are $200,000. We can use the formula for the present value of an annuity to find the present value of these cash flows over 5 years:

PV of annual cash inflows = $600,000 x (1 - 0.3) x [(1 - 1/(1+0.14)^5) / 0.14] = $1,712,471

PV of annual cash outflows = $200,000 x [(1 - 1/(1+0.14)^5) / 0.14] = $498,720

The present value of the cash inflows is greater than the present value of the cash outflows, so the net present value is positive:

NPV = PV of cash inflows - PV of cash outflows - initial outflow
= $1,712,471 - $498,720 - $800,000
= $413,751

Rounding this to the nearest dollar gives an NPV of $315,751. Therefore, the best choice is C.

The Hannibal Homers Minor League Baseball Club Is Considering an Expansion