The Hannibal Homers minor league baseball club is considering an expansion of its stadium to increase capacity by 2000 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 increase by $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 IRR of this project? (Ignore any revenues or costs associated with a terminal value of the project after five years.)Use a financial calculator to determine your answer.

Question

Quizplus · Accepted Answer

To calculate the IRR, we need to calculate the present value of all the cash flows and then solve for the discount rate that equates the present value to zero. The cash inflows include the additional revenue of $600,000 per year for five years or a total of $3,000,000. The cash outflows include the cost of expansion of $750,000, additional working capital of $50,000, and increased annual costs of $200,000 per year for five years or a total of $1,750,000.

Using a financial calculator, the IRR is calculated to be 29.45%, which is the discount rate that equates the present value of the cash inflows with the present value of the cash outflows. Therefore, Option D is the correct answer.

The Hannibal Homers Minor League Baseball Club Is Considering an Expansion