King’s Park, Trinidad is owned and operated by a private company, Windy Sports Ltd. You work as the Facilities Manager of the Park and the CEO of the company has asked you to evaluate whether Windy should embark on the expansion of the facility given there are plans by the Government to host next cricket championship. The project seeks to increase the number of seats by building four new box seating areas for VIPs and an additional 5,000 seats for the general public. Each box seating area is expected to generate $400,000 in incremental annual revenue, while each of the new seats for the general public will generate $2,500 in incremental annual revenue. The incremental expenses associated with the new boxes and seating will amount to 60 percent of the revenues. These expenses include hiring additional personnel to handle concessions, ushering, and security. The new construction will cost $15 million and will be fully depreciated (to a value of zero dollars) on a straight-line basis over the 5-year life of the project. The company will have to invest $2 million in additional working capital immediately, but the project will not require any other working capital investments during its life. This working capital will be recovered in the last year of the project. The center's marginal tax rate is 25 percent. Use the following template to arrange your workings and answer the questions that follow. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial investment Working capital Revenue Operating expenses EBITD Depreciation EBIT Tax Net Income Depreciation Cash flow from operations Working capital FCF 1. Compute the Free Cash Flows for each year (2 marks) 2. Compute the project’s NPV at a discount rate of 15% (2 marks) 3. Compute the IRR of the project (1 mark) 4. Should Windy proceed with the project? (1 mark)
King’s Park, Trinidad is owned and operated by a private company, Windy Sports Ltd. You work as the Facilities Manager of the Park and the CEO of the company has asked you to evaluate whether Windy should embark on the expansion of the facility given there are plans by the Government to host next cricket championship. The project seeks to increase the number of seats by building four new box seating areas for VIPs and an additional 5,000 seats for the general public. Each box seating area is expected to generate $400,000 in incremental annual revenue, while each of the new seats for the general public will generate $2,500 in incremental annual revenue. The incremental expenses associated with the new boxes and seating will amount to 60 percent of the revenues. These expenses include hiring additional personnel to handle concessions, ushering, and security. The new construction will cost $15 million and will be fully depreciated (to a value of zero dollars) on a straight-line basis over the 5-year life of the project. The company will have to invest $2 million in additional working capital immediately, but the project will not require any other working capital investments during its life. This working capital will be recovered in the last year of the project. The center's marginal tax rate is 25 percent. Use the following template to arrange your workings and answer the questions that follow. Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial investment Working capital Revenue Operating expenses EBITD Depreciation EBIT Tax Net Income Depreciation Cash flow from operations Working capital FCF 1. Compute the Free Cash Flows for each year (2 marks) 2. Compute the project’s NPV at a discount rate of 15% (2 marks) 3. Compute the IRR of the project (1 mark) 4. Should Windy proceed with the project? (1 mark)
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