King’s Park, Trinidad is owned and operated by a private company,Windy Sports Ltd. You work as the Facilities Manager of the Park andthe CEO of the company has asked you to evaluate whether Windy shouldembark on the expansion of the facility given there are plans by theGovernment to host next cricket championship.The project seeks to increase the number of seats by building fournew box seating areas for VIPs and an additional 5,000 seats for thegeneral public. Each box seating area is expected to generate $400,000in incremental annual revenue, while each of the new seats for thegeneral public will generate $2,500 in incremental annual revenue.The incremental expenses associated with the new boxes and seatingwill amount to 60 percent of the revenues. These expenses includehiring additional personnel to handle concessions, ushering, andsecurity. The new construction will cost $15 million and will be fullydepreciated (to a value of zero dollars) on a straight-line basis overthe 5-year life of the project. The company will have to invest $2million in additional working capital immediately, but the projectwill not require any other working capital investments during itslife. This working capital will be recovered in the last year of theproject. The center's marginal tax rate is 25 percent.Use the following template to arrange your workings and answer thequestions that follow.Year 0 Year 1 Year 2 Year 3 Year 4 Year 5InitialinvestmentWorkingcapitalRevenueOperatingexpensesEBITDDepreciationEBITTaxNet IncomeDepreciationCash flow fromoperationsWorkingcapitalFCF1. 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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