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
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.
Questions:
1. Compute the Free Cash Flows for each year
2. Compute the project’s NPV at a discount rate of 15%
3. Compute the IRR of the project
4. Should Windy proceed with the project?
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