To make capital budgeting decision, it is required that the asset and or projects are properly evaluated. This is done as follows: Estimated the cash flows which is expected to be generated from the project or asset Evaluate the riskiness of the project and determine an appropriate discount rate specific for the project Determine the present value of all the expected cash flows, this is done by using the below equation PV of CF = C F ^ 1 ( 1 + r ) 1 + C F ^ 2 ( 1 + r ) 2 + ....... + C F n ^ ( 1 + r ) n = ∑ t = 1 n C F t ^ ( 1 + r ) t Here, Expected net cash flow in Period t is “ C F t ^ ” Required rate of return is “ r ” Now, compare the present value of future expected cash flows with the cost of the project. If the present value of cash inflows is higher than the present value of the cost of the asset or project, the project shall be accepted, as it would generate profit. N P V = − C F 0 ^ + C F ^ 1 ( 1 + r ) 1 + C F ^ 2 ( 1 + r ) 2 + ....... + C F n ^ ( 1 + r ) n = ∑ t = 0 n C F t ^ ( 1 + r ) t A project will cost $42,000 and generate $11,000 for next 5 years. Required rate of return is 9%.

Question

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…

Answer 1

Question

Chapter 9, Problem 4PROB

Summary Introduction

To make capital budgeting decision, it is required that the asset and or projects are properly evaluated. This is done as follows:

Estimated the cash flows which is expected to be generated from the project or asset

Evaluate the riskiness of the project and determine an appropriate discount rate specific for the project

Determine the present value of all the expected cash flows, this is done by using the below equation

PV of CF=CF^1(1+r)1+CF^2(1+r)2+.......+CFn^(1+r)n=∑t=1nCFt^(1+r)t

Here,

Expected net cash flow in Period t is “CFt^”

Required rate of return is “r”

Now, compare the present value of future expected cash flows with the cost of the project. If the present value of cash inflows is higher than the present value of the cost of the asset or project, the project shall be accepted, as it would generate profit.

NPV=−CF0^+CF^1(1+r)1+CF^2(1+r)2+.......+CFn^(1+r)n=∑t=0nCFt^(1+r)t

A project will cost $42,000 and generate $11,000 for next 5 years. Required rate of return is 9%.

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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…

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