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Question - Straightforward Net Present Value and Payback Computations
The Calgary Eskimos play in the Canadian Hockey League. Although the Eskimos will soon be moving to a modern arena, management is studying the possibility of expanding the team's present facility to accommodate increased crowds. A $2.4 million expansion is planned that has a $200,000 residual value and will be depreciated by the straight-line method over four seasons. Information about the expansion follows:
Number of seats
Occupancy rate
Ticket Price
Class 1 seats
2500
80%
$6
Class 2 seats
2000
60
4
The team will play 56 home games each season. Total added operating costs per game (ushers, cleanup, and depreciation) are expected to average $11,800. All such costs, except depreciation, require cash outlays.
Required -
a. By using the net present value method and a 16% desired rate of return, determine whether the expansion should be undertaken.
b. In addition to the cash flows presented here, what other cash flows might change if the Eskimos add on to the arena?
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