Goldbloom Corp. is thinking about opening a soccer camp in southern California. To start the camp, Goldbloom would need to purchase land and build four soccer fields and a sleeping and dining facility to house 150 soccer players. Each year, the camp would be run for 8 sessions of 1 week each. The company would hire college soccer players as coaches. The camp attendees would be male and female soccer players ages 12-18. Property values in southern California have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Goldbloom can sell the property for more than it was originally purchased for. The following amounts have been estimated.
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Cost of land
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$300,000
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Cost to build soccer fields, dorm and dining facility
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$600,000
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Annual cash inflows assuming 150 players and 8 weeks
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$940,000
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Annual cash outflows
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$840,000
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Estimated useful life
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20 years
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Salvage value
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$1,500,000
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Discount rate
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8%
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Instructions
(a) Calculate the net present value of the project.
(b) To gauge the sensitivity of the project to these estimates, assume that if only 125 players attend each week, annual cash inflows will be $800,000 and annual cash outflows will be $750,000. What is the net present value using these alternative estimates? Discuss your findings.
(c) Assuming the original facts, what is the net present value if the project is actually riskier than first assumed and an 11% discount rate is more appropriate?
(d) Assume that during the first 5 years, the annual net cash flows each year were only $40,000. At the end of the fifth year, the company is running low on cash, so manage- ment decides to sell the property for $1,332,000. What was the actual internal rate of return on the project? Explain how this return was possible given that the camp did not appear to be successful.