(Problem 8 3) Straight forward 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 |
2,500 |
80% |
$6 |
|||
|
Class 2 seats |
2,000 |
60 |
4 |
The team will play 50 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.
Instructions
- By using the net present value method and a 16% desired rate of return, determine whether the expansion should be undertaken.
- In addition to the cash flows presented here, what other cash flows might change if the Eskimos add on to the arena?