Question

Outdoor Sports is considering adding a putt putt golf course to its facility. The course would cost $185,000, would be depreciated on a straight-line basis over its 6-year life, and would have a zero salvage value. The sales would be $90,500 a year, with variable costs of $28,300 and fixed costs of $12,900. In addition, the firm anticipates an additional $22,500 in revenue from its existing facilities if the putt putt course is added. The project will require $3,500 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 40 percent? Multiple Choice $44,600 0 $42.827 0 $41100 $41,100 0 $66,454 $66,454 0 $14.404

Answer 1

Correct answer: NPV= $41,100

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B C D E F G H I Year-1 Year-2 Year-3 Year-4 Year-5 Initial Cost Initial NWC required Year-0 -$185,000 $3,500 Annual sales Additional revenue Total Revenue Variable cost Fixed cost Depreciation EBIT Taxes (40%) Net Income $90,500 $22,500 $113,000 $28,300 $12,900 $30,833 $40,967 $16,387 $24,580 $90,500 $22,500 $113,000 $28,300 $12,900 $30,833 $40,967 $16,387 $24,580 $90,500 $22,500 $113,000 $28,300 $12,900 $30,833 $40,967 $16,387 $24,580 $90,500 $22,500 $113,000 $28,300 $12,900 $30,833 $40,967 $16,387 $24,580 $90,500 $22,500 $113,000 $28,300 $12,900 $30,8331 $40,967 $16,387 $24,580 $90,500 $22,500 $113,000 $28,300 $12,900 $30,833 $40,967 $16,387 $24,580 $55,413 $55,413 $55,413 $55,413 $55,413 Operating Cash Flow NWC recovered Total Cash Flows $55,413 $3,500 $58,913 $188,500 $55,413 $55,413 $55,413 $55,413 $55,413 Discount rate 12% Net Present value of Project $41,100

Cell reference -

E F G н | Year-o Year-1 Year-2 Year-3 Year-4 Year-5 Year-6 Initial Cost Initial NWC required -185000 -3500 Annual sales Additional revenue Total Revenue Variable cost Fixed cost Depreciation EBIT Taxes (40%) Net Income 90500 905009050090500 90500 90500 22500 22500 22500 22500 22500 22500 =D6+D7 =E6+E7 =F6+F7 =G6+G7 =H6+H7 =16+17 28300 28300 28300 28300 28300 28300 12900 12900 12900 12900 12900 12900 --$C$3/6 =-$C$3/6 =-$C$3/6 =-$C$3/6 =-$C$3/6 |=-$C$3/6 =D8-SUM(D9:011) =E8-SUM(E9:E11) |=F8-SUM(F9:F11) =G8-SUM(G9: 611) I=H8-SUM(H9:H11) 1=18-SUM(19:111) =D12*40% =E12*40% =F12*40% =G12*40% =H12*40% =112*40% =D12-D13 =E12-E13 =F12-F13 =G12-613 =H12-H13 =112-113 =D14+D11 =E14+E11 =F14+F11 =G14+G11 =H14+H11 =114+111 Operating Cash Flow NWC recovered Total Cash Flows |=-C4 =SUM(C3:04) =D16 E16 =F16 G16 =H16 =116+117 Discount rate 0.12 Net Present value of Project =NPV(C20, D18:118)+C18

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.