Question

Objectives:                

At the end of this activity, the students are expected to have been able to:

1. Define capital budgeting, explain why it is important, differentiate between security valuation and capital budgeting, and state how project proposals are generally classified.

2. Calculate net present value (NPV) and internal rate of return (IRR) for a given project and evaluate each method.

3. Define NPV profiles, the crossover rate, and explain the rationale behind the NPV and IRR methods, their reinvestment rate assumptions, and which method is better when evaluating independent versus mutually exclusive projects.

4. Briefly explain the problem of multiple IRRs and when this situation could occur.

                                  

NOTE: Set up your video camera. Take your video while you are doing the activity. You will submit this as your output for the activity.

Procedure:

1. The test is divided into two parts.
2. Read and understand the instruction for each part.

Questions: (to be answered within the video)

Pony Corp. is thinking about opening a baseball camp in Bataan. In order to start the camp, the company would need to purchase land, build five baseball fields, and a dormitory-type sleeping and dining facility to house 100 players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college baseball players as coaches. The camp attendees would be baseball players age 12-18. Property values in Bataan have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Schilling can sell the property for more than it was originally purchased for. The following amounts have been estimated:

         Cost of land                                                                                      Php 600,000

         Cost to build dorm and dining facility                                        Php 2,100,000

         Annual cash inflows assuming 100 players and 10 weeks              2,520,000

         Annual cash outflows                                                                           2,250,000

         Estimated useful life                                                                               20 years

         Salvage value                                                                                         3,900,000

         Discount rate                                                                                                  10%

         Present value of an annuity of 1                                                                8.514

         Present value of 1                                                                                          .149

Instructions:

(A) To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each week, revenues will be Php 2,085,000 and expenses will be Php 1,875,000. What is the net present value using these alternative estimates? Discuss your findings.

2. Assuming the original facts, what is the net present value if the project is actually riskier than first assumed, and a 12% discount rate is more appropriate? The present value of 1 at 12% is .104 and the present value of an annuity of 1 is 7.469.

Answer 1

cost of land	6,00,000.00
cost of build dorm	21,00,000.00
Cash Inflow	25,20,000.00
cash outflow	22,50,000.00
useful life	20 years
salvage value	39,00,000.00
discount rate	10%
PV
	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
Cash Outflow	-27,00,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00	-22,50,000.00
Cash Inflow		25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	25,20,000.00	64,20,000.00
Net Cashflow	-27,00,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	2,70,000.00	41,70,000.00
Discount rate	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%	10%
PV	-27,00,000.00	2,45,454.55	2,23,140.50	2,02,855.00	1,84,413.63	1,67,648.76	1,52,407.96	1,38,552.69	1,25,956.99	1,14,506.36	1,04,096.69	94,633.35	86,030.32	78,209.38	71,099.44	64,635.85	58,759.87	53,418.06	48,561.87	44,147.16	6,19,843.93
	=C15/((1+C16)^C11)
NPV	₹ 1,78,372.35	=NPV(C16,D15:W15)+C15
IRR	11%	=IRR(C15:W15)