Question

Background: Ohio State University sold the right to operate campus parking for $483 million. In exchange for the upfront payment, the purchaser collects all parking fees. The contract calls for parking rates to increase by 5.5% per year for first ten years and 4% thereafter. Answer the following questions assuming the contact lasts for 20 years, the first annual payment for managing the parking facilities is $36,351,926.10 and it was received at the end of the first year. Required: 1. Prepare an Excel spreadsheet detailing the annual payment over the contract life. In order to receive credit for you work, you must attach a copy of your Excel spreadsheet printed with the formulas showing ("Show Formulas" option). When displaying your answers round all numbers to the nearest dollar amount a. Calculate the parking fees for each year of the contract, and the total fees over the contract life. b. Use the NPV function to calculate the present value of the fees at 7% and 10% c. Determine the interest rate the purchaser is charging Ohio State University Ohio State added the $483 million in proceeds to its endowment to finance student scholarships. If each year Ohio State earns 6% on endowment and pays out 4% for scholarships, calculate the endowment balance at the end of each contract year Do you see any problems with this arrangement from Ohio State's perspective? 2. 3.

Answer 1

(1)

Parking fee Discount factor Discount factor @ 7% at 10 % Present value @ 7% Present value @ 10% 3,63,51,926 3,83,51,282 4,04,60,603 4,26,85,936 4,50,33,662 4,75,10,514 5,01,23,592 5,28,80,389 5,57,88,811 5,88,57,195 6,12,11,483 6,36,59,943 6,62,06,340 6,88,54,594 7,16,08,778 7,44,73,129 7,74,52,054 8,05,50,136 8,37,72,141 8,71,23,027 0.934579439 0.873438728 0.816297877 0.762895212 0.712986179 0.666342224 0.622749742 0.582009105 0.543933743 0.508349292 0.475092796 0.444011959 0.414964448 0.387817241 0.36244602 0.338734598 0.31657439 0.295863916 0.276508333 0.258419003 0.909090909 0.826446281 0.751314801 0.683013455 0.620921323 0.56447393 0.513158118 0.46650738 0.424097618 0.385543289 0.350493899 0.318630818 0.28966438 0.263331254 0.239392049 0.217629136 0.197844669 0.17985879 0.163507991 0.148643628 3,39,73,763 3,34,97,495 3,30,27,904 3,25,64,896 3,21,08,379 3,16,58,261 3,12,14,454 3,07,76,868 3,03,45,417 2,99,20,014 2,90,81,135 2,82,65,776 2,74,73,277 2,67,02,999 2,59,54,316 2,52,26,625 2,45,19,337 2,38,31,879 2,31,63,695 2,25,14,246 3,30,47,206 3,16,95,274 3,03,98,650 2,91,55,068 2,79,62,361 2,68,18,446 2,57,21,328 2,46,69,092 2,36,59,902 2,26,91,997 2,14,54,251 2,02,84,020 1,91,77,618 1,81,31,567 1,71,42,572 1,62,07,523 1,53,23,476 1,44,87,650 1,36,97,415 1,29,50,283 13 14 15 16 17 19 20 Total 1,20,29,55,534 57,58,20,734 44,46,75,698

(a)Total parking fees over the contract life = $1202955534

(b) NPV of parking fees @ 7 % = $575820734

NPV of parking fees @ 10 % =$444675698

(c)

NPV of the project @ 7 % = -483000000 + 575820734 = 92820734

NPV of the project @ 10 % = -483000000 + 444675698 = -38324302

Therefore using linear interpolation IRR = 9.12 %

This is the interest rate the purchaser is charging the Ohio state university

(2)

Year end A/C balance at the A/C balance at the beginning A/C balance at the year beginning before after scholarship payment scholarship payment 483000000 463680000 491500800 491500800 471840768 500151214.1 500151214.1 480145165.5 508953875.4 508953875.4 488595720.4 517911463.7 517911463.7 497195005.1 527026705.4 527026705.4 505945637.2 536302375.4 536302375.4 514850280.4 545741297.2 545741297.2 523911645.3 555346344.1 555346344.1 533132490.3 565120439.7 565120439.7 542515622.1 575066559.5 575066559.5 552063897.1 585187730.9 585187730.9 561780221.7 595487035 595487035 571667553.6 605967606.8 605967606.8 581728902.5 616632636.7 616632636.7 591967331.2 627485371.1 627485371.1 602385956.2 638529113.6 638529113.6 612987949.1 649767226 649767226 623776537 661203129.2 661203129.2 634755004 672840304.3 672840304.3 645926692.1 684682293.6