Ranade Center for the Athletic Arts is a for-profit entity co-located with Ranad
ID: 2457078 • Letter: R
Question
Ranade Center for the Athletic Arts is a for-profit entity co-located with Ranade University. Their ATMARR is 12% and they pay taxes at 34%. The CEO of the Ranade Center is considering building a new tennis facility and has two choices:
Five and a half years later, you are doing a post-mortem analysis of the project and discover that while the Small Center had a salvage price of $2 million, the Bigger Center was, in fact, sold for $5 million. How does this change your analysis, if at all?
Small Center Big Center Initial Cost $11 million $33 million Uniform Annual Benefits $3 million $9 million Estimated Salvage Value $2 million $3 million Depreciation Method SOYD SOYD Life 5 years 5 yearsExplanation / Answer
Small Center Amount (in $) Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total Initial cost of tennis facility 1,10,00,000.00 1,10,00,000.00 Less: Estimated Salvage Value 20,00,000.00 2000000.00 Net cost of tennis facility 90,00,000.00 9000000.00 Uniform Annual Benefit 30,00,000.00 30,00,000.00 30,00,000.00 30,00,000.00 30,00,000.00 15000000.00 P.V of Uniform Annual Benefit 26,78,571.43 23,91,581.63 21,35,340.74 19,06,554.24 17,02,280.57 10814328.61 Less: Depreciation 30,00,000.00 24,00,000.00 18,00,000.00 12,00,000.00 6,00,000.00 9000000.00 Benefit after Depreciation 0.00 6,00,000.00 12,00,000.00 18,00,000.00 24,00,000.00 6000000.00 Less: Tax 0.00 2,04,000.00 4,08,000.00 6,12,000.00 8,16,000.00 2040000.00 Net benefit 0.00 3,96,000.00 7,92,000.00 11,88,000.00 15,84,000.00 3960000.00 P.V of Net benefit 0.00 3,15,688.78 5,63,729.96 7,54,995.48 8,98,804.14 2533218.35 Big Center Amount (in $) Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Total Initial cost of tennis facility 3,30,00,000.00 3,30,00,000.00 Less: Estimated Salvage Value 30,00,000.00 3000000.00 Net cost of tennis facility 3,00,00,000.00 30000000.00 Uniform Annual Benefit 90,00,000.00 90,00,000.00 90,00,000.00 90,00,000.00 90,00,000.00 45000000.00 P.V of Uniform Annual Benefit 80,35,714.29 71,74,744.90 64,06,022.23 57,19,662.71 51,06,841.70 32442985.82 Less: Depreciation 1,00,00,000.00 80,00,000.00 60,00,000.00 40,00,000.00 20,00,000.00 30000000.00 Benefit after Depreciation -10,00,000.00 10,00,000.00 30,00,000.00 50,00,000.00 70,00,000.00 15000000.00 Less: Tax -3,40,000.00 3,40,000.00 10,20,000.00 17,00,000.00 23,80,000.00 5100000.00 Net benefit -6,60,000.00 6,60,000.00 19,80,000.00 33,00,000.00 46,20,000.00 9900000.00 P.V of Net benefit -5,89,285.71 5,26,147.96 14,09,324.89 20,97,209.66 26,21,512.07 6064908.87 Particulars Small Center Big Center P.V of Uniform Annual Benefit 10814328.61 32442985.82 Net cost of tennis facility 9000000.00 30000000.00 NPV of the facilities 1814328.61 2442985.82 Thus Big Center facility is preferable since it has higher NPV. Effect of Small Center having a salvage price of $2 million and Bigger Center having a salvage value of $5 million. Particulars Small Center Big Center P.V of Uniform Annual Benefit 10814328.61 32442985.82 Net cost of tennis facility 9000000.00 28000000.00 NPV of the facilities 1814328.61 4442985.82 Thus Big Center is still preferable since it has higher NPV.
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