Instructor-provided worksheet is recommended. New City is considering building a

Question

Instructor-provided worksheet is recommended.

New City is considering building a recreation center. The estimated construction cost is $12 million with annual staffing and maintenance costs of $750,000 over the twenty year life of the project. At the end of the life of the project, New City expects to be able to sell the land for $4 million, though the amount could be as low as $2 million and as high as $5 million. Analysts estimate the first year benefits (accruing at the end of the year of the first year) to be $1.2 million. They expect the annual benefit to grow in real terms due to increases in population and income. Their prediction is a growth rate of 4 percent, but it could be as low as 1 percent and as high as 6 percent. Analysts estimate the real discount rate for New City to be 6 percent, though they acknowledge that it could be a percentage point higher or lower.      

                        is considering building a teceis recommended.

                        nsitivity Analysising and selling the stent to cardiologists.

                        costs now that thea. Calculate the present value of net benefits for the project using the analysts’ predictions.

Investigate the sensitivity of the present value of net benefits to alternative predictions within the ranges given by the analysts.

Submit a copy of your Excel spreadsheet for problem 3 showing the present value of net benefits for the project (part a). For part b, you can vary the assumed values for the scrap value of land ($2 M to $5M), growth rate of benefits (0.01 to 0.06) and discount rate (0.05 to 0.07) as an exercise but submit your results for the best-case analysis and the worst-case analysis.

Problem 3 Spreadsheet
Assumptions:
Annual Discount Rate 0.06
Annual Growth Rate of Benefits 0.04
Construction Cost $12,000,000
Annual Operations Cost $750,000
First Year Benefit $1,200,000
Scrap Value $4,000,000
Construction Operational Annual Scrap Annual PV Annual
Cost Cost Benefit Value NB NB
Year 0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Net Present Value $0

Explanation / Answer

Answer :

Given ,

construction cost - $12,000,000

Annual staffing & maintenance costs - $750,000

Period - 20 years

Scrap value - $4,000,000 ( highest - $5m & lowest - $2m)

first year benefits - $1,200,000

after that growth rate - 4% ( highest - 6% & lowest -1%)

discount rate - 6%

Part a

Part B

Hence Best Case Scenerio -

where annual benefits have growth rate of 6% & also project has highest scrap value of $5m. But the dicount rate applied needs to be 5%

Worst Case Scenerio -

where Annual benefits have growth rate of 4%, having scrap value of $4m, & project discounted @ 6%

year particulars inflow $ outflow $ Net cashflow $ discount factor @ 6% present value $ 0 consturction cost 0 12000000 -12000000 1 -12000000 1 annual cash outflow 1200000 750000 450000 0.9434 424530 2 annual cash outflow 1248000 750000 498000 0.89 443220 3 annual cash outflow 1297920 750000 547920 0.8396 460034 4 annual cash outflow 1349837 750000 599837 0.7921 475131 5 annual cash outflow 1403830 750000 653830 0.7473 488607 6 annual cash outflow 1459983 750000 709983 0.705 500538 7 annual cash outflow 1518383 750000 768383 0.6651 511052 8 annual cash outflow 1579118 750000 829118 0.6274 520189 9 annual cash outflow 1642283 750000 892283 0.5919 528142 10 annual cash outflow 1707974 750000 957974 0.5584 534933 11 annual cash outflow 1776293 750000 1026293 0.5268 540651 12 annual cash outflow 1847345 750000 1097345 0.497 545380 13 annual cash outflow 1921239 750000 1171239 0.4688 549077 14 annual cash outflow 1998088 750000 1248088 0.4423 552029 15 annual cash outflow 2078012 750000 1328012 0.4173 554179 16 annual cash outflow 2161132 750000 1411132 0.3936 555422 17 annual cash outflow 2247577 750000 1497577 0.3714 556200 18 annual cash outflow 2337481 750000 1587481 0.3503 556095 19 annual cash outflow 2430980 750000 1680980 0.3305 555564 20 annual cash outflow 2528219 750000 1778219 0.3118 554449 20 Scrap value 0 0 4000000 0.3118 1247200 Net Present Value -347378

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