Fun Land is considering adding a miniature golf course to its facility. The cour

Question

Fun Land is considering adding a miniature golf course to its facility. The course would cost $63000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $35000 a year with $6000 of that amount being variable cost. The fixed cost would be $8000. In addition, the firm anticipates an additional $15000 in revenue from its existing facilities if the course is added. The project will require $6000 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 11 percent and a tax rate of 40 percent?

Explanation / Answer

Depreciation expense = $63000/4 =15750 Free cash flow for year 1-4 = ($35000 +$15000 -$6000 -$8000 -15750)*(1-40%) + 15750 =$27,900 NPV = -$63000 -$6000 +$27,900/1.11 + $27,900/1.11^2 + $27,900/1.11^3 + $27,900/1.11^4 + $6000/1.11^4 = $21,510.62

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