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 $54,000, would be depreciated on a straight line basis over its 5-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $35,000 a year with $7,000 of that amount being variable cost. The fixed cost would be $5,000. In addition, the firm anticipates an additional $12,000 in revenue from its existing facilities if the course is added. The project will require $8,000 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 13.6 percent and a tax rate of 33.9 percent?

Explanation / Answer

The NPV is given by $30909.76

Year 1 Year2 Year3 Year 4 Year 5 Sales 47000 47000 47000 47000 47000 Variable Cost 7000 7000 7000 7000 7000 Fixed Cost 5000 5000 5000 5000 5000 Depreciation 10800 10800 10800 10800 10800 Operating Costs 24200 24200 24200 24200 24200 Tax 8203.8 8203.8 8203.8 8203.8 8203.8 PAT 15996.2 15996.2 15996.2 15996.2 15996.2 Operating Cashflows PAT + Dep 26796.2 26796.2 26796.2 26796.2 26796.2 Investments -54000 Investment in working capital -8000 Recovery of working capital 8000 $30,909.76 -62000 26796.2 26796.2 26796.2 26796.2 34796.2

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