. Assume Camden, NJ is considering whether or not to build a new sports stadium.
ID: 2753123 • Letter: #
Question
. Assume Camden, NJ is considering whether or not to build a new sports stadium. The stadium is expected to cost $100 million today. The stadium is expected to generate more jobs and revenue for the city. The stadium is expected to generate $200 million dollars over twenty years. Assume the city uses a 5% discount rate.
A. What is the present discounted value of the benefits?
B. What is the present discounted value of the cost? C. What is the net present value of the stadium?
D. Based on your answer in part C, should Camden, NJ invest in a new sports stadium?
Explanation / Answer
BENEFITS OVER 20 YEARS = 200 MILLION
BENEFITS EACH YEAR = 10 MILLION (200/20)
PRESENT VALUE OF THE BENEFITS = BENEFITS OVER 20 YEARS * TABLE FACTOR FOR 20 YEARS OF 5% DISCOUNT RATE
= 10000000 * 12.462
= $124620000
PRESENT VALUE OF THE COSTS = EXPECTED COSTS FOR TODAY
= $100000000
NET PRESENT VALUE = PRESENT VALUE FOR BENEFITS - PRESENT VALUE OF THE COSTS
= 124620000-100000000
= $24620000
YES COMPANY SHOULD INVEST IN A NEW SPORTS STADIUM AS IT HAS POSITIVE NPV
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