Outdoor Sports is considering adding a putt putt golf course

Outdoor Sports is considering adding a putt putt golf course to its facility. The course would cost $182,000, would be depreciated on a straight-line basis over its 6-year life, and would have a zero salvage value. The sales would be $87,100 a year, with variable costs of $28,150 and fixed costs of $12,750. In addition, the firm anticipates an additional $21,300 in revenue from its existing facilities if the putt putt course is added. The project will require $3,350 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?

Solution

Initial Cost $182,000 Depreciation 30333.33 (182000/6) NWC          3,350 Total initial cost     185,350 Sales Revenue 87100 Year Cash flow x DF at 11% = Prsent Value Additional revenue 21300 0 -185350 1       (185,350.00) - Variable Cost 28150 1 52633.33 0.900900901           47,417.41 - Fixed Cost 12750 2 52633.33 0.811622433           42,718.39 -Depreciation 30333.33 3 52633.33 0.731191381           38,485.04 EBT 37166.67 4 52633.33 0.658730974           34,671.20 - Tax at 40% 14866.67 5 52633.33 0.593451328           31,235.32 EAT 22300 6 55983.33 0.534640836           29,930.97 Add back depreciation 30333.33 NPV           39,108.34 CFAT 52633.33 Year 6 cash flow 55983.33 (52633.33+3350)