Straightforward net present value and payback computations The Calgary Eskimos play in the Canadian Hockey League. Although the Eskimos will soon be moving to a modern arena, m
Straightforward net present value and payback computations
The Calgary Eskimos play in the Canadian Hockey League. Although the Eskimos will soon be moving to a modern arena, management is studying the possibility of expanding the team’s present facility to accommodate increased crowds. A $2.4 million expansion is planned that has a $200,000 residual value and will be depreciated by the straight-line method over four seasons. Information about the expansion follows:
| Number of seats | Occupancy rate | Ticket Price | |
| Class 1 seats | 2500 | 80% | $6 |
| Class 2 seats | 2000 | 60 | 4 |
4
The team will play 56 home games each season. Total added operating costs per game (ushers, cleanup, and depreciation) are expected to average $11,800. All such costs, except depreciation, require cash outlays.
Instructions
a By using the net present value method and a 16% desired rate of return, determine whether the expansion should be undertaken.
b In addition to the cash flows presented here, what other cash flows might change if the Eskimos add on to the arena?
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