Windsor Park Dominica Is Owned And Operated By A Private Com ✓ Solved
Windsor Park Dominica Is Owned And Operated By A Private Company
Windsor Park Dominica is owned and operated by a private company, Windees Ltd. You work as the Facilities Manager of the Park and the CEO of the company has asked you to evaluate whether Windees should embark on the expansion of the facility given there are plans by the Government to host Cricket World Cup in 2020. The project seeks to increase the number of seats by building four new box seating areas for VIPs and an additional 5,000 seats for the general public. Each box seating area is expected to generate $400,000 in incremental annual revenue, while each of the new seats for the general public will generate $2,500 in incremental annual revenue. The incremental expenses associated with the new boxes and seating will amount to 60 percent of the revenues. These expenses include hiring additional personnel to handle concessions, ushering, and security. The new construction will cost $15 million and will be fully depreciated (to a value of zero dollars) on a straight-line basis over the 5-year life of the project. The company will have to invest $2 million in additional working capital immediately, but the project will not require any other working capital investments during its life. This working capital will be recovered in the last year of the project. The center's marginal tax rate is 25 percent.
A. What are the incremental cash flows from this project? In other words determine the free cash flow of the project over its life. (You may use the table below to work out this part of the problem) (6 points) Year 0 Years 1 Year 2 Year 3 Year 4 Year 5 Capital Expenses Working Capital Revenue Operating Expenses EBITDA D&A EBIT à—(1 - t) Net Income D&A Cash Flow from Operations Working Capital Free Cash Flows
B. What is the Net Present Value if the project is assessed at a discount rate of 15% and should the project be accepted and why? (5 points)
C. What is the Internal Rate of Return of the project and should the project be accepted and why. (4 points)
Paper For Above Instructions
The expansion of Windsor Park in Dominica, owned by Windees Ltd., is critically assessed to determine its financial viability in light of hosting the Cricket World Cup in 2020. Under this project proposal, significant upgrades and additions are planned, including four box seating areas for VIPs and 5,000 additional seats for the general public. This paper will outline the incremental cash flows, calculate the Net Present Value (NPV), and ascertain the Internal Rate of Return (IRR) to guide decision-making regarding the project's acceptance.
Incremental Cash Flows
To calculate the incremental cash flows, it is essential first to determine revenue and expenses generated by the project.
- Revenue from Box Seats: Four box seating areas, each generating $400,000 yearly results in:
- 4 * $400,000 = $1,600,000
- Revenue from General Seating: With 5,000 new general public seats generating $2,500 each annually, the total revenue comes to:
- 5,000 * $2,500 = $12,500,000
- Total Revenue:
$1,600,000 + $12,500,000 = $14,100,000
- Operating Expenses: Incremental expenses are 60% of total revenue:
- 0.60 * $14,100,000 = $8,460,000
- EBITDA:
- EBITDA = Total Revenue - Operating Expenses
- EBITDA = $14,100,000 - $8,460,000 = $5,640,000
- Depreciation: For the new construction of $15 million depreciated over 5 years:
- Annual D&A = $15,000,000 / 5 = $3,000,000
- EBIT:
EBIT = EBITDA - D&A = $5,640,000 - $3,000,000 = $2,640,000
- Tax Effect: With a tax rate of 25%:
- Tax = EBIT Tax Rate = $2,640,000 0.25 = $660,000
- Net Income:
Net Income = EBIT - Tax = $2,640,000 - $660,000 = $1,980,000
- Cash Flow from Operations:
Cash Flow = Net Income + D&A = $1,980,000 + $3,000,000 = $4,980,000
The cash flow also needs to take working capital into account. An immediate investment of $2 million is necessary, but this amount will be recovered in the final year.
The summarized cash flows for each year along with net cash flows are presented below.
| Year | Capital Expenses | Working Capital | Revenue | Operating Expenses | EBITDA | D&A | EBIT | Net Income | Cash Flow from Operations | Free Cash Flows |
|---|---|---|---|---|---|---|---|---|---|---|
| 0 | $15,000,000 | $2,000,000 | $0 | $0 | $0 | $0 | $0 | $0 | $0 | -$17,000,000 |
| 1 | $0 | $0 | $14,100,000 | $8,460,000 | $5,640,000 | $3,000,000 | $2,640,000 | $1,980,000 | $4,980,000 | $4,980,000 |
| 2 | $0 | $0 | $14,100,000 | $8,460,000 | $5,640,000 | $3,000,000 | $2,640,000 | $1,980,000 | $4,980,000 | $4,980,000 |
| 3 | $0 | $0 | $14,100,000 | $8,460,000 | $5,640,000 | $3,000,000 | $2,640,000 | $1,980,000 | $4,980,000 | $4,980,000 |
| 4 | $0 | $0 | $14,100,000 | $8,460,000 | $5,640,000 | $3,000,000 | $2,640,000 | $1,980,000 | $4,980,000 | $4,980,000 |
| 5 | $0 | $2,000,000 | $14,100,000 | $8,460,000 | $5,640,000 | $3,000,000 | $2,640,000 | $1,980,000 | $6,980,000 | $4,980,000 |
In the 5th year, $2 million of working capital is recovered, increasing net cash flows significantly.
Net Present Value (NPV)
The NPV is calculated using a discount rate of 15%. The formula for NPV is:
NPV = Σ (Cash Flows / (1 + r)^t) where r is the discount rate and t is the time period.
The cash flows are:
- Year 0: -$17,000,000
- Year 1: $4,980,000
- Year 2: $4,980,000
- Year 3: $4,980,000
- Year 4: $4,980,000
- Year 5: $6,980,000
Calculating NPV:
NPV = (-$17,000,000) + ($4,980,000 / (1 + 0.15)^1) + ($4,980,000 / (1 + 0.15)^2) + ($4,980,000 / (1 + 0.15)^3) + ($4,980,000 / (1 + 0.15)^4) + ($6,980,000 / (1 + 0.15)^5)
The resulting NPV is approximately $1,015,978.77. Since the NPV is positive, this indicates the project should be accepted.
Internal Rate of Return (IRR)
The IRR is the discount rate that makes the NPV of the project zero. It can be calculated using the cash flows detailed above. Estimating the IRR for the given cash flows produces an IRR of approximately 17.11%.
Since the IRR is greater than the required return of 15%, this indicates that the project is financially viable and should be accepted.
Conclusion
The analysis of the cash flows, along with the positive NPV and a favorable IRR, supports the decision to proceed with the expansion of Windsor Park. The growth potential and the opportunity to host a significant international event like the Cricket World Cup, aligning with favorable financial metrics, indicate that this project is a sensible investment for Windees Ltd.
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