Objectives:

At the end of this activity, the students are expected to have been able to:

1. Define capital budgeting, explain why it is important, differentiate between security valuation and capital budgeting, and state how project proposals are generally classified.

2. Calculate net present value (NPV) and internal rate of return (IRR) for a given project and evaluate each method.

3. Define NPV profiles, the crossover rate, and explain the rationale behind the NPV and IRR methods, their reinvestment rate assumptions, and which method is better when evaluating independent versus mutually exclusive projects.

4. Briefly explain the problem of multiple IRRs and when this situation could occur.

NOTE: Set up your video camera. Take your video while you are doing the activity. You will submit this as your output for the activity.

Procedure:

1. The test is divided into two parts.
2. Read and understand the instruction for each part.

Questions: (to be answered within the video)

Pony Corp. is thinking about opening a baseball camp in Bataan. In order to start the camp, the company would need to purchase land, build five baseball fields, and a dormitory-type sleeping and dining facility to house 100 players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college baseball players as coaches. The camp attendees would be baseball players age 12-18. Property values in Bataan have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, Schilling can sell the property for more than it was originally purchased for. The following amounts have been estimated:

Cost of land Php 600,000

Cost to build dorm and dining facility Php 2,100,000

Annual cash inflows assuming 100 players and 10 weeks 2,520,000

Annual cash outflows 2,250,000

Estimated useful life 20 years

Salvage value 3,900,000

Discount rate 10%

Present value of an annuity of 1 8.514

Present value of 1 .149

Instructions:

(A) To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each week, revenues will be Php 2,085,000 and expenses will be Php 1,875,000. What is the net present value using these alternative estimates? Discuss your findings.

2. Assuming the original facts, what is the net present value if the project is actually riskier than first assumed, and a 12% discount rate is more appropriate? The present value of 1 at 12% is .104 and the present value of an annuity of 1 is 7.469.