The city of Witchita, Kansas, is considering building a hockey arena and entertainment complex. It will cost $60 million to build. It will take 2 years to build and $20 million is to be spent up front, another $20 million is due at the end of 1 year and the final $20 million is due at the end of 2 years. Also, at the end of 2 years, the city will have sold all 32 private luxury boxes at $150,000 per box. The arena will be opened in year 3 and the city estimates that the arena will have net cashflows (after expenses) of $9,000,000 a year (years 3 to 15 all cashflows are assumed to be at the end of each year). For the 12th year, the 32 luxury boxes will be renewed (at $150,000 per box) along with the $9,000,000 net cashflow. At the end of the 15th year, the city plans to sell the arena to a private company for $70 million.

(a) Calculate the net present value of the cashflows at cost of capital rates of 2%, 4%, 6%, , 30%. (Hint: try using the NPV function in Excel) and then graph the results. (2 + 2 = 4 marks) (b) Calculate the IRR to 2 decimal points. (Hint: use the IRR function in Excel)

(c) At the end of 11 years (just before the luxury box leases are to be renewed), the arenas management takes a look at the actual cashflows over the years. It turns out that actual cashflows declined to $8,000,000 in year 5, $7,000,000 in year 6, $6,000,000 in year 7 and $5,000,000 in year 8 to 11. What is the IRR of the actual cashflows after 11 years?

(d) To combat declining revenues, the city decides to build a second ice pad at the arena at a cost of $8,000,000 (paid at end of year 12). The city then renews the leases of the 32 luxury boxes at only $100,000 per box, plus the arena ends up with additional net cashflows during year 12 of $5,000,000. The city estimates net cashflows for the new arena will be $12 million for years 13, 14 and 15. At the end of 15 years, the city plans to sell the arena to a private company for $80 million. What is the expected IRR?