You are a senior analyst at Basketti Inc. To validate that the project idea is feasible, the company spent $75,000 during a pilot project last year. The money was spent to build two courts and a pre-beta version of the app. The company is now evaluating whether to continue its investment in the project.

Building the proposed 50 basketball courts will require an investment of $20,000 per court for paving, fencing, lighting, etc. The courts will be depreciated on a straight-line basis to a net book value of $0. Basketti has received special approval to depreciate the courts as personal property over a 7-year life, rather than having to depreciate them as land improvements, which would require a 15-year life. The investment in an inventory of paddles, nets, and ballsboth for sale and for customers to borrowis expected to cost $362,000. The increase in Accounts Receivable is expected to be $210,000, and in Accounts Payable $145,000. To partially finance the project, the company will issue Long-Term Debt of $750,000.

First year operating results are expected as follows: Sales $784,000, Costs of Goods Sold (COGS) expense $522,000, and Selling, General and Administrative (SG&A) expense $115,000. Sales are expected to grow 5.0% per year, and both COGS and SG&A are expected to remain at a constant percentage of Sales. Pickleheads pays a combined federal and state tax rate of 22.0%.

Basketti hopes to sell the courts and equipment to the mall owners for a total salvage value of $300,000 at the end of the projects five-year life. At that time, all Current Asset and Current Liability accounts will return to their pre-project levels.

Basketti requires a return of 12.0% on capital projects. It has 1,000,000 shares outstanding.

Prepare an analysis to determine whether the firm should implement this capital project. Your analysis should provide answers to each of the following questions.

1. What is the projects initial investment requirement (the cash flow at the end of year zero)?
2. What are the operating cash flows (the operating cash flows at the ends of years 1 through 5)?
3. What is the total terminal cash flow (the non-operating cash flow at the end of year 5)?
4. What is the NPV?
5. What is the IRR?
6. Should the firm implement the project? Why or why not? Answer this question twice: first, using the results of your NPV calculation, and second, using the results of your IRR calculation.
7. How much does the project earn? Answer this question twice, first, using the results of your NPV calculation, and second, using the results of your IRR calculation.

If the firm implements the project, what will be the expected change in the stock price (that is, the capital gain or loss per share)?