You can invest in a new project being proposed by your friend Sally. She is proposing investing in a dodgeball project in which a currently empty lot downtown would be converted into a dodgeball field. The city has already committed to buying the empty plot of land 36 months (3 years) from now for a price of $150,000, regardless of who owns the land. In fact, they will use imminent domain to force the owners to sell at that price, at that time. However, the land must have been in an unimproved condition and have remained vacant for 12 months prior to their purchase or the owners will face penalties costing more than the land is worth.

The current owners are asking $150,000 today for the land, but Sally thinks this still represents a great short-term business opportunity. Based on her market research, she thinks she can buy the land today, invest $50,000 in improvements to convert the empty plot into a dodgeball field and then operate for 2 years before having to return the land to its initial condition as a vacant field, which is estimated to cost $10,000. At that point, Sally plans to leave the field open for the required 12 months and then sell it to the City for the announced $150,000. For the 2 years that the dodgeball field is operating, Sally thinks he will be able to generate $60,000 per year in annual revenues. If you undertake the project, there will be a permit fee of $200 from the city to approve of the project which must be made prior to the start of the construction. To fund your investment in this operation you would need to sell your baseball card collection filled with very expensive cards from the 1940s that you estimate increases in value by 12% per year. As far as you can tell, investing in the dodgeball field will be slightly riskier than keeping your investment in the baseball cards. Finally, all construction costs must be paid at the initiation of the construction activity. PART A - From a purely economic perspective, should you invest in your friends project? A) Yes because the IRR equals your average yield on the baseball card investment B) No, because it has a negative NPV

C) Yes, because it has a positive NPV D) No, because you are not able to exactly estimate a discount rate for NPV calculation PART B- What is the IRR of the project? A) 12% because that is the opportunity cost of selling your baseball card collection B) Greater than 12% because this project is slightly riskier than keeping your baseball card collection which is estimated to yield 12% per year C) Impossible to determine because the project has non-traditional cash flows D) 12% because that is the discount rate that sets the sum of the time adjusted cash flows equal to $0 PART C - What is the payback period for this project? A) Impossible to determine from the information given B) More than 2 years C) Exactly 2 years D) Less than 2 years