Question
You work for a municipal park and recreation department. Your town has operated a recreation center and athletic complex near the center of town since
You work for a municipal park and recreation department. Your town has operated a recreation center and athletic complex near the center of town since its construction in 1963. The town is considering replacing this facility with a new complex on the edge of town. Based on previous budgets as well as projections, the side-by-side operational budget comparisons of the existing and proposed facilities are presented below:
| Proposed New Facility |
Annual Revenue | $2,398,542 |
Annual Operating Expenses (including Maintenance/Repair) | $2,020,600 |
Annual Net Cash Flow (Assume simple formula of Revenues - Expenses) |
|
The cost analysis for the construction of the new complex is below (Add the contingency and complete the table)
Land acquisition (100 acres at $15,000/acre) | $1,500,000 |
Pre-construction work | $3,500 |
Design and project management | $269,060 |
Parking and entry drive | $238,880 |
Recreation center construction | $2,000,000 |
Group picnic areas and shelters | $180,000 |
Playground at group picnic area | $50,000 |
Restroom facilities | $27,000 |
Multi-purpose lighted turf fields | $868,770 |
Sport field equipment | $75,000 |
Trail construction | $36,000 |
Landscaping | $16,000 |
Fencing | $15,000 |
Utility connections | $19,000 |
Subtotal | $5,298,210 |
Add a 15% Contingency to be included in the turnkey cost |
|
Total (This is turnkey cost for this budget) |
|
- Based on the estimations of the capital budget above, answer the following:
a. Turnkey cost* of construction for the new complex. This will also be the Amount Borrowed |
|
b. Annual returns (i.e. revenue or cash flow) from the new complex |
|
- Considering the Turnkey cost, what is the payback period for the new complex? ______ Years
- Now, calculate the internal rate of return based on the Amount Borrowed and Annual Returns
- First, you have to identify the appropriate crude discount rate based on Amount Borrowed and Annual Returns (This can be calculated by using the payback period formula, just don't round to years)
- Based on Interest Table (from Moodle), and using your calculation of the discount rate, what is the internal rate of return for the new complex if you assume a 30-year life of the facility?
To find the Internal Rate of Return/Return on Investment. Look at the interest table (on Moodle). The column on the left side (Labeled Period) is the estimated investment period in years (in this case, the expected life of the facility). Then going across from the identified year, find the closest figure to the discount rate value you calculated in 3a. The % figure at the top of that column represents the Internal Rate of Return.
_____________%
- Now, calculate the Net Present Value based on the Amount Borrowed and Annual Returns
- Use the formula NPV = Annual Returns(Discount Rate) - Amount Borrowed
First, use the Internal Rate of Return % to identify the associated Discount Rate in the Interest Table based on the period
NPV = ___________________________
- Finally, let's calculate the cost of financing to understand the full cost of financing the facility. You town is able to get a 20-year serial bond at an annual compounding interest rate of 3% for the total construction to be financed (the answer to 1c above)
Based on this information, use the Online Calculator below to Answer the following: https://www.mycalculators.com/ca/aloanm.html
Note: Once you enter the details in the calculator (e.g., amount, # of years, & interest rate), click on "Payment" for the calculator to work.
Annual loan payment
|
$ |
Total amount your town will pay over the life of the bond in both principal and interest
|
$ |
- Calculate the amounts in the following scenarios:
| If you find a lower interest rate of 2.5% over 20 years | If you find a shorter-term bond of 15 years at 3% interest |
Annual loan payment |
$ |
$ |
Total amount your town will pay over the life of the bond |
$ |
$ |
Based on the assessment, do you think building the new complex would be a good financial investment for your city? Why or why not?
Step by Step Solution
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