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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)

 

 


  1. 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 

 

 

  1. Considering the Turnkey cost, what is the payback period for the new complex?  ______ Years

 

 

 

 

  1. Now, calculate the internal rate of return based on the Amount Borrowed and Annual Returns

 

 

  1. 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)


  1. 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.

 

 

            _____________%

 

 

 

  1. Now, calculate the Net Present Value based on the Amount Borrowed and Annual Returns
    1. 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 = ___________________________

      

  1. 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

 

 

 

 

$

 

  1. 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?

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