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Calculating NPV and PI in the given case

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The Philadelphia Phillies are interested in building a new stadium. The most cost-effective method of building the stadium is to fund it through ticket sales. To go ahead with this development, the Phillies must spend $ 100,000 for a land survey, $ 100,000 for building permits and $ 10,000,000 for its installation. The stadium will net the company an estimated $ 3,500,000 each year over the 5-year life of the formula. Calculate the Phillies cost of capital (Rrf = 5.65%, B = 1.25, Rm = 15%). Assume that cash inflows occur at the end of the year.

Calculate the NPV, and the Profitability Index (PI) for this project. Should the project be undertaken? Why?

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Please refer attached file for better clarity of table and formulas.

Initial Investment=Co=(100000+100000+10000000)=10,200,000.00

We can calculate cost of capital by using CAPM model.
Cost of capital=r=Rrf+B*(Rm-Rrf)=5.65%+1.25*(15%-5.65%)=17.3375%

I assume that ...

Solution Summary

Solution describes the steps to calculate NPV and profitability index in the given case.

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See Also This Related BrainMass Solution

Finance Case: Calculate WACC, NPV, PI, IRR and MIRR

See also enclosed Word document of the case study and excel spreadsheet for the financial exibit. Please help answer all questions.

The Investment Detective

The essence of capital budgeting and resource allocation is a search for good investments in which to place the firm's capital. The process can be simple when viewed in purely mechanical terms, but a number of subtle issues can obscure the best investment choices. The capital budgeting analyst is necessarily, therefore, a detective who must winnow good evidence from bad. Much of the challenges is knowing what quantitative analysis to generate in the first place.

Supposed you are a new capital budgeting analyst for a company considering investments in the eight projects listed in Exhibit 1. The chief financial officer of your company has asked you to rank the projects and recommend the "four best" that the company should accept.

Part I

For the first part of this assignment only quantitative considerations are relevant. No other project characteristics are deciding factors in the selection, except that management has determined that projects 7 and 8 are mutually exclusive.
All projects require the same initial investment, $2,000,000. Moreover, all are believed to be of the same risk class. The weighted average cost of capital for the first part is 10%. To simulate your analysis, consider the following questions:

1. Can you rank the projects simply by inspecting the cash flows?
2. What criteria might you use to rank the projects? Which quantitative ranking methods are better? Why?
3. What is the ranking you found by using quantitative methods? Does this ranking differ from the ranking obtained by simple inspection of the cash flows?
4. What kinds of real investment projects have cash flows similar to those in the exhibit?

Part II
The company has the following capital structure:
Account $ Costs before tax
Long-term Debt 2,000,000 10%
Preferred Stock 500,000 14%
Common Stock 2,500,000 16%

1. Calculate the weighted average cost of capital (tax is 36%)
2. Using the same cash flows in exhibit I, find the NPV, PI, IRR and MIRR. Which project(s) would you recommend and why?

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