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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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    Solution Preview

    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.