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?
Please refer attached file for better clarity of table and formulas.
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 describes the steps to calculate NPV and profitability index in the given case.