Assignment 5 The Atlanta Falcons want to build a new stadium. They expect the st
ID: 2576939 • Letter: A
Question
Assignment 5
The Atlanta Falcons want to build a new stadium. They expect the stadium will last 25 years. They are deciding if they should put a roof on the building. The roof will cost $150M. They will finance the roof using debt that will cost 5%. Part of the roof costs includes solar panels that are expected to save the Falcons $1M per year in energy costs. Energy costs are expected to grow at 3% per year. In addition, the more pleasant climate a roof will provide is expected to increase ticket value and the ability to have other events. The Falcons expect the incremental profit to be $7.5M in year one, and they expect that to grow by 3% as well.
Using the facts above please answer the following:
a) Should the Falcons add a roof?
b) The Falcons may have been a bit aggressive. Incremental profit will still be $7.5M, but it will grow at 2% per year. Should they add the roof?
c) The Falcons realize that the solar panels will still be valuable in 25 years and they will be able to resell them for $10M. Should they add the roof?
Explanation / Answer
a.
Calculation of Net Present Value of Cash flows
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.05)n), i=5%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
150
0
1
150
Interest on Loan for 25 years
150 x 5% = 7.5
1-25
14.10
105.75
TOTAL CASH OUTFLOWS
255.75
Cash Inflows:
Savings of energy (See Note)
1
1-25
14.10
14.10
Incremental Profit
7.5
1
0.952
7.14
Incremental Profit
7.5 x 103% = 7.725
2
0.9070
7
Incremental Profit
7.725 x 103% = 7.95675
3
0.863
6.866
Incremental Profit
8.195
4
0.822
6.736
Incremental Profit
8.44
5
0.7835
6.612
Incremental Profit
8.6945
6
0.746
6.48
Incremental Profit
8.955
7
0.710
6.35
Incremental Profit
9.22
8
0.677
6.242
Incremental Profit
9.5
9
0.644
6.118
Incremental Profit
9.78
10
0.6139
6
Incremental Profit
10.079
11
0.5846
5.89
Incremental Profit
10.38
12
0.557
5.782
Incremental Profit
10.69
13
0.530
5.666
Incremental Profit
11.01
14
0.505
5.56
Incremental Profit
11.34
15
0.4810
5.45
Incremental Profit
11.68
16
0.4581
5.35
Incremental Profit
12.035
17
0.436
5.25
Incremental Profit
12.39
18
0.4155
5.148
Incremental Profit
12.76
19
0.395
5.04
Incremental Profit
13.15
20
0.376
4.944
Incremental Profit
13.545
21
0.359
4.862
Incremental Profit
13.95
22
0.341
4.76
Incremental Profit
14.37
23
0.325
4.67
Incremental Profit
14.80
24
0.310
4.588
Incremental Profit
15.24
25
0.295
4.4958
NET Incremental profits and savings
157.10
Present Value of Cash flows
(98.65)
Since present Value of cash outflows is more than inflows. The roof should not be added.
NOTE: In the given question, savings in energy cost will remain same at $1 million and will not grow at 3% rate since the growth is of cost of energy and not of savings of energy
Particulars
Amount (In $)
(A)
Time(n)
Present Value Factor (1/ (1.05)n), i=5%
(B)
Present Value Amount (In $)
(A x B)
Cash Outflows:
Initial Investment
150
0
1
150
Interest on Loan for 25 years
150 x 5% = 7.5
1-25
14.10
105.75
TOTAL CASH OUTFLOWS
255.75
Cash Inflows:
Savings of energy (See Note)
1
1-25
14.10
14.10
Incremental Profit
7.5
1
0.952
7.14
Incremental Profit
7.5 x 103% = 7.725
2
0.9070
7
Incremental Profit
7.725 x 103% = 7.95675
3
0.863
6.866
Incremental Profit
8.195
4
0.822
6.736
Incremental Profit
8.44
5
0.7835
6.612
Incremental Profit
8.6945
6
0.746
6.48
Incremental Profit
8.955
7
0.710
6.35
Incremental Profit
9.22
8
0.677
6.242
Incremental Profit
9.5
9
0.644
6.118
Incremental Profit
9.78
10
0.6139
6
Incremental Profit
10.079
11
0.5846
5.89
Incremental Profit
10.38
12
0.557
5.782
Incremental Profit
10.69
13
0.530
5.666
Incremental Profit
11.01
14
0.505
5.56
Incremental Profit
11.34
15
0.4810
5.45
Incremental Profit
11.68
16
0.4581
5.35
Incremental Profit
12.035
17
0.436
5.25
Incremental Profit
12.39
18
0.4155
5.148
Incremental Profit
12.76
19
0.395
5.04
Incremental Profit
13.15
20
0.376
4.944
Incremental Profit
13.545
21
0.359
4.862
Incremental Profit
13.95
22
0.341
4.76
Incremental Profit
14.37
23
0.325
4.67
Incremental Profit
14.80
24
0.310
4.588
Incremental Profit
15.24
25
0.295
4.4958
NET Incremental profits and savings
157.10
Present Value of Cash flows
(98.65)