QUESTIONS A football club is considering two projects to renew the club field. T
ID: 2806946 • Letter: Q
Question
QUESTIONS A football club is considering two projects to renew the club field. The club can either build a ew stadium, or expand the existing one. The cash flows related to each project are presented in the table below. Time Build New Stadium Expand the Existing Stadium -100000 12000 42000 60000 0 -150000 85000 75000 70000 2 3 a. Calculate the payback period, profitability index, net present value, IRR and MIRR for the two projects if the cost of capital is 7%. 0marks) b. Based on answers in part a, and if the projects are mutually exclusive, which project should be applied by the football club. (20 marks)Explanation / Answer
a Build new stadium Year 0 1 2 3 Cash flows -150000 85000 75000 70,000.00 Cost of capital 7% Cummulative cash flows 85000 160000 230000 Payback period 1.87 Years It will be between years 1 and 2 as cummulative cash flows exceeds year 0 cash flow between year 1 and 2 NPV 52,088.01 using the NPV formula Profitability index 0.35 NPV/Year 0 cash flow IRR 26% using IRR formula and values as stated above Expand the existing stadium Year 0 1 2 3 Cash flows -100000 12000 42000 60,000.00 Cost of capital 7% Cummulative cash flows 12000 54000 114000 Payback period 2.77 Years It will be between years 1 and 2 as cummulative cash flows exceeds year 0 cash flow between year 1 and 2 NPV -3,122.75 using the NPV formula Profitability index -0.03 NPV/Year 0 cash flow IRR 6% using IRR formula and values as stated above b So using NPV,IRR and payback period project A should be selected