Question

The Williamston Wingnuts minor league hockey team is considering building a new arena in Downtown Williamston. They have decided they will only build the arena if it will be Net Present Value positive based on 5 years of cash flows. The team’s accounting department has compiled the following costs: $2,000,000 for the land the arena would be built on. They bought this land in 2010. Construction costs of $28,000,000 $50,000 for a marketing study conducted last year to determine whether more fans would come to the games if they built a new arena. $50,000 for new signage in front of the building and around the city that will only be needed if the arena is built. $500 for a trip taken by team management to see the Portland (Mich.) Puckheads’ new arena at a game last season to gather design ideas. $50,000 for street lights in the parking lot and on Grand River Ave. that will only be needed if the arena is built. $100,000 in additional Net Working Capital will be needed at the beginning of the project, 60% of which will be recovered at the end of the project.

What is the Total Year 0 cash flow for this project?

Answer 1

Answer:

$28,200,000

Explanation:

The computation of the total year 0 cash flow is shown below:

= Construction cost + new signage cost + street lights cost + additional net working capital  

= $28,000,000 + $50,000 + $50,000 + $100,000

= $28,200,000

The land cost, marketing cost, trip study are considered as a sunk cost . Hence, it is to be ignored

So in this case we considered these above four cost in order to find out the total year 0 cash flow