**Price: $2.50**

Lewis Corp. is thinking about opening a basketball camp in Texas. In order to

start the camp, the company would need to purchase land and build eight basketball

courts and a dormitory-type sleeping and dining facility to house 110 basketball players.

Each year, the camp would be run for 8 sessions of 1 week each. The company would

hire college basketball players as coaches. The camp attendees would be male and female

basketball players ages 12 to 18. Property values in Texas have enjoyed a steady increase

in value. It is expected that after using the facility for 20 years, Lewis can sell the property

for more than it was originally purchased for. The amounts shown on the next page have

been estimated.

Cost of land | $200,000 |

Cost to build dorm and dining facility | $350,000 |

Annual cash inflows assuming 110 players and 8 weeks | $700,000 |

Annual cash outflows | $570,000 |

Estimated useful life | 20 years |

Salvage value | $700,000 |

Discount rate | 12% |

Instructions

(a) Calculate the net present value of the project.

(b) To gauge the sensitivity of the project to these estimates, assume that if only 90 campers

attend each week, annual cash inflows will be $570,000 and annual cash outflows will

be $508,000. What is the net present value using these alternative estimates?

(c) Assuming the original facts, what is the net present value if the project is actually

riskier than first assumed, and a 15% discount rate is more appropriate?

(d) Assume that during the first 5 years the annual net cash inflows each year were only

$65,000. At the end of the fifth year, the company is running low on cash, so management

decides to sell the property for $668,000. What was the actual internal rate of

return on the project?

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