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Lewis Corp 200000

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%

(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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