Reference no: EM132687149

1. Hidden Valley Golf Course is considering installing a new irrigation system on the course. The cost of installing the system is $500,000 and is incurred today. The system will have a useful life of 10 years and can be depreciated in a straight line method. At the end of 10 years, the salvage value will be $10,000. The system will keep the greens and fairways in better condition, thereby attracting more golfers. Based on a market survey, the course will see an incremental increase of 2,500 rounds per year at $40 per round. However, the irrigation system also has maintenance costs of $20,000 per year. Hidden Valley faces a 40% tax rate and has a cost of capital of 11%. Calculate the NPV of the irrigation system.

2. A European soccer team is considering purchasing a star player in the transfer market. To buy the player, the team would have to pay a transfer fee to the player's current team of $9M. The team is also contractually obligated to pay the player a salary of $2M per year for the next 6 years. However, the player is expected to increase the team's performance by 4 wins per year. Historical data shows each additional win is worth approximately $1.5M in revenues from ticket sales. Assume the transfer fee can be depreciated in a straight line manner over the life of the contract, but that the yearly salary cannot be depreciated. The team's tax rate is 30% and relevant discount rate is 4%. Should the team purchase the player?