Reference no: EM133111653
The city of Pawnee's municipal council consists of several departments, one of which is the Parks and Recreation department. Their role is to design and build public spaces to embellish the city and its neighborhoods.
The city has decided to dissolve this department since nobody has produced any significant work from there in a long while. A local real estate businessman has contacted the mayor and offered 5 500 000 $ to purchase the Parks and Rec's building, which is located downtown where most commerce are located. The assets themselves are composed of office furniture and old computers, with an estimated salvage value of 50 000 $.
Concurrently, a Club Med has offered to establish a giant resort near the city, in an area where there is a great potential to develop mountain bike trails. But, to undertake this project, the city would need to keep the Parks and Rec department in operation, since all the other municipal employees are too busy to administer this. Annual expenses for the department (salaries, supplies, etc.) are estimated to be of 250 000 $ per year. The council also estimates the Club Med will bring an incremental 50 000 $ of municipal tax revenues, and another 275 000 $ in tourism revenues. These establishments usually operate for 15 years before their popularity decreases and Club Med sells their assets to real estate developers. The Parks and Rec department will then be shutdown, with the building getting old and in need of major renovations, lowering the estimated resale value to 2 500 000 $.
The city's discount rate is 10% and since it is a government body, it does not pay income taxes.
Required:
1) Using the net present value method, determine whether the City of Pawnee should sell the Parks and Rec assets immediately or keep it and open a Club Med
2) Be the devil's advocate and identify 2 reasons supporting the opposite conclusion of what your NPV suggests (ex: if the NPV of selling the building immediately is higher, why would you (the city council) still consider opening a club med)
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