What is the npv of the stadium

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City A is building a stadium for the franchise. They realize that the stadium will have the following construction costs: $50 mln in year 1, $20 mln in year 2. Then the stadium will start working in year 3, and will function for 5 more years, with $10 mln profits per year. The corporate tax rate is 6%, while the discount rate is 10%. The stadium depreciates over time (assume it depreciates using straight-line depreciation: $14 mln per year). Also assume that after the stadium stops functioning, its scrap value will be -$1 mln.

Suppose City A’s demand function for tickets to a home game is: P = 50 – 0.0005

a. What is the NPV of the stadium? (Hint: discount first year in this example)

b. Is it economically feasible?

c. Does the scrap value sign make sense? Give an example of when scrap value can be negative.

Reference no: EM132054577

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