Question

The Milwaukee Bucks are considering whether they should add an additional vending area, at a cost of $500,000, to the new arena in downtown Milwaukee. They will only make the investment if it will result in an ROR of 15% or higher. The revenue is expected to be between $138,000 and $165,000 per year for five years. Use a present worth analysis to determine if the decision to invest is sensitive to the projected range of revenue.

Answer 1

Answer:

The required cash flow to earn 15% per year is $ 149,157.8

Now, If the expected cash flow is more than $ 149,157.8 per year, they can invest the amount, else it is not suggestible/advisable.

Explanation:

Solution

Given that:

Milwaukee Bucks are considering whether they should add an additional vending area, at a cost of = $500,000

The investment to be made will result in a ROR = 15%

Expected revenue = between $138,000 and $165,000

Now,

The Computation of Required Cash flow per year is stated as follows:

= Initial Investment / PVAF (r%, n )

= $ 500,000 / PVAF (15%, 5)

= $ 500,000 / 3.3522

= $ 149,157.8

Thus,

The required flow of cash to earn 15% per year is $ 149,157.8

If the expected cash flow is more than $ 149,157.8 per year, they can invest the amount, else it is not suggestible.