Federal Deficit

MEMORANDUM

TO: Dr. John Crompton, RATS Project Leader

FROM: Sarah Lee, Project Assistant

SUBJECT: Lakeshore Park District Tennis Facilities

DATE: October 15, 2015

The purpose of this report is calculate the net present values of three proposed projects regarding the tennis facilities in the Lakeshore Park District. Six tables are included in this report showing the net annual cash flow calculations and the net present value calculations for each project.

Based on the findings of these calculations, it is recommended that the district undertake the project proposing a new indoor tennis facility.

1. Net Cash Flow Tables

2. The discount rate used in the present value (PV) and net present value (NPV) calculations was 10%. The memorandum states, “The average discount rate for private tennis facility construction is 13.28% including a 2% risk premium and 3% inflation premium.” As the projects presented are publicly funded, they are tax-exempt and will have a lower discount rate.

nominal rate = real rate + Inflation premium + risk premium

Using the above equation, we calculated the real rate and then referred to the given table to find the interest rate. We see that the new discount rate is 5% plus the 2% risk premium and 3% inflation premium, totaling an interest rate of 10%. The following tables show the NPV calculations for each of the projects.

3. Based on the net present values calculated in question 2, the indoor facility project should be undertaken. Both the outdoor project and renovation project have negative NPV’s, meaning they lose money because their revenues are not high enough to cover their expenditures. The indoor facility project should be undertaken since it has the highest positive NPV, meaning it will generate more profit than the other two proposals.

4. Because these project are mutually exclusive and cannot be conducted at the same time, only one of the profitable projects may be selected. If the projects...