Net Present Value Analysis for Sports Organization

This article provides an analysis of the net present value of a sports organization, including its pros and cons, and a recommendation based on the findings.

Running head: FINANCE AND ECONOMICS 1
FINANCE AND ECONOMICS

Running head: FINANCE AND ECONOMICS
Table of Contents
Net present value.........................................................................................................................................3
Pros of the investment.............................................................................................................................3
Cons of the investment............................................................................................................................4
Recommendation.........................................................................................................................................5
References...................................................................................................................................................6

Running head: FINANCE AND ECONOMICS
Net present value
The net present value of the Sport Organization is determined on the basis of the
difference between the present cash flows and the future cash flows of the sport organization.
The revenue of the five suites has been allocated over the period of ten years. The construction
cost is taken as the initial capital outlay that is required to be paid by the sports organization
(Willigers, Jones & Bratvold, 2017).
Particulars 0 1 2 3 4 5 6 7 8 9 10
Revenue
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
Annual cash
flows
Initial capital
outlay
-
5000
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
1250
00
Discounting
factor
1.00
0
0.90
9
0.82
6
0.75
1
0.68
3
0.62
1
0.56
4
0.51
3
0.46
7
0.42
4
0.38
6
Net present
value
-
5000
00
1136
36
1033
06
9391
4
8537
7
7761
5
7055
9
6414
5
5831
3
5301
2
4819
3
2680
71
Internal rate
of return 21%
Pros of the investment
The advantage of the net present value is that the future dollar is less worthy than the
present value of the investment. The net present value of the Sport organizations is $268071.
This also implies that the overall net present value of the company will increase the value of the
company by $125000.

Running head: FINANCE AND ECONOMICS
The internal rate of return of the company is 21% whereas the cost of the capital is at the
rate of 10%. This again indicates the reasons of how well the company will be able to return the
business if the project is invested and accepted (The motley fool, 2018).
The positive factor of net present value is that it generally takes in the factor of the cost of
capital for making the future projections. It is observed that the cash flows that occur in the later
periods have less cash flow than the cash flows occurring in the earlier years.
Cons of the investment
The biggest disadvantage to the net present value method is that cost of the capital is
quite a hypothetical figure and this may not display the true result. Assuming a cost of capital
that is too low will result in making suboptimal investments. Assuming a cost of capital that is
too high will result in forgoing too many good investments hence the net present value at times
becomes non-useful (Shelley, Boo & Luyties, 2018).
In addition, to the NPV method the net present value is not useful if it is measuring the
proposals of the two different terms and sizes. Because the NPV method results in an answer in
dollars, the size of the net present value output is determined mostly by the size of the input
(Schrader, Piel & Breitner, 2018).
The last and the biggest disadvantage of the net present value is that at times thee net
present value can be positive whereas the internal rate of return is lower than the cost of capital
and this creates the confusion in the minds of the experts on whether to select the project or not.

Running head: FINANCE AND ECONOMICS
Recommendation
From the overall analysis it can be stated that the proposal of the Sports Organization
should accept the existing proposal as the net present value is positive and the internal rate of
return is also higher than the cost of capital which basically will be most feasible and the
potential project for the future growth of the company.

Running head: FINANCE AND ECONOMICS
References
Schrader, P., Piel, J.H. & Breitner, M.H., (2018). Decoupled Net Present Value—An Alternative
to the Long-Term Asset Value in the Evaluation of Ship Investments?. In Operations
Research Proceedings 2017 (pp. 271-276). Springer, Cham.
Shelley, A.S., Boo, S.Y. & Luyties, W., (2018). Net Project Value Assessment of Korean
Offshore Floating Wind Farm using Y-Wind Semi Platform. In Korea Wind Energy
Association (KWEA), Fall Conference.
The motley fool, (2018). What Are the Advantages and Disadvantages of the Net Present Value
Method?. Retrieved from https://www.fool.com/knowledge-center/advantages-and-
disadvantages-of-net-present-value.aspx
Willigers, B.J., Jones, B. & Bratvold, R.B., (2017). The Net-Present-Value Paradox: Criticized
by Many, Applied by All. SPE Economics & Management.