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5 November, 19:16

Suppose New York wants to build a new facility to replace Madison Square Garden. Assume that the cost of building a new arena in midtown Manhattan is $2 billion and that all the costs occur right away. Also assume that New York will receive annual benefits of $100 million for the next 30 years, after which the new arena becomes worthless. Does it make financial sense to build the new facility if interest rates are 5 percent?

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  1. 5 November, 21:08
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    Solution:

    Net Present Worth (NPW) ($ Million) = - 2,000 + 100 x PVIFA (5%, 30)

    = - 2,000 + 100 x 15.3725**

    = - 2,000 + 1,537.25

    = - 462.75

    Since NPW < 0, the project is financially not viable.
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