Question

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?

Answer 1

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.