Assessing the viability of operating amusement park

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Reference no: EM132000817

1. You are assessing the viability of operating an amusement park. The nominal revenues from ticket sales at the end of Year 1 will be $554176. They will increase by 4% per year in real terms. The only annual cost will be to lease the whole operation for $118845 per year. The leasing costs are nominal and will start at the end of Year 1. They will stay fixed in nominal terms.

Assume the inflation rate is 5% and the real discount rate is 10%. All cash flows occur at year-end. The company will not pay any taxes. The business will continue into perpetuity.

What is the NPV of the project?

a. $6921840

b. $8029703

c. $9139137

d. $8940472

e. $8267772

2. You have been hired to perform a feasibility study on a new accounting software that requires an initial investment of $9 million. This project will last 8 years. The company expects a total of $2 million in free cash flow in the first year. After one year the remaining annual free cash flows will be revised either upward to $3 million or downward to $500,000. Each revision has an equal probability of occurring. At that time (i.e. one year from now), the project can be abandoned and sold off for $3.7 million after tax. If the project is not liquidated the cash flow will continue for 7 more years, starting at year 2.

The relevant discount rate is 10 percent. What is the NPV of the project?

a. $1465765

b. $439179

c. $1138753

d. $765798

e. $1411769

Reference no: EM132000817

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