Reference no: EM133495413

A company plans the construction of a winter-themed family amusement park. The project details are as follows:

• $1,000,000 in year 1 and $1,500,000 in year 2 for construction.

• $500,000 in year 3, increasing at a rate of 4.5% per year in years 4 to 10 as operating and maintenance costs.

• $20,000 in each of years 1 and 2, and $40,000 in each of years 3 to 10 for advertising.

• 25,000 tourists will visit the park in each of years 3 and 4, after which the number of tourists is expected to increase at a rate of 5% per year.

• Initially the price of entrance will be $34 for year 3, increasing at a rate of 3.5% in years 4 to 10.

• The opportunity cost is 10%.

a) Construct a table containing the outflows, the inflows, the net cash flow, and the discounted cash flows for years 1 to 10 for the Winter Park project.

b) Calculate the NPV and the IRR in year 10 and decide if the project is profitable.

c) What is the maximum discount rate for which this project should be undertaken?

d) Calculate the cash balances and the interest-based cash balances1. For both columns, highlight the maximum amount tied in the project during the ten years.

e) What is the payback period? What is the interest-based payback period? What do they represent? The investors want to know what changes could make the project profitable, other than financing and want to use some sensitivity analysis to understand this.