Reference no: EM133150894

Question - Assume a company that plans the construction of an amusement park called Dracula Park in the heart of Transylvania. The project requires the following costs (in American dollars):

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

b. $80,000 in year 3, increasing at a rate of 3% per year in years 4 to 10 as operating and maintenance costs;

c. $20,000 in each of years 1 and 2, and $40,000 in each of years 3 to 10 for advertising. The project is financed through the issuance of bonds with an interest rate of 12%.

The park will be opened to the public starting with year 3 and they estimate that 60,000 tourists will visit the park in each of years 3 and 4, after which the number of tourists will grow at a rate of 10% per year. The price of an entrance ticket will be $10.

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

(b) Calculate the NPV and the IRR in year 1 and decide if the project is profitable. [NPV=$370,168.99, IRR= 15.44%, project profitable]

(c) Calculate the cash balances and the interest based cash balances. For both columns, highlight the maximum amount tied in the project during the ten years. [$2,540,000; $2,662,400]

(d) What is the payback period? What is the interest-based payback period? What do they represent? [6 years; 8 years]