Reference no: EM133486550
Case: A company plans the construction of a winter-themed family amusement park in Alberta. 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%. 2
(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.
(f) Using a Data Table command with a change cell determine the NPV and the IRR for changes in initial ticket price of -15%, -10%, -5%, 0%, 5%, 10%, 15%, and 20%. Use a discount rate of 10%. Is the project profitable at any of these changes?
(g) Using a Data Table command with actual values determine the NPV and the IRR for changes in initial number of tourists of -15%, -10%, -5%, 0%, 5%, 10%, 15%, and 20%. Use a discount rate of 10%. Is the project profitable at any of these changes?
(h) An investor, who has studied economics, is concerned that if the price of a ticket increases then the number of tourists will decrease, so instead, maybe they should decrease the ticket price so the number of tourists will increase. Using a two-way Data Table command, determine the NPV for changes in both the initial ticket price and the number of tourists. Do this for the IRR as well (you need to do two, two-way tables). Use the changes of -15% to 20%, increasing by 5%, along with the discount rate of 10%. Use conditional formatting to represent the investor's concerns/idea (outside of scenarios where both ticket price and number of tourists are decreasing). What would your analysis of this project tell you about the demand curve that would be needed, the elasticity, for this to be profitable?