Reference no: EM133072256
Question - Jay's Amusement Park is considering the introduction of a new ride. See the relevant information below. Note that 'k' is an abbreviation for kilo. So $1k is $1,000. The unit sales is measured in tickets sold.
Amusement Park Ride Project Data
Project life 10 years
Initial construction of ride equipment $900k
Depreciation of ride equipment pa See Note 4.
Unit sales at end of each year 80k
Sale price per unit $10
Variable cost per unit $4
Ride operator salary pa, paid in arrears $10k
Annual maintenance costs $30k
Required return on assets (WACC before tax) 10% pa
Tax rate 30%
Note 1: The owner has detailed plans that were previously drawn up by an engineer at a cost of $60k. Market research has also been undertaken at a cost of $5k to determine a suitable ticket price. Both of these costs are tax deductible.
Note 2: An initial (t=0) $20k investment into customer safety goggles (current assets) is required. These current assets will be used up and replaced at the end of each year. These current assets (CA) are expensed in the variable cost per unit at the end of each year, but the investment in these CA happens at the start of each year.
Note 3: The owner expects this ride to attract new visitors to the park and thus increase the ticket sales for existing rides. The expected increase in revenue is expected to be $300k .
Note 4: The ride equipment is expected to last for 10 years with regular maintenance. However, the Tax Office only allows the equipment to be depreciated straight line to zero over 9 years.
Note 5: The ride equipment can be sold to a competitor at time t=10 for $50,000
Note 6: The project will be financed entirely by equity.
Provide all answers in thousands of dollars, with final answers rounded to 2 decimal places.
It is not necessary to show any working. Writing the correct answer alone will score full marks. However, if you make a mistake, you will score poorly. Writing the working may allow you to score partial marks even if your final answer is wrong.
a) Find the project's Firm Free Cash Flow (FFCF) at time t = 0.
b) Find the project's FFCF at time t=1.
c) Find the project's FFCF at time t=10.
d) Find the NPV of the amusement park project.
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