What is the initial investment for the project

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Reference no: EM133291108

Case: Sarah's Creative Productions is evaluating the construction of a studio complex. The planned site is currently valued at $400,000 but this parcel would not need to be purchased since Sarah's Creative Studios already owns it. (If the company does not use the parcel for this project, it will be sold today for its current value). The studio construction would cost Sarah's Creative Productions $1 Million and would be depreciated for tax purposes using straight-line to a zero salvage over twenty years. Costanza and Benis, LLP is retained as the creative consultant of this project. Mr. Costanza (Constanza and Benis, LLP) is due $25,000 in fees next month for services already rendered in the design stage. Another $25,000 in advance fees is expected to be paid at the end of 2023 to Ms. Benis (Constanza and Benis, LLP) for additional services to be performed if the project is launched.

It is expected that the studio will increase Sarah Creative Production's short-movie production by 5 new releases every year with each of them to bring in $90,000 er year in royalty fees. The operation of the studio will necessitate additional marketing expenditures of $100,000 year and other general expenses of $50,000 per year. Lost fees due to Sarah's (Sarah's Creative Productions) giving up her movie engagements would run at $50,000 per year. Sarah's Creative Productions would be expected to increase its net working capital by $20,000 to accommodate increased investments in movies accounts receivable over the life of the studio ownership- this amount would be recovered at the end of the life of the project. Sarah's Creative Productions intends to sell the site parcel for $400,000 and to sell the studio for an additional $500,000 after 10 years.

The marginal tax rate of Sarah's Creative Production is 40%. For purposes of identifying the timing of cash flows, consider all project related cash flows to occur at the end of the year. The construction takes place in 2023, the first year of operations is the year 2024, and the last year of operations is the year 2033. Please show and explain all your answers.

Question 1. What is the initial investment for the project?

Question 2. What is the expected incremental operating third year cash flow?

Question 3. What is the incremental non-operating 25th year cash flow?

Question 4. What is the NPV of this project if the discount rate is 10%

Question 5. Are there any sunk costs and opportunity costs? If yes, what are they?

Reference no: EM133291108

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