Question

In: Finance

Over the past six months, Six Flags conducted a marketing study on improving their park experience....

Over the past six months, Six Flags conducted a marketing study on improving their park experience. The study cost $3.00 million and the results suggested that Six Flags add a kid's only roller coaster.

Suppose that Six Flags decides to build a new roller coaster for the upcoming operating season. The depreciable equipment for the roller coaster will cost $50.00 million and an additional $5.00 million to install. The equipment will be depreciated straight-line over 20 years.

The marketing team at Six Flags expects the coaster to increase attendance at the park by 5%. This translates to 110,199.00 more visitors at an average ticket price of $39.00. Expenses for these visitors are about 11.00% of sales.

There is no impact on working capital. The average visitor spends $20.00 on park merchandise and concessions. The after-tax operating margin on these side effects is 38.00%. The tax rate facing the firm is 38.00%, while the cost of capital is 9.00%.

What is the project cash flow for year 0? (answer in terms of MILLIONS)

What is the project cash flow for year 1? (express answer in millions)

What is the NPV of this coaster project if Six Flags will evaluate it over a 20-year period? (Six Flags expects the first year project cash flow to grow at 5% per year, going forward)
(Express answer in millions)

Solutions

Expert Solution

1.) Project cash flow for year 0 is -55 million outflow.

2.) Project cash flow for year 1 is 3.4165 million inflow.

3.) NPV of the project is -3.2164 million.

CALCULATIONS

  • The study cost of $3 million has already been incurred therefore it is considered as sunk cost and there is no effect of the same on NPV calculations.
  • Total project cash flow in year 0 is 55 million (50 million + 5 million)
  • Depreciation per year as per Straight line method is 55M / 20 = 2.75M
  • Revenue and cash flow per year is as per the following table (Revenue and other cash flow from park merchandise and concessions is increasing@ 5% per year.

Year

Sales (A)

Expense(B) (11% of sales)

Depreciation(C)

Net profit before tax (D)

Tax (38%) €

Net profit after tax(F)

A

B

C

D=A-B-C

E= D * .38

F=D-E

1

4297761

472753.71

2750000

1075007.29

408502.7702

666504.5198

2

4512649.05

496391.3955

2750000

1266257.655

481177.9087

785079.7458

3

4738281.503

521210.9653

2750000

1467070.537

557486.8041

909583.7331

4

4975195.578

547271.5135

2750000

1677924.064

637611.1444

1040312.92

5

5223955.357

574635.0892

2750000

1899320.267

721741.7016

1177578.566

6

5485153.124

603366.8437

2750000

2131786.281

810078.7866

1321707.494

7

5759410.781

633535.1859

2750000

2375875.595

902832.726

1473042.869

8

6047381.32

665211.9452

2750000

2632169.374

1000224.362

1631945.012

9

6349750.386

698472.5424

2750000

2901277.843

1102485.58

1798792.263

10

6667237.905

733396.1695

2750000

3183841.735

1209859.859

1973981.876

11

7000599.8

770065.978

2750000

3480533.822

1322602.852

2157930.97

12

7350629.79

808569.2769

2750000

3792060.513

1440982.995

2351077.518

12

7718161.28

848997.7408

2750000

4119163.539

1565282.145

2553881.394

14

8104069.344

891447.6278

2750000

4462621.716

1695796.252

2766825.464

15

8509272.811

936020.0092

2750000

4823252.802

1832836.065

2990416.737

16

8934736.451

982821.0096

2750000

5201915.442

1976727.868

3225187.574

17

9381473.274

1031962.06

2750000

5599511.214

2127814.261

3471696.953

18

9850546.938

1083560.163

2750000

6016986.774

2286454.974

3730531.8

19

10343074.28

1137738.171

2750000

6455336.113

2453027.723

4002308.39

20

10860228

1194625.08

2750000

6915602.919

2627929.109

4287673.81

Year

cash flow (G)

cash flow from concessions (H)

net cah flow(I)

Net cash flow (J)

discount rate (9%)(J)

Discounted cash flow(L)

G= F+C

H

I=H * .38

J=G +I

K

L= J * K

1

3416504.52

2203980

837512.4

4254016.92

0.917

3902767.816

2

3535079.746

2314179

879388.02

4414467.766

0.842

3715569.199

3

3659583.733

2429887.95

923357.421

4582941.154

0.772

3538871.449

4

3790312.92

2551382.348

969525.2921

4759838.212

0.708

3371989.39

5

3927578.566

2678951.465

1018001.557

4945580.122

0.650

3214287.745

6

4071707.494

2812899.038

1068901.634

5140609.128

0.596

3065177.264

7

4223042.869

2953543.99

1122346.716

5345389.585

0.547

2924111.155

8

4381945.012

3101221.19

1178464.052

5560409.064

0.502

2790581.81

9

4548792.263

3256282.249

1237387.255

5786179.517

0.460

2664117.787

10

4723981.876

3419096.361

1299256.617

6023238.493

0.422

2544281.032

11

4907930.97

3590051.18

1364219.448

6272150.418

0.388

2430664.329

12

5101077.518

3769553.739

1432430.421

6533507.939

0.356

2322888.949

13

5303881.394

3958031.425

1504051.942

6807933.336

0.326

2220602.484

14

5516825.464

4155932.997

1579254.539

7096080.003

0.299

2123476.856

15

5740416.737

4363729.647

1658217.266

7398634.003

0.275

2031206.487

16

5975187.574

4581916.129

1741128.129

7716315.703

0.252

1943506.605

17

6221696.953

4811011.935

1828184.535

8049881.488

0.231

1860111.688

18

6480531.8

5051562.532

1919593.762

8400125.562

0.212

1780774.036

19

6752308.39

5304140.659

2015573.45

8767881.84

0.194

1705262.445

20

7037673.81

5569347.692

2116352.123

9154025.932

0.178

1633360.992

Net discounted future cash flows =

51783609.52

Total net cash flow generated after discounting @ 9% = 51.7836 million

Total project cost = 55 million

Hence NPV is -3.2164 million (51.7836 million – 55 million)

jeff jeffy answered 1 year ago
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