Question

The Walt Disney Company is planning to add a new rollercoaster to its park in Anaheim, California. The cost to purchase and build this rollercoaster will be $12,000,000 and will cost $80,000 in maintenance every year. Disney will also assign staff to organize lines and guide visitors through these rollercoasters. The salary of the staff is expected to be $100,000 every 6 months. After 10 years of operation, the rollercoaster equipment needs to be remodeled at a cost of $1,000,000. During remodeling, it will be unavailable to visitors for 6 months. The rollercoaster will be operational for another 9.5 years, after which it will be considered obsolete. Its estimated salvage value at that time is $1,500,000.

The management of the Disneyland estimates that the rollercoaster will attract 20,000 people in the first six months of operation, and that this figure will grow by 3% per semester (6 months). Assume that during the major upgrade, the number of additional visitors is zero and that the number of visitors after the rollercoaster starts again is the same number as immediately before the major upgrade (the growth rate remains 3%). The benefit per visitor is $10.50 and the interest rate is 7% per year compounded semi- annually.

a) Draw the cash-flow diagram.

b) What is the benefit (in today’s $$) of this investment?

c) What is the cost to Walt Disney company (in today’s $$)?

d) Determine the benefit-cost ratio. Should the Walt Disney management pursue the investment?

e) In case the management should not pursue it, what would be the minimum required benefit per visitor such that the investment can be considered profitable?

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Answer 1