Question

Question 1

A company is building an amusement park and has the following projected cashflows. Costs consist of building costs and staff salaries:

   

Year	Building costs (assume as being paid at start of each respective year)
1	$100,000
2	$50,000
3	$30,000
4	$45,000

5 $0 for year 5 and all future years for building costs

Staff salaries

$4,000 for year 1, increasing by a discrete step of $100 at the start of each future year, but paid continuously throughout each year, every year into the future

  

Revenue consists of ticket sales, merchandise sales, and food and beverage sales: Food and beverages

For all 30 years,

Tickets: $2000 per month for all years. Assume as paid at end of each month.

Merchandise: Equal to 1/3 of ticket sales

Food and beverages: $4250 per year, increasing by $50 per year in each future year. Assume the amount in each year is earned (paid) in the middle of each year.

Investors in the amusement park want to know what the Net Present Value (NPV) of this project is, assuming:

•  a risk discount rate (effective yield) of 14% per annum; and

•  a 30-year time horizon (i.e. all costs and revenues cease after 30 years).

(a) Calculate the present value of costs. Show all workings. [4 marks]

(a) Calculate the present value of revenue. Show all workings. [4 marks]

(b) Hence, calculate the NPV of the overall project. [1 mark]

Answer 1

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