Question

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 107,883.00 more visitors at an average ticket price of $38.00. Expenses for these visitors are about 13.00% of sales.

There is no impact on working capital. The average visitor spends $21.00 on park merchandise and concessions. The after-tax operating margin on these side effects is 34.00%. The tax rate facing the firm is 35.00%, while the cost of capital is 6.00%.

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)

Answer 1

project cash flow for year 1 = $4051082.42

Net Present Value of the project = $11957836.45

Explanation:

Step 1

Calculate the outlay of the project in year 0

Equipment cost      = $50,000,000

Installation cost   = $5,000,000

Book value = Equipment cost + Installation cost

           = $50,000,000 + $5,000,000

           = $55,000,000

Study cost = $3,000,000

Project outlay = Book value + Study cost

               = $55,000,000 + $3,000,000

               = $58,000,000

Step 2

Calculate operating Cash flow for year 1

Sales revenue = No of visitors * Price per ticket

              = 107,883* $38

              = $4,099,554

Expenses on visitor = 14% 0f Sales revenue

                    = 13% * $4,099,554

                    = $564,732

Before tax income = Sales revenue - Expenses on visitor

                  = $4,099,554 - $532942

                  = $3566612

After tax income = Before tax income * (1 - tax rate)

                 = $3566612* (1 - 35%)

                 = $2,318,297.8

Depreciation = Book Value / Project life

             = $55,000,000 / 20

             = $2,750,000

Depreciation tax shield = Depreciation * tax rate

                        = $2,750,000 * 35%

                        = $962,500

Visitor revenue = No of visitors * spending per visitor

                = 107,883 * $21

                = $2,265,543

After tax margin = 34% of Visitor revenue

                 = 34% * $2,265,543

                 = $770,284.62

Operating cash flow for year 1

OCF1 = After-tax income + Depreciation tax shield + After-tax margin

     = $2,318,297.8+ $962,500 + $770,284.62

     = $4051082.42

Step 3

Calculate the Net Present value of the project

Cost of capital       r = 6%

Growth rate           g = 5%

First cash flow    OCF1 = $4051082.42

Project outlay          = $58,000,000

Project life          n = 20 years

PVIFA(r,g,n) = 1 / (r - g) * (1 - ((1 + g) / (1 + r))^n)

NPV = OCF1 * PVIFA(6%,5%,20) - Project outlay

    = $4051082.42 / (6% - 5%) * (1 - ((1 + 5%) / (1 + 6%))^20) - $58,000,000

    = $11957836.45

Net Present Value of the project is $11957836.45