Question

#12 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 119,717.00 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 23.00%. The tax rate facing the firm is 40.00%, while the cost of capital is 6.00% 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) Submit Answer format: Currency: Round to: 2 decimal places.

Answer 1

1) The study cost of $3 million has alredy been incurred, therefore it is considered as sunk cost and there is no effect of the same on NPV calculation. 2) Total project cost is $50.00 and $5.00 million i.e. total $55.00 million 3) Depreciation per year as per SLM method is 55/20 i.e. 2.75 million 4) 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% year on year) Yea Sales Expense Depreciat Net profit @11% of ion before sales tax(1-2-3) Tax @40% Net profit after tax (4-5) 3 27,500 | 4,127,877 1,651,15 2,476,726 27,500 4,668,963 513,586 4,902,411 539,265 5,147,532 566,228 5,404,908 594,540 5,675,154 624,267 4 5 27,500 27,500 27,500 4,335,646 4,553,803 4,782,868 5,023,387 1,734,25 2,601,388 1,821,52 2,732,282 1,913,14 2,869,721 2,009,35 3,014,032 5,958,911 655,480 27,500 5,275,931 2,110,37 3,165,559 6,256,857 688,254 27,500 5,541,103 2,216,44 3,324,662 6,569,700 722,667 27,500 5,819,533 2,327,81 3,491,720 9 6,111,884 2,444,75 3,667,131 6,898,185 758,800 10 7,243,094 796,740 11 7,605,249 836,577 27,500 27,500 27,500 6,418,854 2,567,54 3,851,312 16,741,171 2,696,46 4,044,703 12 7,985,511 878,406 27,500 7,079,605 2,831,844,247,763 14 15 8,384,787 8,804,026 9,244,227 922,327 968,443 1,016,86 27,500 27,500 27,500 7,434,960 7,808,083 8,199,862 2,973,98 3,123,23 3,279,94 4,460,976 4,684,850 4,919,917

5 16 9,706,439 1,067,70 17 10,191,76 1,121,09 18 10,701,34 1,117,14 27,5008,611,230 3,444,495,166,738 27,500 9,043,167 3.617,26 5,425,900 27,500 9,496,700 3,798,685,698,020 9 11,236,41 1,236,00 27,500 9,972,910 3,989,16 5,983,746 20 11,198,23 1,297,80 27,500 10,472,931 4,189,176,283,759 550,000 Tot al 154,383, 16,982,2 716 09 136,851,50 54,740,6 82,110,90 03 4 Year Cash Flow (6+3) Cash Flow from park merchan dise and concessio ns Net cash flow @ 23% (coloumn 8*23%) Total Cash Flow (7+9) Discount Cash ing @6% Flow after discount ing (10*11) 12 2,504,22 9 550,698 2,394,340 10 3,054,924 1 11 0.9434 2,882,00 2,628,88 2,514,057 578,233 3,207,121 0.8900 2,854,32 2,759,78 2,639,760 607,145 3,366,927 0.8396 2,826,93 2,897,22 2,771,748 3,534,723 0.7921 2,799,83 637,502 669,377 702,846 0.7473 3,041,53 2,910,335 3,193,05 3,055,852 2,773,00 3,895,905 0.7050 2,746,45 3,352,16 3,208,645 0.6651 2,720,18 3 2,694,17 774,888 4,294,107 0.6274 737,988 4,090,150 3,519,22 3,369,077 3,694,63 3,537,531 813,632 4,508,263 3,878,81 3,714,407 854,314 4,733,126 10 0.5919 0.5584 2,668,43 2,642,95

11 4,072,20 3,900,128 897,029 4,969,232 0.5268 2,617.73 12 4,275,26 4,095,134 941,881 5,217,144 0.4970 2,592,76 134,488,47 4,299,891 988,975 5,477,451 0.46882,568,04 14 4,712,35 4,514,885 1,038,424 5,750,774 0.4423 2,543,57 15 4,947,41 4,740,629 1,090,345 6,037,762 0.4173 2,519,34 | 5,194,23 4,977,661 | 1,144,862 6,339,100 5,453,40 5,226,544 1,202,105 6,655,505 0.3714 2,471,61 18 5,725,52 5,487,871 1,262,210 6,987,731 0.3503 2,448,10 196,011,24 5,762,265 1,325,321 7,336,567 0.3305 2,424,83 6,311,25 6,050,378 1,391,587 7,702,845 0.3118 2,401,78 0.3936 2,495,36 1 Total 82,660, 904 79,171,1 37 52,691,4 18,209,3 61 100,870, 266 67 Total Net Cash Flow generated after discounting@6% is 526.91 million Total Project Cost is 55.00 Million Hence NPV is 471.91 million(526.91 million less 55.00 million)