purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%.
a. Calculate the initial outlay, annual after-tax cash flow for each year, and the terminal cash flow.
b. Calculate the NPV, IRR, MIRR, PB, DPB, and PI of the project. Is the project acceptable?
c. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the ticket price, and rides per day, and variable cost per rider. Set these variables' values at 10% and 20% above and below their base-case values. Include a graph in your analysis.
d. Conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part c being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20%
purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%,and its marginal tax rate is 25% a.Calculate the initial outlay, annual after-tax cash flow for each year, and the terminal cash
flow.
b.Calculate the NPV, IRR, MIRR, PB, DPB, and PI of the project. Is the project acceptable?
c. Conduct a sensitivity analysis to determine the sensitivity of NPV to changes in the ticket
price, and rides per day, and variable cost per rider. Set these variables' values at 10% and 20% above and below their base-case values. Include a graph in your analysis d. Conduct a scenario analysis. Assume that there is a 25% probability that best-case conditions, with each of the variables discussed in Part c being 20% better than its base-case value, will occur. There is a 25% probability of worst-case conditions, with the variables 20%
