Question

IV. Calculation and Analysis.(30 points) The directors of Sunshine Theme Parks Limited are considering opening a new park in the holiday resort. They have lease land license to operate the theme park for five years. Additional information theme for five years, and have been granted a Forecasts show that the initial cost of the investment will be $6 000 000. The investment of $6 000 000 includes 6 rides, costing $150 000 each. The rides are to be depreciated over 5 years using the straight-line depreciation method at a rate of 20% per year. Running expenses, including depreciation for the rides, for the first three years are forecast to be $1 000 000 per year. In year four, running expenses, including depreciation, are forecast to rise by $200 000. In year five, running expenses are forecast to stay at the same level as in year four. 第8页共10页

Answer 1

Years	0	1	2	3	4	5
Initial Investment (A)	-6000000
Revenue (B)		2625000	2625000	2625000	3780000	3780000
Depreciation Expenses ( C )		180000	180000	180000	180000	180000
Other Running Expenses (D)		820000	820000	820000	1020000	1020000
EBIT (E=B-C-D)		1625000	1625000	1625000	2580000	2580000
Tax (Tax rate not given)		0	0	0	0	0
Earning After Tax (F)		1625000	1625000	1625000	2580000	2580000
Operating Income (G=F+C)		1805000	1805000	1805000	2760000	2760000
PVIF @ 16%	1	0.862069	0.743163	0.640658	0.552291	0.476113
PV	-6000000	1556034	1341409	1156387	1524323	1314072
NPV	892226
Cumulative Present Value	-6000000	-4443966	-3102556	-1946169	-421846	892226

1)

Payback Period = 4years + 421846/1314072

PBP = 4 + 0.32102 year

PBP = 4.32102 year

2) NPV = 892226 (as calculated in the table above)

3) As per the policy of sunshine theme park ltd. a project is accepted if the payback period of the project is less than 5 years. In the given case the PBP of the project is 4.32 years, thus the project is viable.

4) Following factors should be considered while making an investment decision

a) Timing of Cash Flows : Cash Flows received during the initial period of a project is more valuable then those received in the later periods as the time value of money comes into effect.

b) Net present value of the project : A company should accept those projects which has positive NPV.

c) Payback Period of the project : PBP gives an indication about in how much time a company will recover its initial outlay in terms of present value of money.

d) Internal Rate of Return for the project : A company should accept a project when the project IRR is greater than the required rate of return i.e. opportunity cost of capital.