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HW Score: 60%, 3 of 5 core: 0 of 2 pts 30t 3 (2 complete) ▼ Problem 12 Question Help |5 The Astro World amusement park has the opportunity to expand its size now (the end of year 0) by purchasing adjacent property for $225,000 and adding atractions at a cost of $550,000. This expansion is expected to increase attendance by 30 percent over projected attendance without expansion. The price of admission is $30, with a $5 increase planned for the beginning of year 3 Additional operating costs are expected to be $100,000 per year. Estimated attendance for the next five years, without expansion, is as follows: Year Attendance 36,250 41,000 a. What are the pretax combined cash flows for years 0 through 5 that are attributable to the park's expansion? The cash lows attributable to the park's expansion in year 0 are sEnter your response as an integer) your answer in 6 Pemaining

Answer 1

Given,

Cost of acquiring property (in $)	2,25,000
Cost of adding attractions (in $)	5,50,000
Increase in attendance	30%
Additional operating costs per year (in $)	1,00,000
Year	Price of admission
1	30
2	30
3	35
4	35
5	35

Attendance with expansion = Attendance without expansion + Attendance without expansion *30

For example, For year 1 attendance with expansion = 32,000 + 32,000 * 30 % = 41,600

Hence for the other years, it is as shown below:

Year	Estimated attendance without expansion	Estimated attendance with expansion
1	32,000	41600
2	35,000	45500
3	36,250	47125
4	39,500	51350
5	41,000	53300

Costs of expansion = Cost of acquiring property (in $) + Cost of adding attractions (in $) = 225000 + 550000 =$ 775,000

Since there is expansion going on in the year 0 the attendance is assumed to be zero. Hence the revenue generated for year 0 = 0

For year 1 after expansion the additional cost of operating = $100,000

Revenue generated = Estimated attendance with expansion * Price of admission per person = $41,600 * 30 = $1,248,000

Profit = Revenue- cost = $1,248,000 - $100,000 = $1,148,000

Similarly, for the other years, it is as shown below:

	Costs incurred (In $)	Revenue generated (in $)	Profit (in $)
Year 0	7,75,000	0	-7,75,000
Year 1	1,00,000	1248000	11,48,000
Year 2	1,00,000	1365000	12,65,000
Year 3	1,00,000	1649375	15,49,375
Year 4	1,00,000	1797250	16,97,250
Year 5	1,00,000	1865500	17,65,500
Total	12,75,000	79,25,125	66,50,125

Note the cost of admission is increased from 30 to 35 starting from year 3.

The pre-tax cash flows for the same is as shown below:

1,248,000 1,365,000 $1,649,375 $1,797,250 $1,865,500 Year 0 4 5 100,000 $100,000 $100,000 $100,000 100,000 $775,000

The total of the cost incurred, revenue generated and the profits for all the years is calculated in the above-mentioned table.

The cash flow for the park for the year 0 = -$775,000 (explained earlier)