12.26 Making an investment decision on a project ** LO2, 3, 4, 5 An inner city amateur theatre company, Theatre Empire, is planning on performing a new take on two Shakespearean plays, Hamlet and Macbeth, at an old Brisbane theatre in the inner-city suburb of South Bank. The producers of the theatre plan on alternating the performances of the two plays for a combined total of 40 weeks, if possible. Given the size of the theatre and the expected seat-sales rate, the producers think they can gross $420 000 at the box office. The plays will cost $48 000 to mount in the first place to cover the costs of new sets, costumes and props, and the weekly running costs are expected to be $5500. Assume for the NPV that all funds are earned and paid, except the mounting costs, at the end of the 40 weeks. The sets, costumes and props are expected to realise $26 500 at the end of the run. Required (a) What is the ARR? (b) What is the PP? (c) What is the NPV if the producers can earn 12 per cent elsewhere on their funds? (d) Would you advise the producers to go ahead or not? Why? 12.34 Deciding between three projects *** LO2, 3, 4, 5 A company owned exclusively by residents in the New South Wales coastal community of Yamba is offered three projects for which the cash flows are as follows in thousands of dollars. The directors work on 12 per cent as their RRR. Assume all cash flows occur at the end of the relevant years. There are no salvage values factored into the expected cash flows and no salvage values are expected. Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 A -900 300 260 300 220 140 B -800 180 180 240 260 260 C -820 500 120 120 120 380 Required (a) Calculate the three investment appraisal measures for each project. (b) Rank the projects and advise the directors which projects, if any, to accept. Give your reasons.