Question
A Christmas tree farm is considering adding an interactive reindeer ride to their farm. Entry into this business would require the purchase of an additional
A Christmas tree farm is considering adding an interactive reindeer ride to their farm. Entry into this business would require the purchase of an additional 10-acre of farmland at a cost of $500,000 for the land and $100,000 for equipment. The equipment will be depreciated using straight-line with a life of 10 years. At the end of the 10 years, management anticipates that the farm will be sold for $550,000 and $50,000 for the equipment). The marketing department estimates that the firm will be able to sell 50,000 rides at an average price of $5.00 during the first year. Demand is expected to grow at a rate of 5% annually thereafter. Variable operating expenses are expected to average 50% of gross sales, and fixed costs (not including depreciation) will be $60,000 per year. The companys marginal tax rate is 25% and its WACC is 10%. Build a worksheet with all the information, Calculate NPV, Payback period, and profitability ratio. Then, build a data table to conduct a sensitivity analysis that looks at the effect the number of rides sold annually will affect NPV. Do this for 500,000, and + and - 50,000 and 100,000.
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