Question
Cirque du Soleil is considering a new show. The venture requires a large upfront investment in installations, sets, stages, and costumes. Also, in its first
Cirque du Soleil is considering a new show. The venture requires a large upfront investment in installations, sets, stages, and costumes. Also, in its first year the show will require major expenditures in advertisement and promotion. Therefore, the cash flows of this project are expected to be negative in the first years, becoming positive from then on.
Another alternative is to re-launch an old show in a Las Vegas casino. This project would require less investment in advertising and promotion, but it would have a shorter run and it would have lower total expected revenues. Also, there are some termination expenses at the end of the run to remove the installations from the casino theatre.
Consider Cirque du Soleils Weighted Average Cost of capital (WACC) as 15% and an opportunity rate of reinvestment for cash flows as 6%. The estimate of cash flows for both projects are as follows:
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