Dhingra & Associates Consulting and our firm is working on behalf of Falguni and Sameers Financial Empire. The Empire is involved in a major capital expansion by developing a significant Entertainment Centre.

An in- depth market survey and a concept plan have been completed by Dhingra and Associates at a considerable cost of $375,000.

Falguni has owned the land for years and the book value (balance sheet) is just $500,000, and its current market value is $4 million (4,000,000). If the Entertainment Centre project is evaluated over a 10-year period and when the Centre is shut down at the end of that period, the land would be worth $4.8 million based on a land appreciation rate of about 2% per year on average. The project requires a large castle structure, costing $18 million, to be constructed this year (year 0). The castle is a Class 1 asset with a CCA rate of 4%. At the end of the 10-year period, we estimate that the castle can be sold for about half of its initial cost.

We estimate that an investment of $7 million is required for equipment needed to operate the new Centre. This capital cost for all equipment will be depreciated using straight-line depreciation over the 10-year period (starting from year 1)1. Of course, the equipment required for the Centre will be treated quite roughly during this period, so we estimate that they will have no value at the end of the projects life. All annual depreciation amounts related to both the castle and the equipment will result in an annual tax-shield for the company, but were not sure how to account for this in our project analysis. Falguni and Sameer have instructed us that they require a 10% rate of return on this type of project based on similar risk projects. They have sufficient capital available and the marginal tax rate for their company is 35%.

NOTE: 1 Straight-line depreciation means that the annual depreciation amount allowed under CCA tax rule is simply the total initial cost divided by number of years in the projects life.

The project requires $1.2 million in incremental net working capital (NWC) immediately (at year 0). The required amount will double at the end of year 1, and then we expect that it will need to be maintained at the level of $3 million starting from the end of year 2 (when the Centre is working at full capacity) until the end of the project. Please note that at the end of the 10th year, the accumulated NWC will no longer be required.

We estimate that the Entertainment Centre will have $1 million in extra annual fixed costs for the company. Based on our marketing research, we estimate the incremental revenue in year 1 to be about $12 million, with incremental variable costs of $6 million. For each of years 2 to 7, the Centre will run at full capacity, with annual incremental revenues of $15 million and annual incremental variable costs of $7 million for the company. For the last three years (years 8-to-10), we expect a gradual slowdown in the Centres activities that will result in about $1 million of lost revenues per year. This will be accompanied by a $0.5 million reduction in variable costs. There will be no change in the fixed costs of operating the Centre over the 10-year period (from year 1-to-10).

Please use (display + name) the excel function/ formula used for cells (as required).

Ques 1: Given the above information, what is the NPV of this Entertainment Centre project?

Ans: Computing the NPV of the Entertainment Centre project assuming a RRR of 10%

Building:			Equipment:
Initial Cost
Salvage value
Tax Rate
CCA Rate
Discount Rate	10.00%
Number of periods
			PV(CCA TS equipment)
PV( CCA TS building)	$???	this cell will calculate the PV of the CCA tax-shield on the building after you enter all relevant information needed.

Cash flows from Assets:
Year	Revenues	Costs (Fixed+Variable)	(Rev-Cos) after tax	Additions to NWC	Net Capital Spending		Total Net CF of project
0
1
2
3
4
5
6
7
8
9
10

Ques 2 :Using the base case, what is the percentage change in the projects NPV if the required return increased by 2% (r =12% instead of 10%) to account for additional risk factors?

Total project NPV
Base scenario - NPV @ 10%
Q 2: NPV @12%
Q 2: Chge in NPV:

Ques 3 : What is the NPV in a scenario where the annual incremental costs (both fixed and variable) and annual incremental revenues are all worse by 5% compared to the base scenario?

Ans 3: NPV under a scenario where revenues and costs are worse by 5%
Year	Revenues	Costs (Fixed+Variable)	(Rev-Cos) after tax	Additions to NWC	Net Capital Spending		Total Net CF of project
0
1
2
3
4
5
6
7
8
9
10

Total project NPV under this new scenario
NPV @ 10%
change in NPV:		compared to base scenario (Q1)