Question
ou are analyzing a project that plans to invest $20 million in a new theme park called Bonehead Park , based upon the infamous cartoon
ou are analyzing a project that plans to invest $20 million in a new theme park called "Bonehead Park" , based upon the infamous cartoon on MTV, Beavis and Butthead. The park will take two years to build and the expenditure will also be spread out across the two years.
Today: $10 million
One year from now: $5 million
Two years from now: $5 million
Once the park is built, you expect to attract teenagers in record numbers, and have revenues of $10 million a year for the next ten years (your assumed project life). The park will cost $3 million a year to operate, and the depreciation will be $1 million a year. You plan to build it on land that you already own, that you bought three years ago for $1 million. If you do not take this project, you plan to lease the land out and make $200,000 a year before taxes. At the end of the ten years, it is assumed that the park can be salvaged for book value. The tax rate is 40%, and the discount rate is 15%.
a. What is the initial investment (in present value terms)?
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