Question 1 (17 marks)

WyldRyde Ltd is a firm that runs theme parks. Many years ago, WyldRyde opened a theme park that was unsuccessful and the land and buildings are currently rented by a circus - who pays WyldRyde $50,000 a year in rent.

The CEO of WyldRyde thinks that the market has changed and that the firm should consider re-opening the theme park. You have been asked to help analyse whether WyldRyde should re-open the theme park or not and you have been paid $10,000 to do the analysis.

You estimate that the life of the theme park will be 3 years. You think that WyldRyde can sell tickets for $75 each and estimate that 200,000 people will visit the theme park each year. Additionally, you think WyldRyde will be able to earn an additional $750,000 per year from sales of food and drinks, which will be available in vending machines at the park.

WyldRyde has operating costs of $2.5 million per year. In addition, they have further variable costs of $45 per ticket sold. WyldRyde will have to invest $10 million initially to upgrade the parks facilities. This cost can be depreciated straight line over the 3 years of the project to a terminal book value of zero. WyldRyde will also have to initially invest 100,000 in net working capital which will be fully recoverable at the end of the third year. The company tax rate is 30%.

Required:

1. Estimate the after-tax cash flows for the project. To do this you must present two tables. The first table should show the inputs of the accounting flows to determine the after-tax income. The second table should show the inputs to determine the after-tax cash flows. IMPORTANT: You must show each input in your table as a separate row. DO NOT group inputs together. (13 marks)

The next page is blank and should be used for your rough workings.

Use the tables on the 2 pages following the blank page for your answer - one table for each answer. (You do not need to use all the cells, just what you need for your answer)

b. Using NPV analysis, should WyldRyde go ahead with the project? Assume its cost of capital is 12%. Show all your workings. (2 marks)

c. Now assume WyldRyde wants to use IRR to make their decision. Without doing any calculations, given your answer to (b) above, would the IRR of this project be higher or lower than 12%? Justify your answer. You are not required to calculate the IRR to answer this question. (2 marks)