Question 1 (20 marks)

Palace Entertainment Ltd is a firm that runs theme parks. Many years ago, Palace

Entertainment opened a theme park that was unsuccessful and the land and buildings are

currently rented by a circus - who pays Palace Entertainment $40,000 a year in rent.

The CEO of Palace Entertainment 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

Palace Entertainment 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 Palace

Entertainment can sell tickets for $70 each and estimate that 200,000 people will visit the

theme park each year. Additionally, you think Palace Entertainment 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.

Palace Entertainment has operating costs of $2.5 million per year. In addition, they have

further variable costs of $40 per ticket sold. Palace Entertainment will have to invest $9

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. Palace Entertainment 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:

(a) 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. (This means you should NOT use the tax shield approach).

IMPORTANT: You must show each input in your table as a separate row. DO NOT

group inputs together. (14 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).

You may round up to the next whole dollar.