Question 13 (5 points) Saved Questions 13 - 16 are based on the same following information. O.J. Simpson decided to make some money. He plans to build a theme park. Not having enough experience in causing nightmares, O.J. interviewed Freddy Krueger for the position of chief operating officer (COO) of his Park. Freddy liked the job description very much because he finally could be paid for his hobby and make some money for his retirement. Even though Freddy is currently really busy at the Elm Street, he agreed to run the Park for the next 25 years. After that the park will be closed. O.J. and Freddy estimated the following costs and revenue. O.J. would immediately need to start construction on the land which he bought 2 years ago. Current market value of the land is $4 million. To start operations, $27.9 million need to be spend for knifes, blades, gloves, baseball bats, blowtorches, chains, computers and other equipment. Total before-tax salvage value of all the equipment and supplies will be $2.9 million. A new buildings construction will cost $50 million dollars and will have $10 million before-tax salvage value. OJ. could fully depreciate the buildings and equipment on a straight line basis for 25 years. They estimated that Freddy could handle 5,000 visitors each day for 300 days a year, each paying $40 daily admission. O.J. will pay Freddy a salary of $3.3 million per year, $15 million per year for additional labor, and $3.7 million per year for utilities. If the park is opened, O.J. will hire John Cochran, David Kendall, Kenneth Starr and Vernon Jordan to provide unlimited legal services for next 25 years. They will be collectively paid $9.5 million per year. O.J. mentioned that if the number of visitor's injury lawsuits is higher than expected, then his current lawyer, Monica Lewinski, could also help. Five years ago Monica signed 30-year contract promising annual salary of $2 million to provide expected, then his current lawyer, Monica Lewinski, could also help. Five years ago Monica signed 30-year contract promising annual salary of $2 million to provide unlimited legal services to O.J's other companies. She will not ask for an increase in her salary if she is also helping in his Park. O.J. recently paid $0.7 million to Mr. McDougal's firm for tax accounting advice, suggesting that the average business tax rate will be 40%. Last month O.J. paid Freddy's girlfriend's firm to make a marketing survey. She billed him $0.4 million for that. If the Park opens, then she will continue to provide unlimited marketing services to the Park for $0.5 million annually. To run the business smoothly, however, O.J. will incur a change in net working capital: $8 million increase in inventory, $2.5 million increase in minimum cash balance, $18 million increase in account receivable, and $2.5 million increase in account payable. This amount will be recovered at the termination of the business. O.J. has only $2.7 million dollars and the rest of the money needed to finance the project will be borrowed from a bank, controlled by his buddy John Cochran. The loan will be amortized for over the life of the project and the interest will be 10.7%. O.J's required rate of return is 13.85%. How much is the change in net working capital
