Six Flags is considering opening a new water park in Grapevine, TX to compete with the popular Great Wolf Water Lodge Park. However, Six Flags risk siphoning customers away from their profitable subsidiary Hurricane Harbor Water Park in Arlington, TX, which will be about 20 miles from Grapevine, TX.

Six Flags hired PwC to conduct an initial economic feasibility study. PwC gave Six Flags the Green Light.

PwC charged Six Flags $100,000 for the feasibility study.

You have been, as the firms Financial Analyst, tasked to analyze the project and give your recommendations to Senior.

The project will require water filtration pumps. Fortunately, Hurricane Harbor has enough idle Filtering pumps

(with free and clear titles), which they can use for the project.

Similar pumps have a market value of $1,000,000.

The construction and equipment will cost $30 m for the 5-year duration of the project.

The company will also need an initial net working capital of $2,500,000.

The following are some initial financial projections:

Year I Visitors 1,000,000

Ticket price visitor is $50

Variable Cost per visitor $40

Operating expenses account for 1% of sales revenue

Fixed Cost of $200,000 per year

The project will attract 1% of Hurricane Harbor in Arlington Visitors, which account to 1% of the new projects visitors

(Hint: must deduct(negative externalities) from the New project.

The company projects the following growth rates per year

Visitors to the park 4%

Ticket Price per Visitor 2%

Variable Cost per Visitor 2%

Assume a corporate tax rate of 30%. The company uses straight Line in accounting for depreciation

The Weighted Average Cost of Capital (WACC) is 12%

Questions

Using NPV, should the company proceed with the project?

What factors (either economic or social) might negatively affect your recommendation and why