Question
The Ocean City Water Park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $1,800,000 and it
The Ocean City Water Park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $1,800,000 and it will cost an additional $180,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 5-year class life. Management expects to run about 300 rides per day, with each ride averaging 8 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $4.00 and it will be increased by 5% per year. The variable cost per rider will be $1.75 and inflation is expected to be 3% per year, and total fixed costs will be $275,000 per year. After six years, the ride will be dismantled at a cost of $95,000 and the parts will be sold for $725,000. The cost of capital is 8.625%, the re-investment rate is 2.75% and its marginal tax rate is 28%.
a. Calculate the initial outlay, annual after-tax cash flows, and the terminal cash flow.
b. Calculate the NPV, IRR and MIRR
c. Should the Ocean City Water Park proceed with this project? Why or Why not?
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