Basic NPV
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You became an assistant manager at Strategic Finance Dept. of a Theme park.
A new water-ride is proposed by the Sales & Marketing department, which presented the following data.
Initial investment: $40 million.
First year Net Income: 5 million. But 3% of Net Income has to be set aside as Capital Maintenance Fund
Annual increase of the Revenue: 10% for the first 5 years, then 5% for the rest
For the sake of calculation, a new project is considered to be "sold" at the end of 10th year at 80% of the initial investment value.
Corporate wide Hurdle rate (=required rate of return) for a new capital investment project is 15%.
Q1: Analyze whether the new "Harraah" Water Ride Attraction should be invested by calculating the NPV and IRR
Investment Analysis of the Proposed Harraah Water Ride Attraction
Year Net CF = NI - Reserve Key parameters
0 0 Initial investment
1 First year NI (before reserve)
2 Reserve % of NI
3 Growth rate 2-5
4 Growth rate 6-10
5 Residual value of project at yr 10.
6
7
8
9
10
Key parameters
NPV Corporate Hurdle rate
IRR
Based on the above calculation, we should invest or not invest?
type short answer here
Q2: Director of Sales & Marketing proposes an additional strategic idea for the "Harraah" Water Ride project.
She says that if her department can have $3 million budget for national marketing campaign for this project,
she has enough reason to believe that the first year's NI (before reserve) would start from $6 million,
resulting $1 million increase of Net Income in year 1, and maintain the same growth rate as simulated above.
As an assistant manager of Strategic Finance Department, would you endorse her idea or not?
Show your calculations.
(Hint: Add marketing costs as additional initial investment. So it becomes $43 million.
Then start the First Year NI as $6M instead of $5M. All the other parameters and assumptions stay the same)
Investment Analysis of the Proposed Harraah Water Ride Attraction with Marketing Blitz
Year Net CF = NI - Reserve Key parameters
0 Initial investment
1 First year NI (before reserve)
2 Reserve % of NI
3 Growth rate 2-5
4 Growth rate 6-10
5 Residual value of project at yr 10.
6
7
8
9
10
Key parameters
NPV Corporate Hurdle rate
IRR
Based on the above calculation, will you endorse the Sales & Marketing Director's revised idea?
type short answer here
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Solution Summary
Basic NPV issues are solved.
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