The Astro World amusement park has the opportunity to expand its size now (the end of year 0) by purchasing adjacent property for $250,000 and adding attractions at a cost of $550,000. This expansion is expected to increase attendance by 30 percent over projected attendance without expansion. The price of admission is $30, with a $5 increase planned for the beginning of year 3. Additional operating costs are expected to be $100,000 per year. Estimated attendance for the next five years, without expansion, is as follows: Year 1 2 3 4 5 Attendance 30,000 34,000 36,250 38,500 41,000 a. What are the pretax combined cash flows for years 0 through 5 that are attributable to the park’s expansion?b. Ignoring tax, depreciation, and the time value of money, determine how long it will take to recover (pay back) the investment.

The Astro World amusement park has the opportunity to expand its size now (the end of year 0) by purchasing adjacent property for $250,000 and adding attractions at a cost of $550,000. This expansion is expected to increase attendance by 30 percent over projected attendance without expansion. The price of admission is $30, with a $5 increase planned for the beginning of year 3. Additional operating costs are expected to be $100,000 per year. Estimated attendance for the next five years, without expansion, is as follows: Year 1 2 3 4 5 Attendance 30,000 34,000 36,250 38,500 41,000 a. What are the pretax combined cash flows for years 0 through 5 that are attributable to the park’s expansion?b. Ignoring tax, depreciation, and the time value of money, determine how long it will take to recover (pay back) the investment.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 19P

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The Astro World amusement park has the opportunityto expand its size now (the end of year 0) by purchasingadjacent property for $250,000 and adding attractions ata cost of $550,000. This expansion is expected to increaseattendance by 30 percent over projected attendance with-out expansion. The price of admission is $30, with a $5increase planned for the beginning of year 3. Additionaloperating costs are expected to be $100,000 per year.Estimated attendance for the next five years, withoutexpansion, is as follows:Year 1 2 3 4 5Attendance 30,000 34,000 36,250 38,500 41,000a. What are the pretax combined cash flows for years 0through 5 that are attributable to the park’s expansion?b. Ignoring tax, depreciation, and the time value of money,determine how long it will take to recover (pay back) theinvestment.
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