Mooby\'s is considering building a new theme park. After estimating the future c

Question

Mooby's is considering building a new theme park. After estimating the future cash flows, but before the project could be evaluated the economy picked up and with that surge in the economy interest rates rose. That rise in interest rates was reflected in the required rate of return Mooby's used to evaluate new products. As a result the required rate of return for the new theme park jumped from 10.5 percent to 12 percent. If die initial outlay for the park is expected to be $240 million and the project is expected to return free cash flows of $50 million in years 1 through 5 and $70 million in years 6 and 1, what is the project's JYP Fusing die new required rate of return? How much did the project's NPV change as a result of the rise in interest rates? If the required rate of return is 10.5 percent the project's NPV is $ million. If the required rate of return is 12 percent the project's NPV is $ million. The amount of decrease in the project's NPV as a result of the rise in interest rates is $ million.

Explanation / Answer

1.Calculation of NPV if required rate of return is 10.5%:

            Present value of cash flows from year 1 to 5 = $50million * (PV factor @ 10.5% for 5 years)

                                                                            = $50 million *3.7428

                                                                            = $ 187.143 million

          Present value of cash flows for year 6&7        = $70million * (Pv factor @ 10.5% for 6th year+ for 7th year)

                                                                            = $70millioin * 1.0464

                                                                            = $73.2496 million

           present value of total free cash flows    = $260.3926 million

           Less : Initial cash outlay required        = ($240.00 million)

               Npv of the project                           = $20.3926

2.Calculation of NPV if required rate of return is 12% :

          Present value of free cash flow for 1 to 5 years   = $50million*3.60477

                                                                                = $180.2390

           Present value of free cash flow for year 6 & 7     = $70million*(Pv factor @ 12% for 6th year+ for 7th year)

                                                                                = $70million * 0.95898

                                                                                = $67.1286

          Present value of total free cash flows     = $247.3676million

          Less: Initial outlay required                   = ($240.00 million)

                   NPV of the project                      = $7.3676 million

    3.Calculation of amount of decrease in NPV as a result of change in interest rates :

                                        = NPV when required rate of return is 10.5% - NPV when required rate of return is 12%

                                        = $20.3926 - $7.3676

              Decrease in NPV = $13.025

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.