The Astro World amusement park has the opportunity to expand its size now (the e

Question

The Astro World amusement park has the opportunity to expand its size now (the end of year 0) by purchasing adjacent property for $225,000 and adding attractions at a cost of S575,000. This expansion is expected to increase attendance by 30 percent over projected attendance without expansion. The price of admission is S35, 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 Attendance 30,000 34,000 36,750 39,000 41,000 a. What are the pretax combined cash flows for years 0 through 5 that are attributable to the park's expansion? The cash flows attributable to the park's expansion in year O are s(Enter your response as an integer.)

Explanation / Answer

1. Cash flows attributable to the park's expansion in year 1 are

= 30000*35*30% - 100000 = 215000

2. Cash flows attributable to the park's expansion in year 2 are

= 34000*35*30% - 100000 = 257000

3. Cash flows attributable to the park's expansion in year 3 are

= 36750*40*30% - 100000 = 341000

4. Cash flows attributable to the park's expansion in year 4 are

= 39000*40*30% - 100000 = 341000 = 368000

5. Cash flows attributable to the park's expansion in year 5 are

= 41000*40*30% - 100000

= 392000

6. Initial investment = 225000+575000 = 800000

Refer cumulative cashflow table

Payback period is when the cumulative cash inflow becomes equal to the initial investment.

That point is between year 2 and 3.

Payback period = 2 + (800000-687000)/813000

= 2.14 years

Year Cash inflow Cumulative cash inflow 0 1 215000 215000 215000 2 257000 472000 687000 3 341000 813000 1500000 4 368000 1181000 2681000 5 392000 1573000 4254000

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