1. You are assessing the viability of operating an amusement park. The nominal revenues from ticket sales at the end of Year 1 will be $554176. They will increase by 4% per year in real terms. The only annual cost will be to lease the whole operation for $118845 per year. The leasing costs are nominal and will start at the end of Year 1. They will stay fixed in nominal terms.
Assume the inflation rate is 5% and the real discount rate is 10%. All cash flows occur at year-end. The company will not pay any taxes. The business will continue into perpetuity.
What is the NPV of the project?
a. $6921840
b. $8029703
c. $9139137
d. $8940472
e. $8267772
2. You have been hired to perform a feasibility study on a new accounting software that requires an initial investment of $9 million. This project will last 8 years. The company expects a total of $2 million in free cash flow in the first year. After one year the remaining annual free cash flows will be revised either upward to $3 million or downward to $500,000. Each revision has an equal probability of occurring. At that time (i.e. one year from now), the project can be abandoned and sold off for $3.7 million after tax. If the project is not liquidated the cash flow will continue for 7 more years, starting at year 2.
The relevant discount rate is 10 percent. What is the NPV of the project?
a. $1465765
b. $439179
c. $1138753
d. $765798
e. $1411769