Disney wants to create a new attraction at Disneyland to capitalize on the hypesurrounding the Marvel movies. They will spend $60 million today to build this newride. This new ride would only last for 4 years, after which they would create a newerride for the next fad. Here are the numbers for the new ride:3.Year 1Year 3Year 4Year 2$94 million$50 million$50 million$30 million$1 million$1 million$25 million$15 million$0$0Revenues from ride$85 million$40 million$5 million$4 millionCOGS$10 million$5 millionAdvertisingLost revenues fromexisting ridesIncreased sales of$3 million$5 million$8 million$10 millionmerchandiseThey will depreciate the new ride to zero over 4 years using straight-line depreciationThey anticipate that, four years from now, they could sell the ride for $5 million. Theywill need to increase net working capital by $12 million today, but this amount willdecrease by $3 million each year until the end of the investment. They will also use landthat they already own for this investment; the land has a market value of $40 million anda book value of $10 million.Disney has a tax rate of 30% and expects a return of 11% on investments like this.Should they make this investment?

Question
Asked Oct 27, 2019
38 views

Help please not sure how to . And also how do I set this up using excel. Pearson Corporate Finance book 4th edition stand alone by Berk.

Disney wants to create a new attraction at Disneyland to capitalize on the hype
surrounding the Marvel movies. They will spend $60 million today to build this new
ride. This new ride would only last for 4 years, after which they would create a newer
ride for the next fad. Here are the numbers for the new ride:
3.
Year 1
Year 3
Year 4
Year 2
$94 million
$50 million
$50 million
$30 million
$1 million
$1 million
$25 million
$15 million
$0
$0
Revenues from ride
$85 million
$40 million
$5 million
$4 million
COGS
$10 million
$5 million
Advertising
Lost revenues from
existing rides
Increased sales of
$3 million
$5 million
$8 million
$10 million
merchandise
They will depreciate the new ride to zero over 4 years using straight-line depreciation
They anticipate that, four years from now, they could sell the ride for $5 million. They
will need to increase net working capital by $12 million today, but this amount will
decrease by $3 million each year until the end of the investment. They will also use land
that they already own for this investment; the land has a market value of $40 million and
a book value of $10 million.
Disney has a tax rate of 30% and expects a return of 11% on investments like this.
Should they make this investment?
help_outline

Image Transcriptionclose

Disney wants to create a new attraction at Disneyland to capitalize on the hype surrounding the Marvel movies. They will spend $60 million today to build this new ride. This new ride would only last for 4 years, after which they would create a newer ride for the next fad. Here are the numbers for the new ride: 3. Year 1 Year 3 Year 4 Year 2 $94 million $50 million $50 million $30 million $1 million $1 million $25 million $15 million $0 $0 Revenues from ride $85 million $40 million $5 million $4 million COGS $10 million $5 million Advertising Lost revenues from existing rides Increased sales of $3 million $5 million $8 million $10 million merchandise They will depreciate the new ride to zero over 4 years using straight-line depreciation They anticipate that, four years from now, they could sell the ride for $5 million. They will need to increase net working capital by $12 million today, but this amount will decrease by $3 million each year until the end of the investment. They will also use land that they already own for this investment; the land has a market value of $40 million and a book value of $10 million. Disney has a tax rate of 30% and expects a return of 11% on investments like this. Should they make this investment?

fullscreen
check_circle

Expert Answer

Step 1

In order to find out if the investment should be made in the new ide, first the cash flow for each year needs to be determined and then net present value will be calculated. IF NPV is positive, investment should be made as it would add value to the company.

First, Net Income of the company would be created for four years as follows:

Note: Depreciation = $60 million / 4 = $15 million each year.

help_outline

Image Transcriptionclose

K N P Q 255 Values in $ million Year 1 Year 2 Year 3 50 Year 4 256 Revenue 94 85 25 257 Less COGS 50 40 30 15 258 Les Advertising Less Lost revenues 259 from existing ride Add Increaed sale 10 5 0 4 5 1 0 260 of merchandise 10 3 5 8 261 Less Depreciation 15 EO256-0257- O258- O259+0260- 11 0261 15 15 15 EQ256-0257- EM256-M257- M258- M259+M260- Q258- Q259+Q260- 50261 |-К256-К257-К258- 17 K259+K260-K261 262 EBIT 263 Interest 26 M261 0 0 0 0 26-M262-M263 17 K262-K263 11-0262-0263 264 EBT 5 Q262-Q263 3.3 30 % 0264 5.1 -30% "К264 7.8 30% "M264 1.5 30% Q264 265 Tax 11.9-K264-K265 18.2-M264-M265 7.7-0264-0265 3.5-Q264-Q265 267 Net Income o M

fullscreen
Step 2

Second, Salvage value at the end of 4 years is $5 million, whereas the book value is zero. Therefore, gain on sale of new ride is

help_outline

Image Transcriptionclose

Gain Salvage value - Book Value =S5 million 0 =S5million After tax salvage value is gain less tax on gain: After tax salvage value Gain - Tax*Gain =5-30%x5 =5-1.5 $3.5million

fullscreen
Step 3

Third, Cash Flow statement and ...

help_outline

Image Transcriptionclose

J К M 272 Cash Flow Year 3 273 Values in Million $ Year 0 Year 1 Year 4 Year 2 274 275 Net Income 276 Add Depreciation 277 Operating Cash Flow 11.9 18.2 7.7 3.5 15 15 15 15 26.9 33.2 22.7 18.5 278 279 Initial investment Change in Net 280 Working Capital -60 -12 3 3 281 282 Add Gain from sale of new ride 3.5 283 284 Net Cash Flow 285 PV factor @11% -72 29.9 36,2 25.7 22 0.900900901 0.811622 0.731191381 0.658731 18.7916185 14.49208 26.93693694 29.38073 286 Present Value -72 287 NPV 17.60137

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Finance

Capital Budgeting

Related Finance Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Assume ABC shares have a market capitalization of $50 million. The company is expected to pay a divi...

A: WACC refers to weighted average cost of capital. It is the rate that a firm needs to pay (on an aver...

question_answer

Q: Please show all equations and work as needed. Make the correct answer clear. If possible, please typ...

A: The computation of total number of shares after raising venture capital fund is as follows:As par th...

question_answer

Q: If you invest $5,000 today, you will receive $1,000 in a year, $1,500 each in year 2 and year 3, and...

A: Calculate the net present value as follows:

question_answer

Q: Teaser Rate Mortgage A mortgage broker is offering a 30-year mortgage with a teaser rate. In the fir...

A: Effective interest rate can be described as the interest rate gained or paid in actual on a project....

question_answer

Q: Executives at Microsoft are interested to get into the drone delivery business. Since it would take ...

A: 1.First option:With an assumption of the lump sum fund of $40 million is made in 0th year, the prese...

question_answer

Q: 01 O63 9a How much money should be deposited today in an account that earns 5% compounded semiannual...

A: We need to use the concept of time value of money to solve the question. According to the concept of...

question_answer

Q: Atlantic Corporation is the largest logging company in the north eastern part of the United States. ...

A: Last years dividend = D0 = $ 5 per shareGrowth rate in dividend, g = -5%Ke = the required rate of re...

question_answer

Q: The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 2.85 percent and ...

A: Calculation of Expected Rate:The expected rate of 10-year Treasury Bond is 7.40%.Excel Spreadsheet:

question_answer

Q: Wesimann Co. issued 15-year bonds a year ago at a coupon rate of 8.7 percent. The bonds make semiann...

A: Calculation of Current Bond Price:The bond is issued a year ago so the bond duration is 14 years.The...