The town council of Frostbite, Ontario, is trying to decide whether to build an outdoor skating rink which would cost $1.2 million and last for only one season. Operating costs would be zero. Yearly passes would be sold to anyone who wanted to use the rink. If p is the price of the pass in dollars, the number demanded would be q = 1600 - 0.5p. The council has asked you to advise them on building the rink. You should tell them that O revenues won't cover construction costs at any ticket price. There is no way to increase total consumer surplus by building the rink. O if the rink is built and price is set to maximize profits, the town makes a profit and consumers will be better off.

The town council of Frostbite, Ontario, is trying to decide whether to build an outdoor skating rink which would cost $1.2 million and last for only one season. Operating costs would be zero. Yearly passes would be sold to anyone who wanted to use the rink. If p is the price of the pass in dollars, the number demanded would be q = 1600 - 0.5p. The council has asked you to advise them on building the rink. You should tell them that O revenues won't cover construction costs at any ticket price. There is no way to increase total consumer surplus by building the rink. O if the rink is built and price is set to maximize profits, the town makes a profit and consumers will be better off.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1dM

See similar textbooks

Similar questions

The Aubey Coffee Company is evaluating the within-plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost but low annual operating costs and (2) several forklift trucks, which cost less but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8%, and the projects’ expected net costs are listed in the following table: What is the IRR of each alternative? What is the present value of the costs of each alternative? Which method should be chosen?
The Yoran Yacht Company (YYC), a prominent sailboat builder in Newport, may design a new 30-foot sailboat based on the winged keels first introduced on the 12-meter yachts that raced for the Americas Cup. First, YYC would have to invest 10,000 at t = 0 for the design and model tank testing of the new boat. YYCs managers believe there is a 60% probability that this phase will be successful and the project will continue. If Stage 1 is not successful, the project will be abandoned with zero salvage value. The next stage, if undertaken, would consist of making the molds and producing two prototype boats. This would cost 500,000 at t = 1. If the boats test well, YYC would go into production. If they do not, the molds and prototypes could be sold for 100,000. The managers estimate the probability is 80% that the boats will pass testing and that Stage 3 will be undertaken. Stage 3 consists of converting an unused production line to produce the new design. This would cost 1 million at t = 2. If the economy is strong at this point, the net value of sales would be 3 million; if the economy is weak, the net value would be 1.5 million. Both net values occur at t = 3, and each state of the economy has a probability of 0.5. YYCs corporate cost of capital is 12%. a. Assume this project has average risk. Construct a decision tree and determine the projects expected NPV. b. Find the projects standard deviation of NPV and coefficient of variation of NPV. If YYCs average project had a CV of between 1.0 and 2.0, would this project be of high, low, or average stand-alone risk?
A town is seeking a new tourist attraction, and the town council has voted to budget $500,000 for the project. A survey shows that an interesting cave can be enlarged and developed for a contract price of $400,000. The proposed attraction is expected to have an infinite life. The estimated annual expenses of operation total $50,000. The price per ticket is to be based on an average of 12,000 visitors per year. If money is worth 8%, what should be the price of each ticket?
great lakes clinic has been asked to provide exclusive healthcare services for next year's world exposition. although flattered by the request, the clinic's managers want to conduct a financial analysis of the project. there will be an up front cost of $160,000 to get the clinic in operation. then, a net cash inflow of $1 million is expected from operations in each of the two years of the exposition. however, the clinic has to py the organizers of the exposition a fee for the marketing value of the opportunity. this fee, which must be paid at th end of the second year, is $2 million.a. what are the cash flows associated with the project?b. what is the project's IRR?c. assuming a project cost of capital of 10 percent, what is the project's NPV?
Aerotron Electronics is considering purchasing a water filtration system to assist in circuit board manufacturing. The system costs $40,000. It has an expected life of 7 years at which time its salvage value will be $7,500. Operating and maintenance expenses are estimated to be $2,000 per year. If the filtration system is not purchased, Aerotron Electronics will have to pay Bay City $12,000 per year for water purification. If the system is purchased, no water purification from Bay City will be needed. Aerotron Electronics must borrow half of the purchase price, but they cannot start repaying the loan for 2 years. The bank has agreed to three equal annual payments, with the first payment due at the end of year 2. The loan interest rate is 8% compounded annually. Aerotron Electronics’ MARR is 10% compounded annually. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investmentsbased on present worth? c. Should Aerotron…
Former Green Bay Packers defensive tackle, Don Davey, is considering opening a Firehouse Sub Shop in Wauwatosa, Wisconsin. The new Fireside Sub Shop will require new sandwich-grilling equipment costing $598,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The grilling equipment will be salvaged for $181,000 at the end of the project. The Sub Shop project requires an initial investment of $42,000 in net working capital, which will be recovered at the end of the project. The tax rate is 35%. What is the Firehouse Sub Shop project’s IRR if it is expected to generate an annual operating cash flow of $176,600? a. 13.24% b. 18.39% c. 18.48% d. 16.87% e. 15.64%
North City must choose between two new snow-removal machines. The SuperBlower has a $70,000 first cost, a 20-year life, and an $8000 salvage value. At the end of 9 years, it will need a major overhaul costing $19,000. Annual maintenance and operating costs are $9000. The Sno-Mover will cost $50,000, has an expected life of 10 years, and has no salvage value. The annual maintenance and operating costs are expected to be $12,000. Using a 12% interest rate, which machine should be chosen?