FIN3704 Assignment 5 (COMPLETE ANSWERS) Semester 2 2024 - DUE 15 October 2024

FIN3704 Assignment 5 (COMPLETE
ANSWERS) Semester 2 2024 - DUE 15
October 2024

, FIN3704 Assignment 5 (COMPLETE ANSWERS)
Semester 2 2024 - DUE 15 October 2024
Question 2 (20 Marks) The Port Saint John Water Park has
thought about buying a new log flume ride. The equipment costs
R900 000 to purchase, and installation costs an additional
R56400. The equipment has a six-year expected life and will be
depreciated using the MACRS seven-year class life. Management
anticipates 160 rides per day, with 45 riders on average per ride.
The season Will last for 130 days per year. The ticket price per
rider is expected to be R6.25 in the first year, with an annual
increase of 5%. The variable cost per rider will be R1.75, with a
total annual fixed cost of R625 000. The ride will be dismantled
after six years at a cost of R354 000, and the parts will be sold for
R700 000. The capital cost is 8.50%, and the marginal tax rate is
25%. a. Calculate the initial outlay, annual after-tax cash flow for
each year, and the terminal cash flow. (14) b. Calculate the NPV,
IRR, and MIRR of the new equipment. Also, indicate whether the
project
Part A: Calculate the Initial Outlay, Annual After-Tax Cash Flows, and
Terminal Cash Flow

1. Initial Outlay

The initial outlay consists of the equipment cost and installation cost:

 Equipment cost: R900,000
 Installation cost: R56,400

Total Initial Outlay = R900,000 + R56,400 = R956,400

2. Annual After-Tax Cash Flow (Years 1 to 6)

The steps to calculate the annual after-tax cash flow are as follows:

Revenue Calculation:

 Rides per year = 160 rides/day × 45 riders/ride × 130 days = 936,000 riders/year
 Ticket price per rider increases by 5% annually starting from R6.25.