FIN3704 Assignment 5
(COMPLETE ANSWERS)
Semester 2 2024 - DUE 15
October 2024
CONTACT:
,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 Question 1 (10 Marks) Given the following set of
cash flows: Period Cash Flow 1 45 000 2 40 000 3 35 000
4 30 000 5 25 000 (2) a. If your required rate of return is
9% per year, calculate BOTH the present and future value
of the above stream of cash flows?
To tackle these problems, we'll need to go step by step through the calculations. Here's how we
can approach them:
Question 1 (10 Marks)
Given the following cash flows:
, Period Cash Flow
1 R45,000
2 R40,000
3 R35,000
4 R30,000
5 R25,000
a. Present and Future Value of the Cash Flows
We are asked to calculate the Present Value (PV) and Future Value (FV) of these cash flows
using a required rate of return of 9%.
Present Value (PV) is calculated using the formula:
PV=∑(CFt(1+r)t)PV = \sum \left( \frac{{CF_t}}{{(1 + r)^t}} \right)PV=∑((1+r)tCFt)
Where CFtCF_tCFt is the cash flow at time ttt, and rrr is the discount rate (9%).
Future Value (FV) is calculated using the formula:
FV=CF1(1+r)(n−t)+CF2(1+r)(n−t)+...+CFnFV = CF_1(1 + r)^{(n - t)} + CF_2(1 +
r)^{(n - t)} + ... + CF_nFV=CF1(1+r)(n−t)+CF2(1+r)(n−t)+...+CFn
Where nnn is the total number of periods and ttt is the current time period.
Question 2 (20 Marks)
The Port Saint John Water Park is considering buying a new log flume ride. Let’s break down
the parts of the question.
a. Initial Outlay, Annual After-Tax Cash Flow, and Terminal Cash Flow
1. Initial Outlay: The initial outlay includes the purchase cost of the equipment and the
installation costs:
Initial Outlay=R900,000+R56,400=R956,400\text{Initial Outlay} = R900,000 + R56,400
= R956,400Initial Outlay=R900,000+R56,400=R956,400
2. Annual After-Tax Cash Flow:
o Revenue from the ride:
The total number of riders per year is calculated as:
(COMPLETE ANSWERS)
Semester 2 2024 - DUE 15
October 2024
CONTACT:
,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 Question 1 (10 Marks) Given the following set of
cash flows: Period Cash Flow 1 45 000 2 40 000 3 35 000
4 30 000 5 25 000 (2) a. If your required rate of return is
9% per year, calculate BOTH the present and future value
of the above stream of cash flows?
To tackle these problems, we'll need to go step by step through the calculations. Here's how we
can approach them:
Question 1 (10 Marks)
Given the following cash flows:
, Period Cash Flow
1 R45,000
2 R40,000
3 R35,000
4 R30,000
5 R25,000
a. Present and Future Value of the Cash Flows
We are asked to calculate the Present Value (PV) and Future Value (FV) of these cash flows
using a required rate of return of 9%.
Present Value (PV) is calculated using the formula:
PV=∑(CFt(1+r)t)PV = \sum \left( \frac{{CF_t}}{{(1 + r)^t}} \right)PV=∑((1+r)tCFt)
Where CFtCF_tCFt is the cash flow at time ttt, and rrr is the discount rate (9%).
Future Value (FV) is calculated using the formula:
FV=CF1(1+r)(n−t)+CF2(1+r)(n−t)+...+CFnFV = CF_1(1 + r)^{(n - t)} + CF_2(1 +
r)^{(n - t)} + ... + CF_nFV=CF1(1+r)(n−t)+CF2(1+r)(n−t)+...+CFn
Where nnn is the total number of periods and ttt is the current time period.
Question 2 (20 Marks)
The Port Saint John Water Park is considering buying a new log flume ride. Let’s break down
the parts of the question.
a. Initial Outlay, Annual After-Tax Cash Flow, and Terminal Cash Flow
1. Initial Outlay: The initial outlay includes the purchase cost of the equipment and the
installation costs:
Initial Outlay=R900,000+R56,400=R956,400\text{Initial Outlay} = R900,000 + R56,400
= R956,400Initial Outlay=R900,000+R56,400=R956,400
2. Annual After-Tax Cash Flow:
o Revenue from the ride:
The total number of riders per year is calculated as:
