Exam (elaborations)
FIN3704 Assignment 5 Semester 2 2024 - DUE 15 October 2024
- Institution
- University Of South Africa
FIN3704 Assignment 5 Semester 2 2024 - DUE 15 October 2024 QUESTIONS WITH COMPLETE ANSWERS
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[Company name]FIN3704
Assignment 5
Semester 2 2024 -
DUE 15 October
2024
QUESTIONS WITH DETAILED ANSWERS
,FIN3704 Assignment 5 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: Initial Outlay, Annual After-tax Cash Flow, and Terminal Cash Flow
1. Initial Outlay (Investment Cost): The initial outlay includes the cost of purchasing
and installing the log flume ride.
o Purchase cost: R900,000
o Installation cost: R56,400
o Total Initial Outlay = R900,000 + R56,400 = R956,400
2. Annual After-tax Cash Flow: We need to calculate the after-tax cash flow for
each year, factoring in ticket revenue, variable and fixed costs, and depreciation.
Revenue Calculation (for each year):
o Year 1:
Rides per day = 160
Riders per ride = 45
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