Carol loves the advice you have been giving him! He is now determining if he should invest in opening a new laser tag c
Posted: Tue Apr 26, 2022 11:48 am
Carol loves the advice you have been giving him! He is now
determining if he should invest in opening a new laser tag centre
to cater to the growing demand for this awesome leisure
activity. To start the centre, Carol thinks he will need to
immediately invest in $20,000 of computer equipment and $2,400,000
of specialized laser tag equipment. Both assets depreciate at a
rate of 30%. Assume that the laser tag equipment will be sold for
$1,400,000 when the business is closed (in two years). The computer
equipment will be worthless at that time. The laser tag centre will
charge $6 per game and the company expects to host 38,000 games in
the first year and 41,000 in the second year. Operating cash
flows as a percentage of sales are expected to be 80% in the first
year and 85% in the second year. Assume that all revenues
(and expenses) occur at the end of the year. The tax rate is 40%
and the cost of capital is 10%.
(a) Should Carol invest in the laser tag centre?
Why? Please base your answer on your estimate of the NPV of
the investment. Please provide a clear concluding statement
that summarizes your result.
(b) Carol has heard about something called the Internal Rate of
Return (IRR). He wants to know if the IRR for this project is
greater than, less than or equal to 10% for this project? How
do you know?
(c) Carol wonders, if the cost of capital was 12% instead of
10%, should he invest? Why or why not?
determining if he should invest in opening a new laser tag centre
to cater to the growing demand for this awesome leisure
activity. To start the centre, Carol thinks he will need to
immediately invest in $20,000 of computer equipment and $2,400,000
of specialized laser tag equipment. Both assets depreciate at a
rate of 30%. Assume that the laser tag equipment will be sold for
$1,400,000 when the business is closed (in two years). The computer
equipment will be worthless at that time. The laser tag centre will
charge $6 per game and the company expects to host 38,000 games in
the first year and 41,000 in the second year. Operating cash
flows as a percentage of sales are expected to be 80% in the first
year and 85% in the second year. Assume that all revenues
(and expenses) occur at the end of the year. The tax rate is 40%
and the cost of capital is 10%.
(a) Should Carol invest in the laser tag centre?
Why? Please base your answer on your estimate of the NPV of
the investment. Please provide a clear concluding statement
that summarizes your result.
(b) Carol has heard about something called the Internal Rate of
Return (IRR). He wants to know if the IRR for this project is
greater than, less than or equal to 10% for this project? How
do you know?
(c) Carol wonders, if the cost of capital was 12% instead of
10%, should he invest? Why or why not?