3. Disney wants to create a new attraction at Disneyland to capitalize on the hype surrounding...

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3. Disney wants to create a new attraction at Disneyland to capitalize on the hype surrounding the Marvel movies. They will spend $60 million today to build this new ride. This new ride would only last for 4 years, after which they would create a newer ride for the next fad. Here are the numbers for the new ride: Revenues from ride COGS Advertising Lost revenues from existing rides Increased sales of merchandise Year 1 $94 million $50 million $10 million $5 million $3 million Year 2 $85 million $40 million $5 million $4 million $5 million Year 3 $50 million $30 million $1 million $1 million $8 million Year 4 $25 million $15 million $0 $0 $10 million They will depreciate the new ride to zero over 4 years using straight-line depreciation. They anticipate that, four years from now, they could sell the ride for $5 million. They will need to increase net working capital by $12 million today, but this amount will decrease by $3 million each year until the end of the investment. They will also use land that they already own for this investment; the land has a market value of $40 million and a book value of $10 million. Disney has a tax rate of 30% and expects a return of 11% on investments like this. Should they make this investment? 4. (continuation of problem #3) Suppose that Disney decides to borrow money to make the investment above. They expect that interest expense on the new loan would be $5 million each year for 4 years. What would be the effect on EPS each year, if Disney has 1 million shares outstanding? 3. Disney wants to create a new attraction at Disneyland to capitalize on the hype surrounding the Marvel movies. They will spend $60 million today to build this new ride. This new ride would only last for 4 years, after which they would create a newer ride for the next fad. Here are the numbers for the new ride: Revenues from ride COGS Advertising Lost revenues from existing rides Increased sales of merchandise Year 1 $94 million $50 million $10 million $5 million $3 million Year 2 $85 million $40 million $5 million $4 million $5 million Year 3 $50 million $30 million $1 million $1 million $8 million Year 4 $25 million $15 million $0 $0 $10 million They will depreciate the new ride to zero over 4 years using straight-line depreciation. They anticipate that, four years from now, they could sell the ride for $5 million. They will need to increase net working capital by $12 million today, but this amount will decrease by $3 million each year until the end of the investment. They will also use land that they already own for this investment; the land has a market value of $40 million and a book value of $10 million. Disney has a tax rate of 30% and expects a return of 11% on investments like this. Should they make this investment? 4. (continuation of problem #3) Suppose that Disney decides to borrow money to make the investment above. They expect that interest expense on the new loan would be $5 million each year for 4 years. What would be the effect on EPS each year, if Disney has 1 million shares outstanding?

Answer rating: 100% (QA)

Year 0 1 2 3 4 Cost million 60 Increase in Working capital Million 12 72 Revenue million 94 85 50 25 ... View the full answer