Question $3(25$ marks$)$

Waterpark plc is a company engaging in theme park activities and operates in Belle Mare. The company is considering the construction of another theme park near Bagatelle. The new theme park would have a mixture of family activities and adventure rides. Waterpark has just spent Rs$500,000$ on market research into the demand for theme park activities around Bagatelle, and is encouraged by the findings.

The theme park is expected to attract an average of $1,500$ visitors per day for at least four years, after which major new investment would be required in order to maintain demand. The price of admission to the theme park is expected to be Rs$180$ per adult and Rs$100$ per child. $60\%$ of visitors are forecast to be children. In addition to admission revenues, it is expected that the average visitor will spend Rs$80$ on food and drinks, $($of which $30\%$ is profit$),$ and Rs$50$ on gifts and souvenirs, $($of which $40\%$ is profit$).$ The park would open for $360$ days per year.

Except for maintenance, construction costs and the realizable value of theme park equipment, all other costs and receipts are shown at current prices and are expected to rise by $3\%$ per year from current values.

The theme park would cost a total of Rs$250$ million. This would be financed by existing company funds. It will take one year before the construction is fully complete. The park would become operational at the start of year $2.$ Half of the Rs$250$ million would be payable immediately, and half in one year$$s time. In addition a working capital of Rs$50$ million will be required from the end of year one.

The realisable value of fixed assets is expected to be Rs$357\mathrm{.}14$ million after four years of operation. Maintenance costs $($excluding labour$)$ are expected to be Rs$15$ million in the first year of operation, increasing by Rs$4$ million per year thereafter. Annual insurance costs are Rs$2$ million, and the company would apportion Rs$2\mathrm{.}5$ million per year to the theme park from existing overheads. The theme park would require $1,500$ staff costing a total of Rs$40$ million per annum $($at current prices$).$

Waterpark plc is quoted on the Stock exchange of Mauritius $($SEM$)$ and its beta equity is $2\mathrm{.}5.$ The current yield on treasury bills $($a risk free asset$)$ is $2\mathrm{.}5\%$ per annum. The company$$s beta debt is $0\mathrm{.}63.$ The company$$s target equity weight is $80\%.$ The return on the SEMDEX $($the index of all shares quoted on the SEM$)$ has averaged $6\mathrm{.}5\%$ per annum over the last $5$ years.

Required:

a$)$ Prepare a sheet showing the free cash flows generated by the theme park project. $(12$ marks$)$

b$)$ Compute the weighted average cost of capital $($WACC$)$ of the Bagatelle theme park project. $(6$ marks$)$

c$)$ Compute the NPV of the Bagatelle theme park project. $(2$ marks$)$

d$)$ Compute the return on investment per annum of the Bagatelle theme park project. $(3$ marks$)$

e$)$ Comment on your results and evaluate whether the Bagatelle theme park project should go ahead. $(2$ marks$)$