The Disney Corporation is thinking of capitalizing on its movie success by building a Frozen attraction at

Fantastic news! We've Found the answer you've been seeking!

Question:

The Disney Corporation is thinking of capitalizing on its movie success by building a“Frozen” attraction at Walt Disney World. The company has spent $2.5 million on marketresearch and has determined the following:a. The attraction will cost $100 million to build and will last for at least 5 years. It is expectedthat the equipment can be salvaged for $25 million after 5 years. The company willdepreciate the book value of the attraction down to salvage value over these 5 years,straight line.b. The company expects that the attraction will result in an additional 200,000 visitors to WaltDisney World for each of the five years. Each additional visitor will generate approximately$175 per visitor in ticket sales and other ancillary revenue during the first year. This isexpected to increase in the following years by about 2.5% annually.c. The costs of running the attraction are expected to be $10 million per year. This figure isconsidered operating expenses.d. The number of incremental visitors is not expected to grow significantly during the fiveyear period, and the costs are expected to be constant for as long as the attraction wouldbe in operation.e. Unfortunately, space at Walt Disney World is limited and the Frozen attraction wouldoccupy land that would otherwise go to another potential attraction that has a Net PresentValue of $10M.f. Initial working capital needs are $500k and this is expected to increase by $250K per yearfor each of the next four years. All working capital is recovered at the end of year 5.g. Assume that revenue is received and costs are paid at year's end.Your task:

1. Given items a-g above, list all applicable or relevant cash flows that should be included /considered in a cost-benefit analysis for this project.

2. Identify and document issues or concerns with any of these assumptions. These could bequalitative or quantitative in nature. Any missing data that you should made Disney’smanagement aware?

3. Should you recommend Disney to pursue the Frozen attraction?

4. Time permitting - using the Disney’s cost of capital of 8% as the discount rate, determinethe Net Present Value of this opportunity. Disney’s tax rate is 28%.5. Prepare to share your analysis with the class