Walt plc is a company based in the UK. The managers of Walt plc are thinking...

 

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Walt plc is a company based in the UK. The managers of Walt plc are thinking about building a fun park in Lyra, which is a province of Stringland. Walt plc will pay £10m to buy the land for the park. This will be paid in period 0. If Walt plc builds the park 100 local people will have to move to new homes in another province. The local people have asked Walt plc for £10m as compensation for moving. Alternatively, a government minister has offered instead to force the local people to move without compensation. Although this alternative would save Walt plc £10m, Walt plc would have to give the nephew of the minister a gift of £1m to persuade the minister to do this. Walt plc owns some old ride equipment (which has a net book value of £120m) which was going to be sold in period 0 for £30m. Instead this equipment will now be used in the fun park. This ride equipment is very old and dangerous and without maintenance it is expected to kill 0.1% of all visitors. The compensation to be paid for killing someone in Stringland is £1,000 per person. However, these deaths could be avoided by spending £5m per year on maintenance. Price for entry to the fun park will be £10 per person and visitor numbers will be: Year 1 Year 2 Year 3 Visitors Number of people 1,000,000 1,500,000 2,000,000 The other costs of running the park will be £3m per year. At the end of year three, the maintained equipment will be sold for £30m. Walt plc's cost of capital is 8%. You should assume all cash flows take place at the end of the year in which they occur. Required: 1. This project requires the managers of Walt plc to decide how they will compensate locals for moving and how they will maintain the machines. Explain and justify your reasons for the choices you have made about: a. the costs for compensating the locals b. maintaining the machines 2. Calculate the NPV of the fun park and hence recommend if you believe the fun park project should go ahead. Walt plc is a company based in the UK. The managers of Walt plc are thinking about building a fun park in Lyra, which is a province of Stringland. Walt plc will pay £10m to buy the land for the park. This will be paid in period 0. If Walt plc builds the park 100 local people will have to move to new homes in another province. The local people have asked Walt plc for £10m as compensation for moving. Alternatively, a government minister has offered instead to force the local people to move without compensation. Although this alternative would save Walt plc £10m, Walt plc would have to give the nephew of the minister a gift of £1m to persuade the minister to do this. Walt plc owns some old ride equipment (which has a net book value of £120m) which was going to be sold in period 0 for £30m. Instead this equipment will now be used in the fun park. This ride equipment is very old and dangerous and without maintenance it is expected to kill 0.1% of all visitors. The compensation to be paid for killing someone in Stringland is £1,000 per person. However, these deaths could be avoided by spending £5m per year on maintenance. Price for entry to the fun park will be £10 per person and visitor numbers will be: Year 1 Year 2 Year 3 Visitors Number of people 1,000,000 1,500,000 2,000,000 The other costs of running the park will be £3m per year. At the end of year three, the maintained equipment will be sold for £30m. Walt plc's cost of capital is 8%. You should assume all cash flows take place at the end of the year in which they occur. Required: 1. This project requires the managers of Walt plc to decide how they will compensate locals for moving and how they will maintain the machines. Explain and justify your reasons for the choices you have made about: a. the costs for compensating the locals b. maintaining the machines 2. Calculate the NPV of the fun park and hence recommend if you believe the fun park project should go ahead.

Answer rating: 100% (QA)

Answer Solution 1a Cost of compensating the locals Payment to local Option1 1000 million Force them ... View the full answer