Question

Bill build an amusement park. Building the park will require 6 annual investments of the same amount. The first of these investments will be made today. The remaining 5 investments will be made at the end of each of the next 5 years, starting from year 1. The amount of each annual investment is still unknown, but it will be equal across all 6 years. The park, which is expected to have infinite life, will commence its operations at the beginning of year 8 and will provide an after-tax free cash flow of $10 million at the end of year 8. After year 8, all future cash flows (which occur at year-end) are expected to grow at 3% per year. If the discount rate is 12%, what is the maximum amount of annual investment (I) under which the project will create at least $1 million in net present value? Show all calculations.

Answer 1

Present Value of the Cash Inflow (t=7)= Annual Inflow/(Discount Rate-Growth Rate) = 10/(12%-3%) = $111.11

Present Value of CashInflow Today = $111.11/(1+12%) = $99.21

and we need the present value =$1 million that means present value of all outflow = 99.21-1 = 98.21 million

Amount of Maximum Annual Installment can be calculate as below:-

Formula Used :-

Annual Installement

=PMT(B2,B3,-B1,,1)

(Answer is in million)

I hope my efforts will be fruitful to you