Should the circus open the seattle venue

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Reference no: EM133908404

Problem

A circus is considering opening a new venue in Seattle for one of its troupes. The circus already owns a vacant piece of land that it bought a few years ago for $1,000,000. However, it would also need to buy a large tent to install on the land. The tent has a price of $400,000 and would be depreciated over 4 years using the straight-line method. The management believes that the new Seattle venue would bring the circus $800,000 in yearly revenues for 4 years, but would also increase its expenses by $500,000 per year. Each year, the investment in working capital should be equal to 25% of the revenues generated in the following year. After 4 years, the circus will sell the Seattle venue. The estimated selling price is $750,000 for the land and $200,000 for the tent. The circus tax rate is 40% and its opportunity cost of capital is 16%. Should the circus open the Seattle venue?

Reference no: EM133908404

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