Reference no: EM132588359

You are in charge of analyzing a project with plans to invest RM21 million into a new amusement park. The park will take two years to build and the expenditure will also be spread out across the two years.

January 2020: RM 10 million

January 2021: RM5.5 million

January 2023: RM5.5 million

Once the park is built, you expect to attract teenagers in record numbers, and have revenues of RM10 million a year for the next ten years (your assumed project life). The park will cost RM3 million a year to operate, and the depreciation will be RM1 million a year. You plan to build it on land that you already own, that you bought three years ago for RM1 million. If you do not take this project, you plan to lease the land out and make RM210,000 a year before taxes. At the end of the ten years, it is assumed that the park can be salvaged for book value. The tax rate is 40%, and the discount rate is 15%.

Task required:

Question 1. Critically justify if the project is feasibility by computing the NPV of this project on a before tax and after tax.

Question 2. Critically evaluate which project appraisal tool provides greater accuracy in determining project feasibility and why?

Assume that due to the appearance of a friendly investor, who is keen to invest another RM10 million into the theme park, the project is now being planned to last another 10 years longer after Year 10 but this investor would like to have an (after tax) exit value of RM26 million at the end of the 20th year.

Question 3. Recalculate the NPV of this project on an after-tax basis?

Question 4. Critically assess if it is worthwhile to extend the project for another 10 years to Year 20.