Ch. 13 - Fun Time Entertainment.xlsx - Chapter 13 Fun Time Entertainment Fun Time Entertainment is considering two projects that have the following

Ch. 13 - Fun Time Entertainment.xlsx - Chapter 13 Fun Time...

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Chapter 13 - Fun Time Entertainment Fun Time Entertainment is considering two projects that have the following estimated cash flows. Fun Time's cost of capital is 10%. Help the CFO determine whether the projects should be pursued. Option 1: A Water Park A. 20000 0.666667 3.666666667 years reject Cash outlay - $75,000 B. 33.6% accept Year 1 cash flow - $10,000 C. $ 86,135.91 choose water park Year 2 cash flow - $20,000 D. $ 38,448.43 choose skating rink Year 3 cash flow - $25,000 Year 4 cash flow - $30,000 Year 5 cash flow - $35,000 Sales price at end of year 5 - $120,000 Option 2: A Skating Rink A. 0 2 years accept Cash outlay - $60,000 B. 47.9% accept - prefer this one though Year 1 cash flow - $30,000 C. $ 69,246.64 choose water park Year 2 cash flow - $30,000 D. $ 41,774.69 choose skating rink Year 3 cash flow - $30,000 Year 4 cash flow - $30,000 Sales price at end of year 4 - $50,000 a) What is the payback period for each project? A1 3 0.666667 3.666667 If Fun Time's required payback period was three years, would either project be accep A2 2 2 A3 Only Option 2 accepted b) What is the IRR of each project? B1 34% If the cost of capital is 10%, would either project be accepted? B2 48% What if only one project could be accepted, which would you choose? B3 Both would be accepted B4 We choose Option 2 with higher IR c) What is the NPV of each project at the 10% cost of capital?

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