Njenge Limited a company established as a Special Purpose Vehicle intends to put up a theme park in Samfya. Among the major attractions at the theme park will be entertainment targeted at children below the age of ten (10) years e.g. talking toy horses. In addition the company is considering producing an animated film to accompany the range of entertainment products. This is in accordance with the company's long-term expansion plans, culminating in a stock exchange flotation in three years' time. The film will take one year to make. In the year following that, sales of the film will commence. The following information has been provided. -Market research has already been carried out at a cost of K1.2million. -The services of a company specialising in animation will be required at a total cost of K520,000. 50% of these costs will be paid immediately with the remainder being paid in one year's time. - Two producers will be employed throughout the first year of the project. They will each be paid salaries of K120 000 per year. - other production cost during the year are expected to be K 650 000. - A film director will be employed immediately on a one year contract at a cost of K 160 000. - The animated film is expected to generate revenues of K 1.2 million in the first year of sales, K 2.2 Million in the second year and K 1.6 million in the third year. - Two producers and the director will each be paid royalties from the film. These will be paid at the rate of 1.5% of gross revenues for each of the producers and 2% for the director. They will always be payable one year in arrears. - Specialist equipment will need to be purchased immediately for the film production. This will cost K2.3 million but can be sold at the end of the year for K1.7 million. - The company's cost of capital is 10% per annum. Assume that all cash flows occur at the end of each year, unless otherwise stated. Required: Calculate the project's net present value and payback period at the company's cost of capital. Conclude as to whether the company should proceed with the project, giving a reason for your conclusion.

Njenge Limited a company established as a Special Purpose Vehicle intends to put up a theme park in Samfya. Among the major attractions at the theme park will be entertainment targeted at children below the age of ten (10) years e.g. talking toy horses. In addition the company is considering producing an animated film to accompany the range of entertainment products. This is in accordance with the company's long-term expansion plans, culminating in a stock exchange flotation in three years' time. The film will take one year to make. In the year following that, sales of the film will commence. The following information has been provided. -Market research has already been carried out at a cost of K1.2million. -The services of a company specialising in animation will be required at a total cost of K520,000. 50% of these costs will be paid immediately with the remainder being paid in one year's time. - Two producers will be employed throughout the first year of the project. They will each be paid salaries of K120 000 per year. - other production cost during the year are expected to be K 650 000. - A film director will be employed immediately on a one year contract at a cost of K 160 000. - The animated film is expected to generate revenues of K 1.2 million in the first year of sales, K 2.2 Million in the second year and K 1.6 million in the third year. - Two producers and the director will each be paid royalties from the film. These will be paid at the rate of 1.5% of gross revenues for each of the producers and 2% for the director. They will always be payable one year in arrears. - Specialist equipment will need to be purchased immediately for the film production. This will cost K2.3 million but can be sold at the end of the year for K1.7 million. - The company's cost of capital is 10% per annum. Assume that all cash flows occur at the end of each year, unless otherwise stated. Required: Calculate the project's net present value and payback period at the company's cost of capital. Conclude as to whether the company should proceed with the project, giving a reason for your conclusion.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 17P

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