Chapter 10, Problem 12SP

(NPV with different required rates of return) Mooby’s is considering building a new theme park. After future cash flows were estimated, but before the project could be evaluated, the economy picked up and with that surge in the economy interest rates rose. That rise in interest rates was reflected in the required rate of return Mooby’s used to evaluate new projects. As a result, the required rate of return for the new theme park jumped from 9.5 percent to 11.00 percent. If the initial outlay for the park is expected to be $250 million and the project is expected to return free cash flows of $50 million in years 1 through 5 and $75 million in years 6 and 7, what is the project’s NPV using the new required rate of return? How much did the project’s NPV change as a result of the rise in interest rates?