Question

Mooby's is considering building a new theme park. After estimating the future cash flows, 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 products. As a result the required rate of return for the new theme park jumped from 10.5 percent to 12 percent. If die initial outlay for the park is expected to be $240 million and the project is expected to return free cash flows of $50 million in years 1 through 5 and $70 million in years 6 and 1, what is the project's JYP Fusing die new required rate of return? How much did the project's NPV change as a result of the rise in interest rates? If the required rate of return is 10.5 percent the project's NPV is $ million. If the required rate of return is 12 percent the project's NPV is $ million. The amount of decrease in the project's NPV as a result of the rise in interest rates is $ million.

Answer 1

To calculate the project's NPV with the new required rate of return of 12%, we must discount the projected cash flows at this higher rate. Unfortunately, without the initial NPV at the 10.5% rate, the exact change in NPV due to the interest rate rise cannot be determined.

Step-by-step explanation:

The project's Net Present Value (NPV) using the new required rate of return of 12% needs to be calculated by discounting the projected free cash flows. Initially, with a rate of 10.5%, the NPV was calculated (though not displayed in the question). It is understood that when the required rate of return increases due to higher interest rates, the NPV of a project typically decreases because future cash flows are discounted at a higher rate, making them less valuable in today's terms.

Unfortunately, without the initial NPV at 10.5%, we cannot provide the exact decrease in NPV. However, we can say that if the interest rates rise, this increase is reflected in a higher discount rate, leading to a lower overall NPV for the project.