Question

Six Flags wants to invest $50 million into an existing water park to get an incremental increase in cash flows of $5 million/year (that grows at 1.5 percent/year forever). The discount rate is 10%. What is the NPV of the investment decision?

a. $7 million
b. $15 million
c. $50 million
d. $35 million

Answer 1

Calculating the NPV using the provided figures for cash flow, discount rate, and growth rate results in an NPV of approximately $8.82 million after subtracting the initial investment.

Step-by-step explanation:

The Net Present Value (NPV) of the investment decision can be evaluated using the formula for the present value of a growing perpetuity: NPV = Cash Flow / (Discount Rate - Growth Rate). Plugging in the values provided we have NPV = $5 million / (0.10 - 0.015), which gives NPV = $5 million / 0.085. Calculating this, we find the NPV to be approximately $58.82 million. Then, we subtract the initial investment of $50 million to find the NPV of the investment decision: $58.82 million - $50 million = $8.82 million. However, since our provided answer choices do not include this result, we check our approach or re-calculate as necessary to match the provided options.