You are the owner and manager of the 400-seat Roma Majestic Cinema in Geelong. Recently you were approached by the Royal Victorian Mozart Society to see whether you would be interested in having the society perform a one-night-only concert at the cinema every two years. The first concert will be scheduled almost immediately (year 0) and you are guaranteed repeat business in years 2 and 4. Because the society is an amateur group, the musicians are not paid but the cinema will have to meet all operating costs such as advertising, the wages of the ushers, electricity, and so on. In return, the cinema also retains all the revenue from ticket sales. Knowing that there is a strong unmet demand for listening to Mozart’s music in Geelong, you estimate that you will be able to sell 75% of the tickets, of which two-thirds will be at the standard price of $60 per ticket in year 0 and one-third at the premium price of $80 per ticket also in year 0. Ticket prices are then expected to increase at a rate of 5% per annum. The operating cost of a one-night concert is currently estimated to be $7,000 and these operating costs are expected to increase at a rate of 6% per annum. You have been advised that if you decide to proceed with the proposal you will need to make immediate improvements to the cinema’s acoustics at a cost of $35,000. Such improvements are essential to attract a music-loving audience but will also attract some extra cinema patrons and hence produce a small increase in the net cash inflows to the cinema side of the business. The present value of these increased net cash inflows has been estimated at $12,500.
The required rate of return for this proposal is 15% p.a. Ignore any tax issues and complete the following table. Show all calculations.
Year Cash inflows Cash outflows Net cash flows Present value of cash flows
0
2
4