In addition to the revenue earned from movie tickets, cinemas earn significant revenue from concession stands. Across the industry, concessions account for about 20% of total sales and about 40% of a cinema’s profit. One cinema in South Dublin has tracked its concession sales and realizes that it is underperforming. Only about 12% of its total sales are in concessions in the last full year, and they plan to make an investment to improve on that performance. The proposal for your consideration is an investment of €325,000 in a new concession stand. The following facts are also relevant about the cinema in question: Total Sales last year: €4.2 million (3.7 million movie tickets, €500,000 concession sales) Profit last year from total operations: €500,000 (380,000 from movie tickets, €120,000 from concessions) Management argue that if they can at least hold ticket sales as they are, and bring concessions up to industry standard, then this investment will pay for itself within 3 years. Management proposes to depreciate this asset over 5 years, after which they expect to need to refurbish the concession areas again with no residual value from the currently proposed concession. (State any assumptions you make). a. Do you agree with the management team that this project will pay for itself in 3 years? Explain in detail your answer. b. Calculate the NPV for the planned refurbishment of the concession facilities assuming an IRR of 9% over its five-year life. c. Would you recommend pursuing this project? d. What other factors or risks not detailed do you think management should consider in making this decision?
In addition to the revenue earned from movie tickets, cinemas earn significant revenue from concession stands. Across the industry, concessions account for about 20% of total sales and about 40% of a cinema’s profit. One cinema in South Dublin has tracked its concession sales and realizes that it is underperforming. Only about 12% of its total sales are in concessions in the last full year, and they plan to make an investment to improve on that performance. The proposal for your consideration is an investment of €325,000 in a new concession stand. The following facts are also relevant about the cinema in question: Total Sales last year: €4.2 million (3.7 million movie tickets, €500,000 concession sales) Profit last year from total operations: €500,000 (380,000 from movie tickets, €120,000 from concessions) Management argue that if they can at least hold ticket sales as they are, and bring concessions up to industry standard, then this investment will pay for itself within 3 years. Management proposes to
a. Do you agree with the management team that this project will pay for itself in 3 years? Explain in detail your answer.
b. Calculate the NPV for the planned refurbishment of the concession facilities assuming an
c. Would you recommend pursuing this project?
d. What other factors or risks not detailed do you think management should consider in making this decision?
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