Please explain why a theater operator should invest in a new 4D auditorium.
You should explain your answer in NPV, Payback Period, IRR, ARR, ROI, CAGR. Other than precise, step-by-step calculation, you should explain the answers by your own words and explain in details the outcomes of this investment project.
CAPEX (for 100 4D Seat Auditorium) : Total 1 Million USD
Seat Number Reduction : 35% (Seat loss rate when converting a 3D Auditorium to a 4DX Auditorium)
4D Equipment : $650K in total
Auditorium Renovation Construction Cost (Converting an 3D Auditorium to a 4D Auditorium): $350K
Annual Incremental Net Cash flow for Cinema (based on 100 4D Seat Auditorium)
Occupancy Rate (“OR” : Seats Sold / Seats Available)
4D OR : 50%
Existing 3D Auditorium OR (Before Conversion) : 15%
Show per day : 5 Shows per day (for each 3D and 4D)
By definition, “Annual Incremental Net Cash flow for Cinema” excludes Existing Cash Flow from the existing 3D Auditorium (before Conversion)
Per Ticket Incremental Revenue on 4D for Cinema (Cinema Incremental Cash Flow) : $7.48 / sold ticket
OPEX per year for Cinema in order to operate the 4D Auditorium : $39,000 / year.
Others
WACC (Discount Rate) : 9%
CAPEX for establishing a 3D Auditorium: Approximately 1 Million for a 154 Seat 3D Auditorium
OPEX for operating a 3D Auditorium: Approximately USD $ 0.85 dollars/ticket.
To answer the first comment below:
Life of the project - is until the next technology is discovered. There is no exact time but it is not anytime soon. Although, current project will need some upgrades in following years (for example some new features can be added), however, it will not demand complete re-construction of the auditorium.
Revenue of the current project - I was expecting this question, because as soon as I saw the problem set, this was the first thing I saw missing. Though I asked, I was not provided with the current revenue numbers. For now lets consider the current revenue from 3D to be much more smaller number than the future revenue from 4D.