This analysis is for the purchase of a Regal Movie Theatre for a price of $11,500,000. We have projected a sale of 1,330,425 tickets per year and 40% of our customers buying concessions. This equals out to a gross income of $2,900,000 with a profit of $96,500. These numbers increase each year as we pay off the building and our customer base increases. By year ten, our net income will have increased to $730,000. We believe the project looks profitable and we vote to complete it.
We collected data to portray the good and bad scenarios for our free cash flows. In the good scenario, we are going to use an option to renovate our movie theater. From years six through ten, we will spend $2,300,000 each year for building renovations. These renovations will keep our theater updated and will increase the number of customers wanting to watch movies here. With this scenario, our tickets sold will increase to 1,724,625. If we do not do the renovation, our theater will become quite rundown and customers will not want to come back. With the bad scenario, we will only be able to sell 739,125 tickets.
We set the probability of the good option as 60% and of the bad option as 40%. The reason for this is that we did not want to be too optimistic about our good option. Since we made our good and bad option by changing the numbers of occupancy, our probability would greatly depend on movies showing. Therefore, we agreed that 60% and 40%, which is not that different from fifty-fifty, is appropriate for our analysis.