The management of an amusement park is considering purchasing a new ride for $40
ID: 2348860 • Letter: T
Question
The management of an amusement park is considering purchasing a new ride for $40,000 that would have a useful life of 15 years and a salvage value of $6,000. The ride would require annual operating costs of $22,000 throughout its useful life. The company's discount rate is 12%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. hopefully, the presence of the ride would attract new customers. (Ignore income taxes in this problem)Required: How much additional revenue would the ride have to generate per year to make it an attractive investment?
Explanation / Answer
188,743.60 / 6.1809 = 27,711.99 $27,712 additional revenue per year would be required to justify the investment in the new ride. This much revenue (27,712) would result in NPV of 0 (or break even point). Any less will lead to negative NPV, any more will lead to positive NPV.
*6.1809 us obtained by adding all the 12% factors of year 1 through 15, from this table https://docs.google.com/viewer?a=v&q=cache:2JsyQjvJ_sAJ:www.studyfinance.com/common/TVMTable3.pdf+&hl=en&gl=us&pid=bl&srcid=ADGEESiUULcMfUfv-5jSkMofK99E2QdR6m6ugO51b7U-3DcEoKjqtQNmdalwATqTuZ93MuvIMkprGNko7LzKfWdkY7b_y3ZutS2T_raC_Jlt10J-0447_pVNY1SgZZ-ZSAWmv8Ph72_Z&sig=AHIEtbSHnWEN17Xdy-i92EaDmJVYNFo7MA
Years Amount PV 12% Factors Precent Value Cost of Operating Now $(40,000) 1.0000 $(40,000.00) Annual Operating Cost 1 to 15 $(22,000) 6.8109* $(149,839.80) Salvage Value 15 $6,000 0.1827 $1,096.20 Net Present Value (NPV) $(188,743.60)Related Questions
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