The management of an amusement park is considering purchasing a new ride for $72
ID: 2381158 • Letter: T
Question
The management of an amusement park is considering purchasing a new ride for $72,000 that would have a useful life of 8 years and a salvage value of $9,000. The ride would require annual operating costs of $29,000 throughout its useful life. The company's discount rate is 14%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly because 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.)
How much additional revenue would the ride have to generate per year to make it an attractive investment?
Show work please. Thank you!
Required:How much additional revenue would the ride have to generate per year to make it an attractive investment?
Show work please. Thank you!
Explanation / Answer
Hi,
Please find the answer as follows:
NPV = -72000 - 29000/(1+.14)^1 - 29000/(1+.14)^2 - 29000/(1+.14)^3 - 29000/(1+.14)^4 - 29000/(1+.14)^5 - 29000/(1+.14)^6 - 29000/(1+.14)^7 - 29000/(1+.14)^8 + 9000/(1+.14)^8 = -203372.02
Minimum Annual Cash Flows = Negative Net Present Value/Present Value Factor
Minimum Annual Cash Flows = 203372.02/PVIFA(14%,8) = 203372.02/4.6389 = 43840.57 or 43841
Answer is 43840.57 or 43841.
Thanks.
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