Question

The management of an amusement park is considering purchasing a new ride for $98,000 that would have a useful life of 10 years and a salvage value of $11,800. The ride would require annual operating costs of $41,000 throughout its useful life. The company's discount rate is 9%. 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 entities them to unlimited rides. Hopefully. the presence of the ride would attract new customers. (Ignore income taxes.) Click here to view Exhibit 12B-1 and Exhibit 12B-2 to determine the appropriate discount factor(s) using the tables provided. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment? (Round your Intermediate calculations and final answer to the nearest whole dollar amount.) Additional revenue

Answer 1

	Years	Amount	9% Factor	Present Value
Cost of asset	Now	98,000	1	(98,000)
Annual operating costs	1 to 10	-41,000	6.418	(263,138)
Salvage value	10	11,800	0.422	4,980
Net present value				(356,158)

Additional revenue to justify investment = $356,158 / 6.418 = $ 55,494

$ 55,494 additional revenue per year would be necessary to justify the investment. This additional revenue would result in a net present value of zero. Less than that would result in a negative net present value. And more than that would result in a positive net present value.

Note that 6.418 is obtained using exhibit 12B-2 and 0.422 using exhibit 12B-1

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