Question

The management of an amusement park is considering purchasing a new ride for $84,000 that would have a useful life of 10 years and a salvage value of $10,400. The ride would require annual operating costs of $34,000 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 entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers. (Ignore income taxes.)

Click here to view Exhibit 7B-1 and Exhibit 7B-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

• To make this project attractive the initial cost should at least equal the net present value of income.
• Present value factor are used to find present value of net income.
• intial cost = $84,000
• salvage = $10,400*PV factor 9% 10th year [cash inflow in 10th year]
• net cash flow = (addition Revenue- additional cost)*PVA factor year 10

we will use PVA as there is continuous revenues and costs for 10 years.

Initial cost = Net cash flow+present value of salvage

suppose the additional revenue is X

$84,000= (X-$34,000)*6.418 + $10,400*0.422

$84,000 = 6.418x-$218,212+$4,389

6.418x=$84,000+$218,212-$4,389

X=$46,404

at least $46,404 per year additional revenue should be earned to make this project attractive so that costs can be covered up and there will be no loss at this revenue.