Question

The management of an amusement park is considering purchasing a new ride for $83,000 that would have a useful life of 10 years and a salvage value of $10,300. The ride would require annual operating costs of $33,500 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 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using the tables provided.

Answer 1

Particulars	Years	Amount	9% Factor	Present Value
Cost of asset	Now	83,000	1	-83,000
Annual operating costs	1 to 10	-33,500	6.418	-2,15,003
Salvage value	10	10,300	0.422	4346.6
Net present value				-2,93,656

Additional revenue to justify investment = $293656/ 6.418 = $ 45755

$ 45755 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.