Question

The management of an amusement park is considering purchasing a new ride for $50,000 that would have a useful life of 10 years and a salvage value of $5,000. The ride would require annual operating costs of $33,000 throughout its useful life. The company's discount rate is 8%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly because customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment? (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.) Additional revenue=?

Answer 1

	Years	Amount	8% Factor	Present Value
Cost of asset	Now	(50,000)	1.00	(50,000)
Annual operating costs	1-10	(33,000)	6.71	(221,430)
Salvage value	10	5,000	0.463	2,315
Net present value				269,115

Additional revenue = $269,115 / 6.71 = $40,107

$40,107 additional revenue per year would be necessary to justify the investment. This additional revenue would result in zero net present value. Less than this would result in negative net present value. And anymore than this  would result in positive net present value.