Question

A theme park invested into its premier rollercoaster “The Sine Wave” to make it 2π more exciting. The modification cost was only $20,000 and is expected to last 5 years with a $1,500 salvage value for the equipment at the end of the fifth year. The maintenance cost is expected to be $2,000 in the first year, increasing by 10% per year thereafter. The theme park prices one ride at $1 and sells 10,000 rides per year. Assuming annual interest rate of 5%, was this a viable project?

Answer 1

Annual income = 10,000 x $1 = $10,000

In year 5, Annual income = $(10,000 + 1,500) = $11,500 (Including salvage value)

Net Annual benefit (NAB) = Annual income - Annual cost

Present Worth (PW) of NAB is computed as follows.

Year	Income ($)	Cost ($)	NAB ($)	PV Factor @5%	Discounted NAB ($)
	(A)	(B)	(C)=(A)-(B)	(D)	(C)x(D)
0		20,000	-20,000	1.0000	-20,000
1	10,000	2,000	8,000	0.9524	7,619
2	10,000	2,200	7,800	0.9070	7,075
3	10,000	2,420	7,580	0.8638	6,548
4	10,000	2,662	7,338	0.8227	6,037
5	11,500	2,928	8,572	0.7835	6,716
				PW of NAB ($) =	13,995

Since PW > 0, the project is viable.