The management of an amusement park is considering purchasing a new ride for $82,000 that would have a useful life of 10 yearsand a salvage value of $10,200. The ride would require annual operating costs of $33,000 throughout its useful life. The company'sdiscount rate is 9%. Management is unsure about how much additional ticket revenue the new ride would generate-particularly sincecustomers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride wouldattract 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?Note: Round your Intermediate calculations and final answer to the nearest whole dollar amount.Additional revenue$45,769

Revenue refers to the total income generated by a business or organization from its primary…

Answered: The management of an amusement park is…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Beryl's Iced Tea currently rents a bottling machine for $51,000 per year, including all maintenance expenses. It is considering purchasing a machine instead, and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $23,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $260,000. This machine will require $15,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $35,000 will be spent upfront training the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The corporate tax rate is 30%. Should Beryl's Iced Tea continue…
You must evaluate a proposal to buy a new milling machine. The purchase price of the milling machine, including shipping and installation costs, is $162,000, and the equipment will be fully depreciated at the time of purchase. The machine would be sold after 3 years for $111,000. The machine would require a $9,000 increase in net operating working capital (increased Inventory less increased accounts payable). There would be no effect on revenues, but pretax labor costs would decline by $42,000 per year. The marginal tax rate is 25%, and the WACC is 11%. Also, the firm spent $4,500 last year investigating the feasibility of using the machine. a. How should the $4,500 spent last year be handled? 1. Last year's expenditure should be treated as a terminal cash flow and dealt with at the end of the project's life. Hence, it should not be included in the initial investment outlay. II. Last year's expenditure is considered an opportunity cost and does not represent an incremental cash flow.…
Ivanhoe Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck(not the least of which is that it runs). The new truck would cost $57,186. Because of the increased capacity, reduced maintenancecosts, and increased fuel economy, the new truck is expected to generate cost savings of $8,100. At the end of eight years, thecompany will sell the truck for an estimated $27,500. Traditionally, the company has used a general rule that it should not accept aproposal unless it has a payback period that is less than 50% of the asset's estimated useful life. Gary Smith, a new manager, hassuggested that the company should not rely only on the payback approach but should also use the net present value method whenevaluating new projects. The company's cost of capital is 8%.Calculate net present value and cash payback period
The Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%. Calculate the NPV, IRR, and MIRR of the new equipment. Is the project acceptable?
Sarasota Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $450,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $78,750. Management also believes that the new bottling machine will save the company money because it is expected to be more reliable than other machines, and thus will reduce downtime. Click here to view PV tables. How much would the reduction in downtime have to be worth in order for the project to be acceptable? Sarasota's discount rate is 10%. (Use the above table.) (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to O decimal places, e.g. 5,275.) Reduction in downtime would have to have a present value $
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $394,000 and would cost another $58,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $196,000. Using the setter requires a $26,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $171,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 13 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter_____________ be purchased because the net present value, that is $__________ , is ______ zero.
Beryl's Iced Tea currently rents a bottling machine for $52,000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $150,000. This machine will require $25,000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $250,000. This machine will require $16,000 per year in ongoing maintenance expenses and will lower bottling costs by $11,000 per year. Also, $39,000 will be spent up front to train the new operators of the machine. Suppose the appropriate discount rate is 7% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the cost of the rental machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a 10-year life with a negligible salvage value. The marginal corporate tax rate is 20%. Should Beryl's Iced…
Rader Railway is determining whether to purchase a new rail setter, which has a base price of $425,000 and would cost another $44,000 to install. The setter will be depreciated according to the MACRS 3-year class of assets, and it would be sold after three years for $210,000. Using the setter requires a $29,000 increase in net working capital. Although it would have no effect on revenues, the setter should save the firm $161,000 per year in before-tax operating costs (excluding depreciation). Rader's marginal tax rate is 40 percent, and its required rate of return is 12 percent. Should the setter be purchased? Do not round intermediate calculations. Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any. The setter_____ be purchased because the net present value________, that is $ , is zero.
A drug store is looking into the possibility of installing a “24/7” automated prescription refill system to increase its projected revenues by $20,000 per year over the next 5 years. Annual expenses to maintain the system are expected to be $5,000. The system will have no market value at the end of its 5-year life, and it will be depreciated by the SL method. The store’s effective income tax rate is 40%, and the after-tax MARR is 12% per year. What is the maximum amount that is justified for the purchase of this prescription refill system?
The Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is $8,000,000, and it will cost an additional $475,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 7-year class life. Management expects to run about 150 rides per day, with each ride averaging 35 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $5.25, and it will be increased by 4% per year. The variable cost per rider will be $1.65, and total fixed costs will be $525,000 per year. After six years, the ride will be dismantled at a cost of $245,000 and the parts will be sold for $600,000. The cost of capital is 8.5%, and its marginal tax rate is 25%. a. Calculate the initial outlay, annual after-tax cash flow for each year, and the terminal cash flow.
Gull Corp. is considering selling its old popcorn machine and replacing it with a newer one. The old machine has a book value of $5,000, and its remaining useful life is five years. Annual costs are $4,000. A high school is willing to buy it for $2,000. New equipment would cost $18,000 with annual operating costs of $1,500. The new machine has an estimated useful life of five years. Prepare a differential analysis. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue with (Alternative 1) or Replace (Alternative 2) Old Machine Continue withOld Machine(Alternative 1) Replace OldMachine(Alternative 2) DifferentialEffects(Alternative 2) Revenues: Proceeds from sale of old machine $ $ $ Costs: Purchase price Variable manufacturing costs (5 years) Profit (loss) $ $ $ Should the machine be replaced?
A commercial oven with a book value of $87,000 has an estimated remaining 5-year life. A proposal is offered to sell the oven for $8,500 and replace it with a new oven costing $110,000. The new machine has a 5-year life with no residual value. The new machine would reduce annual maintenance costs by $23,000. Provide a differential analysis, in good form, on the proposal to replace the commercial oven.

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