The Ocean City water park is considering the purchase of a new log flume ride. The...

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The Ocean City water park is considering the purchase of a newlog flume ride. The cost to
purchase the equipment is $5,000,000, and it will cost anadditional $380,000 to have it installed. The equipment has anexpected life of six years, and it will be depreciated using aMACRS 7-year class life. Management expects to run about 150 ridesper day, with each ride averaging 25 riders. The season will lastfor 120 days per year. In the first year the ticket price per rideris expected to be $5.25, and it will be increased by 4% per year.The variable cost per rider will be $1.4, and total fixed costswill be $425,000 per year. After six years, the ride will bedismatled at a cost of $215,000 and the parts will be sold for$450,000. The cost of capital is 8.5%, and its marginal tax rate is35%.
a. Calculate the initial outlay, annual after-tax cash flow foreach year, and the terminal cash flow.
b. Calculate the NPV, IRR, and MIRR of the new equipment. Is theproject acceptable?
c. Create a Data Table that shows the NPV, IRR, and MIRR forMACRS classes of 3, 5, 7, 10, 15 and 20 years. What do you concludeabout the speed of depreciation and the profitability of aninvestment?
d. Using Goal Seek, calculate the minimum ticket price that mustbe charged in the first year in order to make the projectacceptable.

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Formula Year n 0 1 2 3 4 5 6 Purchase priceinstallation cost Initial outlay IO 5380000 Number of ridesday a 150 150 150 150 150 150 Number of ridersride b 25 25 25 25 25 25 Number of daysyear c 120 120 120 120 120 120 Increasing at 4 pa Ticket pricerider d 525 546 568 591 614 639 Variable costrider e 140 140 140 140 140 140 abcd Total sales S 2362500 2457000 2555280 2657491 2763791 2874342 abce Total variable cost VC 630000 630000 630000 630000 630000 630000 Fixed See Answer

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Transcribed Image Text

The Ocean City water park is considering the purchase of a newlog flume ride. The cost topurchase the equipment is $5,000,000, and it will cost anadditional $380,000 to have it installed. The equipment has anexpected life of six years, and it will be depreciated using aMACRS 7-year class life. Management expects to run about 150 ridesper day, with each ride averaging 25 riders. The season will lastfor 120 days per year. In the first year the ticket price per rideris expected to be $5.25, and it will be increased by 4% per year.The variable cost per rider will be $1.4, and total fixed costswill be $425,000 per year. After six years, the ride will bedismatled at a cost of $215,000 and the parts will be sold for$450,000. The cost of capital is 8.5%, and its marginal tax rate is35%.a. Calculate the initial outlay, annual after-tax cash flow foreach year, and the terminal cash flow.b. Calculate the NPV, IRR, and MIRR of the new equipment. Is theproject acceptable?c. Create a Data Table that shows the NPV, IRR, and MIRR forMACRS classes of 3, 5, 7, 10, 15 and 20 years. What do you concludeabout the speed of depreciation and the profitability of aninvestment?d. Using Goal Seek, calculate the minimum ticket price that mustbe charged in the first year in order to make the projectacceptable.