Question: The Ocean City water park is considering the purchase of

The Ocean City water park is considering the purchase of a new log flume ride. The cost to purchase the equipment is 1,800,000, and it will cost an additional 180,000 to have it installed. The equipment has an expected life of 6 years, and it will be depreciated using a MACRS 5-year class life. Management expects to run about 150 rides per day, with each ride averaging 16 riders. The season will last for 120 days per year. In the first year, the ticket price per rider is expected to be $4.00, and it will be increased by 4% per year. The variable cost per rider will be $1.40, and total fixed costs will be $275,000 per year. After six years, the ride will be dismantled at a cost of $75,000 and the parts will be sold for $650,000. The cost of capital is 12%, and its marginal tax rate is 35%.
(a) Calculate the initial outlay, annual after-tax cash flow for each year and the terminal cash flow.
(b) Calculate the NPV, IRR, and MIRR of the new equipment. Is the project acceptable?
(c) Using the Goal Seek tool, calculate the minimum ticket price that must be charged in the first year in order to make the project acceptable. 

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  • CreatedJuly 26, 2013
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