Reference no: EM136158
(a) Five years ago, the City spent $30,000 to buy a computerized radar system. Currently, a sales rep told the city manager about a new and better radar system that will be purchased for $50,000. The rep also told the manager that the company would provide the city $10,000 in trade on the old system. The new system will last 10 years. The old system may also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the subsequent information to use in the decision as to which system is more desirable:
Old System New System
Cost of radar system ...................... $30,000 $50,000
Current salvage value .................... $10,000 -
Salvage value in 10 years .............. $5,000 $8,000
Annual operating costs .................. $34,000 $29,000
Upgrade required in 5 years .......... $4,000 -
Discount rate .................................. 14% 14%
Required: Should the City buy the new system or keep the old system (prove it)?
(b) The management of an amusement park is allowing for purchasing a new ride for $40,000 that would have a useful life of 10 years and a salvage value of $5,000. The ride would need annual operating costs of $21,000 throughout its useful life. The company's discount rate is 13 percent. Management is unsure about how much additional ticket revenue the new ride would prepare particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. optimistically, the presence of the ride would attract new customers.
Required:
How much additional revenue could the ride have to prepare per year to make it an attractive investment?
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