Reference no: EM132712182

Problem - 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%.

Required -

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. Create a Data Table that shows the NPV, IRR, and MIRR for MACRS classes of 3, 5, 7, 10, 15, and 20 years. What do you conclude about the speed of depreciation and the profitability of an investment?

d. Using Goal Seek, calculate the minimum ticket price that must be charged in the first year in order to make the project acceptable.