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1. (a) (Ignore income taxes in this problem.) Fi...

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1. (a) (Ignore income taxes in this problem.) Five years ago, the City spent $30,000 to purchase a computerized radar system. Recently, a sales rep told the city manager about a new and improved radar system that can be purchased for $50,000. The rep also told the manager that the company would give the city $10,000 in trade on the old system. The new system will last 10 years. The old system will also last that long but only if a $4,000 upgrade is done in 5 years. The manager assembled the following 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 purchase the new system or keep the old system (prove it)? (b) (Ignore income taxes in this problem.) The management of an amusement park is considering 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 require annual operating costs of $21,000 throughout its useful life. The company's discount rate is 13%. Management is unsure about how much additional ticket revenue the new ride would generate particularly since customers pay a flat fee when they enter the park that entitles them to unlimited rides. Hopefully, the presence of the ride would attract new customers. Required: How much additional revenue would the ride have to generate per year to make it an attractive investment (prove it)?

 

Paper#12992 | Written in 18-Jul-2015

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