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Category > Accounting Posted 30 Jul 2017 My Price 7.00

Heritage Amusement Park

EXERCISE 13–7 Payback Period and Simple Rate of Return [LO5, LO6]

The Heritage Amusement Park would like to construct a new ride called the Sonic Boom, which the park management feels would be very popular. The ride would cost $450,000 to construct, and it would have a 10% salvage value at the end of its 15-year useful life. The company estimates that the following annual costs and revenues would be associated with the ride:

 

Ticket revenues . . . . . . . . . . . . . . . . Less operating expenses:

 

 

$250,000

Maintenance. . . . . . . . . . . . . . . . .

$40,000

 

 

Salaries  . . . . . . . . . . . . . . . . . . . .

90,000

 

 

Depreciation . . . . . . . . . . . . . . . . .

27,000

 

 

Insurance . . . . . . . . . . . . . . . . . . .

30,000

 

 

Total operating expenses . . . . . . . . .

 

 

187,000

Net operating income. . . . . . . . . . . .

 

 

$ 63,000

 

Required:

(Ignore income taxes.)

1.       Assume that the Heritage Amusement Park will not construct a new ride unless the ride pro- vides a payback period of six years or less. Does the Sonic Boom ride satisfy this requirement?

2.       Compute the simple rate of return promised by the new ride. If Heritage Amusement Park requires a simple rate of return of at least 12%, does the Sonic Boom ride meet this criterion?

 

Answers

Maurice Tutor
(5)
Status NEW Posted 30 Jul 2017 07:07 PM My Price 7.00

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