The Heritage Amusement Park would like to construct a new ride called the Sonic

Question

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 $392,000 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: (Ignore income taxes):

52,000

74,480

2a.

Compute the simple rate of return promised by the new ride. (Round your answer to the nearest whole percent. Omit the "%" sign in your response.)

2b.

If Heritage Amusement Park requires a simple rate of return of at least 13%, does the Sonic Boom ride meet this criterion?

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 $392,000 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: (Ignore income taxes):

Explanation / Answer

2A] SIMPLE RATE OF RETURN = INCREMENTAL NET OPERATING INCOME/INITIAL INVESTMENT * 100

=74480/392000 * 100

=19%

2B]If Heritage Amusement Park requires a simple rate of return of at least 13%, does the Sonic Boom ride meet this criterion?

ANSWER:-YES

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