Six Flags Amusement Park has asked for your assistance in deciding whether or not to add a set of 6 additional cars to its existing roller coaster. The cost to purchase and install the new set of six cars would be $400,000. This set of cars would have a salvage value of $10,000 at the end of 10 years when the roller coaster reaches the end of its useful life. By adding the set of cars, Six Flags believes it can generate $50,000 of additional roller coaster ticket sales revenue each year over the next ten years. Six Flags has an average cost of capital of 6%.

a) Based on the Net Present Value would you recommend that Six Flags accept or reject the idea of adding the new set of cars to its roller coaster? Show the calculations which support your answer (Present Value Tables on pages 588 and/or 589 of the textbook should be used).

b) Is the rate of return on this investment above or below the cost of capital (desired rate of return) for Six Flags?

c) What would be the payback period of the new set of cars?