MidWest Amusements is in the process of reviewing 10 proposa

MidWest Amusements is in the process of reviewing 10 proposals for new rides at its theme parks in cities scattered throughout the American heartland. The company\'s only experienced safety engineer must carefully review plans and monitor the construction of all new rides. However, she is only available to work on new rides for 1,737 hours during the year. The net present values and the amount of safety engineer time required for the proposed rides are listed below: Safety Engineer Time Required Proposed Ride Ride 1 Ride 2 Ride 3 Ride 4 Ride 5 Ride 6 Ride 7 Ride 8 Ride 9 Ride 10 Net Present Value $ 1,277,500 1,088,000 700,800 609,450 560,000 426,250 327,600 1,635,600 362,600 478,800 350 340 320 170 250 125 126 376 196 266 Total 7,466,600 2,519 Required 1. Which of the proposed rides should the company build this year? (Note: The incremental profit of a long-term project such as constructing a new ride is its net present value.) (You may select more than one answer. Single click the box with a check mark for correct answers and double click to empty the box for the wrong answers.) Ride 1 2 Ride 2 ?Ride 3 2 Ride 4 ?Ride 5 Ride 6 ?Ride 8 Ride 10 2 Ride 7 Ride 9

Solution

1 This exercise can be solved by first computing the profitability index of each new ride and then ranking the rides based on that profitability index: Proposed Ride Net Present Value Safety Engineer Time Required Profitability Index (A) (B) (A) ÷ (B) Ride 1 $1,277,500 350 $3,650 Ride 2 $1,088,000 340 $3,200 Ride 3 $700,800 320 $2,190 Ride 4 $609,450 170 $3,585 Ride 5 $560,000 250 $2,240 Ride 6 $426,250 125 $3,410 Ride 7 $327,600 126 $2,600 Ride 8 $1,635,600 376 $4,350 Ride 9 $362,600 196 $1,850 Ride 10 $478,800 266 $1,800 Proposed Ride Profitability Index Safety Engineer Time Required Cumulative Amount of Safety Engineer Time Required Ride 8 $4,350 376 376 Ride 1 $3,650 350 726 Ride 4 $3,585 170 896 Ride 6 $3,410 125 1021 Ride 2 $3,200 340 1361 Ride 7 $2,600 126 1487 Ride 5 $2,240 250 1737 Ride 3 $2,190 320 2057 Ride 9 $1,850 196 2253 Ride 10 $1,800 266 2519 Given the 1,737 hours of safety engineer time available, the seven rides in bold in the above table should be built. 2 The total net present value for the seven new rides to be built is computed as follows: Ride 8 $1,635,600 Ride 1 $1,277,500 Ride 4 $609,450 Ride 6 $426,250 Ride 2 $1,088,000 Ride 7 $327,600 Ride 5 $560,000 Total $5,924,400