Chapter 8 Problem 1: 1. Straightforward net-present-value and payback computatio
ID: 2370786 • Letter: C
Question
Chapter 8 Problem 1:
1. Straightforward net-present-value and payback computations
STL Entertainment is considering the acquisition of a sight-seeing boat for summer tours along the Mississippi River. The following information is available:
Cost of boat $500,000
Service life 10 summer seasons
Disposal value at the end of 10 seasons $100,000
Capacity per trip 300 passengers
Fixed operating costs per season (including straight-line depreciation) $160,000
Variable operating costs per trip $1,000
Ticket price $5 per passenger
All operating costs, except depreciation, require cash outlays. On the basis of similar operations in other parts of the country, management anticipates that each trip will be sold out and that 120,000 passengers will be carried each season. Ignore income taxes.
Instructions:
By using the net-present-value method, determine whether STL Entertainment should acquire the boat. Assume a 14% desired return on all investments- round calculations to the nearest dollar.
Explanation / Answer
AS per net-present-value method
NPV = {(5*300-1000)*400 - 120000}PVIFA(14%,10) + 100,000 PVIF(14%,10) - 500,000
= 444,263.63 - 500,000
= - $ 55,736.37
Since NPV is negative STL Entertainment should not acquire the boat
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.