Ted wants to buy a new boat that will cost $20,000 with an 8 year life span and

Question

Ted wants to buy a new boat that will cost $20,000 with an 8 year life span and a salvage value of $1000. Maintenance per year will cost Ted $500. But Ted currently has a boat he bought new 3 years back for $18,000 with $950 per year maintenance costs and at the time of purchace it had a 12 year life span with a salvage value of $200, however, a year ago Ted was offered $16,000 trade in value for his current boat. His current boat will need a new motor in two years that will cost $1500. What is the minimum value Ted must be offered to trade in his old boat for the new one? Interest is 10% per year.

Explanation / Answer

NPV for new Boat Cash Out flow Deprciation Benefit Net cash Flow Year 0            -20,000 0           -20,000.0 Year 1 -500 2375              1,704.5 Year 2 -500 2375              1,549.6 Year 3 -500 2375              1,408.7 Year 4 -500 2375              1,280.7 Year 5 -500 2375              1,164.2 Year 6 -500 2375              1,058.4 Year 7 -500 2375                 962.2 Year 8 500 2375              1,341.2 Tota NPV of New Boat             -9,530.5 NPV for new Boat Cash Out flow Deprciation Benefit Net cash Flow Year 0              -1,500 0             -1,500.0 Year 1 -950 1316.7                 333.3 Year 2 -2450 1316.7                -936.6 Year 3 -950 1316.7                 275.5 Year 4 -2450 1316.7                -774.1 Year 5 -950 1316.7                 227.7 Year 6 -2450 1316.7                -639.7 Year 7 -950 1316.7                 188.2 Year 8 -2250 1316.7                -435.4 Tota NPV of New Boat             -3,261.2 Ted should go with OLD Boats

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