Where did you get 400 from in your answer? Chapter 8 Problem 1: 1. Straightforwa
ID: 2503290 • Letter: W
Question
Where did you get 400 from in your answer?
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
Each year
number of trips = 120000/300 = 400
Net revenue from each trip = $5*120000 - 160000 - 1000 *400 = $40000
so cash flows are
year 0 -500000
year 1 40000
year 2 40000
year 3 40000
year 4 40000
year 5 40000
year 6 40000
year 7 40000
year 8 40000
year 9 40000
year 10 140000
NPV @ 14% = -264380.99
No the boat should not be acquired
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