Question

Island Ferry plans to expand operations by acquiring another boat. It has a bid of $950,000 from a boat manufacturer to provide a boat that can carry 40 passengers. The boat has an expected life of eight years with an expected residual value for financial reporting and tax purposes of $50,000. Island Ferry has a tax rate of 40 percent and uses straight-line depreciation for tax purposes. Its required rate of return is 10 percent. The following annual cash flows relate to the investment in the new boat
Item Cash Flow
Passenger revenues ...... $325,000
Labor cost .......... (90,000)
Fuel cost .......... (16,000)
Maintenance cost ........ (27,000)
Miscellaneous cost ...... (4,000)
Taxes ............ ?

Required
Calculate the net present value of the investment in the boat. Should the company make the investment?



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  • CreatedSeptember 23, 2013
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