As a 19^th century economist, you are faced with the following problem. The world's shipping fleet consists of steamships and sailing ships. Each can be used to carry cargo or passengers. The ships have similar sailing capacities but differ in their annual operating costs as follows:

	Steam	Sail
Cargo	$ 80,000	$ 95,000
Passenger	$ 90,000	$ 100,000

Assume: (i) Fares are competitively determined, (ii) demand is not expected to change, (iii) each vessel has a life of 15 years, (iv) current salvage value of either ship (sailing or steam) is $114,091, and (v) Cost of capital is 10%, (vi) no taxes. What is the annual revenue from a cargo ship? (Assume that salvage values are independent of use and there are no taxes.)

Required: 

• Calculate the Present Value (PV) for the firm.

 

• Calculate Equivalent annual cost (EAC).

Answer rating: 100% (QA)

To calculate the Present Value PV for the firm we need to consider the annual operating costs and sa... View the full answer