Your company offers train tours around the suburbs of Victoria. The company currently owns six ExpressT3 trains
Question:
Your company offers train tours around the suburbs of Victoria. The company currently owns six ExpressT3 trains that it is considering replacing with three SuperRailX trains. You have been given the following estimates of costs etc. for each train model:
ExpressT3 | Estimates | SuperRailX | Estimates | |||||
Estimated remaining life | 5 | years | Cost | $ | 56500 | |||
Estimated scrap value: | Estimated life: | 10 | years | |||||
Now | $ | 55200 | Estimated scrap value: | |||||
In 5 years’ time | $ | 11400 | In 5 years’ time | $ | 226000 | |||
In 10 years’ time | $ | 113000 | ||||||
Annual net cash flows | $ | 105000 | Annual net cash flows | $ | 226000 |
Your company has also been informed of the progress of a new innovation - TechnoRail, which is expected to be available in 5 years. The following estimates of costs etc. per TechnoRail have been provided:
TechnoRail | Estimates | |||
Cost | $ | 691000 | ||
Estimated life | 15 | years | ||
Estimated disposal value: | ||||
After 5 years’ operation | $ | 226000 | ||
After 15 years’ operation | $ | 60500 | ||
Annual net cash flows | $ | 281500 |
It is considered that two of the new TechnoRail will be adequate to carry the estimated number of passengers. Other information is as follows:
• Your company cannot foresee any further developments beyond the TechnoRail.
• The annual net cash flows are received at the end of each year.
• The company’s required rate of return is 8 per cent per annum. Ignore taxes.
What is the NPV if the firm retains the ExpressT3 for 5 years, and then replaces them with TechnoRail. TechnoRail is replaced by TechnoRail always at the end of its useful life.
Accounting Business Reporting for Decision Making
ISBN: 9780730302414
4th edition
Authors: Jacqueline Birt, Keryn Chalmers, Albie Brooks, Suzanne Byrne, Judy Oliver