True-Shield Enterprises plans to operate a sightseeing boat along the Charles River in Boston. In negotiating the

Question:

True-Shield Enterprises plans to operate a sightseeing boat along the Charles River in Boston. In negotiating the purchase of a new vessel from Yachts Dynamic Inc., True-Shield learned that Yachts Dynamic would lease the boat to them as an alternative to selling it outright. Through such an arrangement, True-Shield would not pay the $2,000,000 purchase price but would lease for $320,000 annually. True-Shield expects the boat to last for 15 years and have a of $200,000. For tax purposes, however, the boat is 7-year property (that is, the cost of the boat would be recovered over a period of 8 years, using the MACRS rates for 7-year property provided in Exhibit 22-4.)
The annual net cash inflow, excluding any consideration of lease payments and income tax, is expected to be $600,000. The company's income tax rate is 40%, and its cost of cap¬ital is 14%.
Required:
Make a recommendation to purchase or lease the boat, using the method to evaluate each alternative. Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...