STL Entertainment is considering the acquisition of a sight-seeing boat for summ

Question

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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