STL Entertainment is considering the acquisition of a sight-seeing boat for summ
ID: 2380391 • Letter: S
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.
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
Explanation / Answer
No of trip each season = 120000/300 = 400
Cash InFlow each season = (300*5-1000)*400 - 160000+ 50000 = $90,000
Terminal Value = $100,000
NPV = 90,000 PVIFA(14%,10) + 100,000PVIF(14%,10) - 500,000
NPV = 90000*5.216116+100,000*0.269744 - 500000
NPV = -$3575
Answer: NPV - $3575
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