Jan and Deana have been dreaming about owning a boat for some time and have deci

Question

Jan and Deana have been dreaming about owning a boat for some time and have decided that estimating its cash flows will help them in their decision process. They expect to have a disposable annual income of $24,000. Their cash flow estimates for the boat purchase are as follows:

Negotiated price of the new boat: $70,000

Sales tax rate (applicable to purchase price): 6.5%

Boat trade-in: 0

Estimated value of new boat in 4 years: $40,000

Estimated monthly repair and maintenance: $800

Estimated monthly docking fee: $500

Using these cash flow estimates, calculate the following:

The initial investment

Operating cash flow

Terminal cash flow

Summary of annual cash flow

Based on their disposable annual income, what advice would you give Jan and Deana regarding the proposed boat purchase?

Explanation / Answer

Initial Investment = cost of asset x (1+ sales tax) + boat trade in

                                    = 70,000 x (1+0.065) +0

                                    = 74,550

Therefore, Initial investment would be 74,550.

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