Question

1. Reel Fast Charters, based in the Bahamas, runs multi-day fishing charters for wealthy anglers. They have been very successful in their first five years in operation and Brian (the owner) is considering adding a second boat. A new 80’ Viking would cost $5,000,000 with another $1,000,000 needed to upgrade the interior to a level that would attract the wealthy clients they desire. The boat would be depreciated straight-line over 15 years, but would be sold at the end of five years, for an estimated $5,000,000. The new boat would generate estimated additional revenue of $2,000,000 per year and would have associated expenses of $625,000. No additional working capital would be necessary. The firm’s tax rate is 30% and the required rate of return is 12%. Calculate the NPV and IRR. Should the new boat be purchased?

Answer 1

D3 : x N fx --K2/15 A B C D E F G H I J K L M Depreciati Depreciati Cash flows Total cash PVIF@ 1 Year Revenue Costs on PBT Tax@30% PATI on L from Investment flows 12% 20 $(6,000,000) $ (6,000,000) 1.000 $ 1 $2,000,000 $625,000 $400,000 $ 975,000 $292,500 $682,500 $400,000 $1,082,500 $ 1,082,500 0.893 $ 4 2 $2,000,000 $625,000 $400,000 $ 975,000 $292,500 $682,500 $ 400,000 $1,082,500 $ 1,082,500 0.797 $ 5 3 $2,000,000 $625,000 $400,000 $ 975,000 $292,500 $682,500 $ 400.000 $1,082,500 | $ 1,082,500 0.712 $ 6 4 $2,000,000 $625,000 $400,000 $ 975,000 $292,500 $682,500 $400,000 $1,082,500 $ 1,082,500 0.636 $ 5 $2,000,000 $625,000 $400,000 $ 975,000 $292,500 $682,500 $400,000 $1,082,500 $4,700,000 $ 5,782,500 0.567 $ Present value (6,000,000) 966,518 862,962 770,502 687,948 3,281,146 IRR 14.82% Net present value $ 569,076 14 15 16 Asset cost $ 6,000,000 Less: Depreciation charged $2,000,000 WDV of machine at the time of sale $4,000,000 Sale value of machine $5,000,000 Profit/(Loss) on sale $1,000,000 Less:Tax@30% $ 300,000 After tax cash flows from sale $4,700,000 17 18 20 New boat should be purchased

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