Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at 6.2%.
Suppose that one year from now, the Surgeon General of the US government (after considerable research) announces that eating lobster would greatly reduce the risk of colon cancer. Rachel’s new vessel can be re-tooled to handle lobster pots. Describe the manner in which Rachel will make the capital budgeting decision of whether to include lobster harvesting.
If Rachel invest now by borrowing $ 1,250,000.
He should pay every year an Interest of amount $ 77,500 and
He will earn an revenue of $ 2,07,000 per year
So total Net revenue will be $ 1,29,500 ($2,07,000-$77,500)
If we calculate Present value for future earning @ 10% also it will come around $ 6,89,538
It doesnot cover the loan amount itself.
Hence it is not advisable to take up the loan.
Rachel should not include lobster harvesting.
It is showing negative cash flows on a whole.
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...
Rachel’s Crab Heaven (RCH) supplies crabs, fish, and clams to restaurants along the east coast. Rachel is sole owner and chief executive. She currently has one fishing vessel but is considering investing in one that would increase her daily harvest two to three fold. Rachel estimates the new vessel would generate an operating cash flow of $207,000 per year for eight years. The vessel has an initial investment of $1,250,000. Rachel will borrow the entire amount from First Bank at...