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

Question

ABC Entertainment is considering the acquisition of a sight-seeing boat for summer tours along the Mississippi River. The following information is available:

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 130,000 passengers will be carried each season. Ignore income taxes.

Instructions:

By using the net-present-value method, determine whether ABC 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 = 130000/260 = 500
Net revenue from each trip = $6*130000 - 160000 - 1000 *500 = $120000
so cash flows are

year 0 -500000
year 1 120000
year 2 120000
year 3 120000
year 4 120000
year 5 120000
year 6 120000
year 7 120000
year 8 120000
year 9 120000
year 10 120000

NPV @ 14% is negetive,so

No the boat should not be acquired

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