Determining relevant cash flows for a new boat??? Jan and Deana have been dreami
ID: 2618489 • Letter: D
Question
Determining relevant cash flows for a new boat???
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 discretionary annual income of $23,800. Their cash flow estimates for the boat purchase are as? follows:
Negotiated price of the new boat
$69,900
Sales tax rate? (applicable to purchase? price)
6.7%
Boat? trade-in
$0
Estimated value of new boat in 4 years
$40,000
Estimated monthly repair and maintenance
$806
Estimated monthly docking fee
$476
Using these cash flow? estimates, calculate the? following:
a. The initial investment.
round to the nearest dollar (type a negative # to indicate a cash outflow and a positive # to indicate a cash inflow)
b. Operating cash flow.
round to the nearest dollar (type a negative # to indicate a cash outflow and a positive # to indicate a cash inflow)
c. Terminal cash flow.
terminal cash flow = estimated value of new boat in 4 years
$40,000
round to the nearest dollar (type a negative # to indicate a cash outflow and a positive # to indicate a cash inflow)
d. Summary of annual cash flow.? (Note: Assume that Jan and Deana plan on selling the boat in 4? years.)
YEAR 0 cash flow:
YEAR 1 cash flow:
YEAR 2 cash flow:
YEAR 3 cash flow:
YEAR 4 cash flow:
e. Based on their discretionary annual? income, what advice would you give Jan and Deana regarding the proposed boat? purchase?
"We would recommend that Jan and Deana obtain a loan to cover the initial negative cash flow payable in 4? years."
Is the above statement true or? false?
Negotiated price of the new boat
$69,900
Explanation / Answer
a) Initial Investment.......................
Negotiated price of the Boat = $69,900
Add:- Sales Tax = $4,683.30
INITIAL INVESTMENT =$74,583.30
b) Operating cash flow = Annual Income - Annual Repairs&Maintanence - Annual Docking fees
Operating Cash Flow = $23,800 - $(806*12) - $(476*12)
Operating cash flow = $8,416
C) Terminal cash flow = salvage value of machine
Terminal Cash flow = $40000
D) Year 0.........................($74,583.30)
Year 1......................... $8,416.00
Year 2......................... $8,416.00
Year 3......................... $8,416.00
Year 4......................... $48,416.00
NPV = ($919.30)
E) The above ststement is false since the loan will increase the price of boat which will ultimately increase the loss in npv as calculated.