Question

Tropical 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. Should the new boat be purchased?

Solve all three capital budgeting problems on one spreadsheet

Answer 1

NPV

569076.46

The boat should be purchased since NPV is positive

WORKINGS

Year	Initial cost	Tax shield= Tax rate * New depreciation	Salvage after tax = Selling price - Tax*Gain	Net revenue after tax	Net cash flow
0	-6000000				-6000000
1		120000		962500	1082500
2		120000		962500	1082500
3		120000		962500	1082500
4		120000		962500	1082500
5		120000	4700000	962500	5782500

Gain on sale
Purchase price	6000000
Less: depreciation	2000000
Book value after 5 years	4000000
Selling price	5000000
Gain on sale	1000000