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

NPV	569076.46
IRR	14.82%

The new boat should be purchased since NPV is positive.

Year	Cost of Boat	Tax shield- depreciation	Sale of boat	(Sales-cost) after tax	Net CF
0	-6000000				-6000000
1		120000		962500	1082500
2		120000		962500	1082500
3		120000		962500	1082500
4		120000		962500	1082500
5		120000	4700000	962500	5782500

Salvage
Purchase price	6000000
Less: Depreciation	2000000
Closing book value	4000000
Selling price	5000000
Gain/(loss)	1000000
Tax/ (Saving)	300000
Net salvage	4700000