Determining net cash flows for a new boat Jan and Deana have been dreaming about owning...

Determining net 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 disposable annual income of

$23,600. Their cash flow estimates for the boat purchase are as follows:

Negotiated price of the new boat

$69,600


Sales tax rate (applicable to purchase price)	6.2 %


Boat trade-in	$ 0


Estimated value of new boat in 4 years	$39,800


Estimated monthly repair and maintenance	$ 814


Estimated monthly docking fee	$504

Using these cash flow estimates, calculate the following:

a. The initial investment.

b. Operating cash flow.

c. Terminal cash flow.

d. Summary of annual cash flow. (Note: Assume that Jan and Deana plan on selling the boat in 4 years.)

e. On the basis on their disposable annual income, what advice would you give Jan and Deana regarding the proposed boat purchase?

Solutions

Expert Solution

Negoitated price	69,600.00
Add: sales tax 6.2%	4,315.20
Initial investment	73,915.20
Salvage value in 4years	39,800.00
Monthly repair	814.00
monthly docking fee	504.00
Total monthly cost	1,318.00
Total annual cost	15,816.00
Annual income	23,600.00

1	Initial investment
	Negoitated price	69,600.00
	Add: sales tax 6.2%	4,315.20
	Initial investment	73,915.20

2	Monthly repair	814.00
	monthly docking fee	504.00
	Total monthly cost	1,318.00
	Total operating cost(*12) a	15,816.00
	Total annual income (b)	23,600.00
	So operating cashflow (b-a)	7,784.00

3	Terminal cashflow
	Operating cashflow	7,784.00
	Add: Salvage value	39,800.00
	Terminal cashflow	47,584.00

Year	Cashflow
0	(73,915.20)
1	7,784.00
2	7,784.00
3	7,784.00
4	47,584.00
Loss	(2,979.20)

Conclusion
I have taken the total of inflows and outflows without considering the time value of money
And the result is negative, i.e outfow is more than inflow
If we consider the time value of money, the loss will be even bigger
So boat purchase is not viable

jeff jeffy answered 2 hours ago

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