In: Finance
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?
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 | |