Question

In: Finance

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

Related Solutions

1 A. Determining Net Income from Net The section of the statement of cash flows that...
1 A. Determining Net Income from Net The section of the statement of cash flows that reports the cash transactions affecting the determination of net income.Cash Flow from Operating Activities Curwen Inc. reported net cash flow from operating activities of $357,500 on its statement of cash flows for the year ended December 31. The following information was reported in the Cash Flows from Operating Activities section of the A summary of the cash receipts and cash payments for a specific...
Which of the following statements is false about cash flows? Net cash flows represent cash inflows...
Which of the following statements is false about cash flows? Net cash flows represent cash inflows minus cash outflows. They are based on when they occur, not when they accrue. Net cash flows equal net income. None of these are false.
The statement of cash flows is not useful for:   a. Determining a company's ability to...
The statement of cash flows is not useful for:   a. Determining a company's ability to pay its debts.     b. Planning future investing and financing activities.     c. Determining a company's ability to pay dividends.     d. Calculating the net worth of a company.
the statement of cash flows reports for a period of time the net cash flows from...
the statement of cash flows reports for a period of time the net cash flows from a. operatingn, income, and financial activities b. operating, investing, and financing activitez c. investing, financial, and budgeting activites d. income, investing, and budgeting activities
Determining Net Income from Net Cash Flow from Operating Activities Sanhueza, Inc., reported a net cash...
Determining Net Income from Net Cash Flow from Operating Activities Sanhueza, Inc., reported a net cash flow from operating activities of $159,500 on its statement of cash flows for the year ended December 31, 2016. The following information was reported in the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method: Decrease in income taxes payable $3,400 Decrease in inventories 8,500 Depreciation 13,100 Gain on sale of investments 5,900 Increase in accounts payable...
You are considering investing RM70000 in new equipment. You estimate that the net cash flows will...
You are considering investing RM70000 in new equipment. You estimate that the net cash flows will be RM14000 during the first year, but will increase by RM2500 per year the next year and each year thereafter. The equipment is estimated to have a 11-year service life and a net salvage value of RM4600 at that time. Assume MARR of 8%. Answers a.Calculate the annual capital cost CR (ownership cost) for the equipment. b.Determine the equivalent annual savings. c.Is this a...
You are considering investing RM70000 in new equipment. You estimate that the net cash flows will...
You are considering investing RM70000 in new equipment. You estimate that the net cash flows will be RM14000 during the first year, but will increase by RM2500 per year the next year and each year thereafter. The equipment is estimated to have a 11-year service life and a net salvage value of RM4600 at that time. Assume MARR of 8%. a.Calculate the annual capital cost CR (ownership cost) for the equipment. b.Determine the equivalent annual savings. c.Is this a wise...
Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net...
Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net income from operations adjusted for all deferrals of past cash receipts and payments and all accruals of expected future cash receipts and payments.Indirect Method The comparative balance sheet of Yellow Dog Enterprises Inc. at December 31, 20Y8 and 20Y7, is as follows: Dec. 31, 20Y8 Dec. 31, 20Y7 Assets Cash $74,970 $91,680 Accounts receivable (net) 115,190 123,590 Merchandise inventory 164,570 153,180 Prepaid expenses 6,700...
Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net...
Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net income from operations adjusted for all deferrals of past cash receipts and payments and all accruals of expected future cash receipts and payments.Indirect Method List the errors you find in the following statement of cash flows. The cash balance at the beginning of the year was $240,000. All other amounts are correct, except the cash balance at the end of the year. Shasta Inc....
Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net...
Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net income from operations adjusted for all deferrals of past cash receipts and payments and all accruals of expected future cash receipts and payments.Indirect Method The comparative balance sheet of Merrick Equipment Co. for December 31, 20Y9 and 20Y8, is as follows: Dec. 31, 20Y9 Dec. 31, 20Y8 Assets Cash $244,410 $227,360 Accounts receivable (net) 88,540 81,660 Inventories 249,940 241,760 Investments 0 93,660 Land 128,200...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT