Straightforward net-present-value and payback computations
STL Entertainment is considering the acquisition of a sight-seeing boat for summer tours along the Mississippi River. The following information is available:
| Cost of boat |
$500,000 |
| Service life |
10 summer seasons |
| Disposal value at the end of 10 seasons |
$100,000 |
| Capacity per trip
Fixed operating costs per season (including straight-line
|
300 passengers |
| depreciation) |
$160,000 |
| Variable operating costs per trip |
$1,000 |
| Ticket price |
$5 per passenger |
All operating costs, except depreciation, require cash outlays. On the basis of similar operations in other parts of the country, management anticipates that each trip will be sold out and that 120,000 passengers will be carried each season. Ignore income taxes.
Instructions:
By using the net-present-value method, determine whether STL Entertainment should acquire the boat. Assume a 14% desired return on all investments,- round calculations to the nearest dollar.