ACC 206 Week 5 Problem 4 Net-present-value (Updated October 2013).

DOWNLOAD: ACC 206 Week 5 Problem 4 Net-present-value (Updated October 2013).

 Net-present-value

ABC 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                                                                             $550,000

Service life                                                                                 10 summer seasons

 Disposal value at the end of 10 seasons                             $100,000

Capacity per trip                                                                       260 passengers

Fixed operating costs per season (including straight-line

depreciation)                                                                             $160,000

Variable operating costs per trip                                           $1,000

Ticket price                                                                                $6 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 130,000 passengers will be carried each season. Ignore income taxes.

 Instructions:

By using the net-present-value method, determine whether ABC Entertainment should acquire the boat. Assume a 14% desired return on all investments,- round calculations to the nearest dollar.