STL Entertainment is considering the acquisition of the sight-seeing boat for summer tours all along the Mississippi River. The given 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 300 passengers, Fixed operating costs per season (comprising straight-line depreciation) $160,000, Variable operating costs per trip $1,000, Ticket price $5 per passenger
All the operating costs, except depreciation, need 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 the income taxes.
Instructions:
By utilizing the net-present-value method, find out whether STL Entertainment must acquire the boat. Suppose a 14% desired return on all investments- round computations to the closest dollar.