Little Boat, Inc. has a boat that is worn out. It must be either overhauled or replaced with a new boat. You have been given the following information:
Old Boat New Boat
Purchase cost new 31,500 45,000
Remaining book value 17,250
Overhaul needed now 10,500
Annual cash operating costs 15,000 7,500
Salvage value now 13,500
Salvage value eight years from now 1,500 6,000
If the company keeps and overhauls the old boat, it will be useable for eight more years. If the company buys a new boat it will be used for eight years and then traded on another boat. Depreciation is computed on a straight line basis. All alternatives are evaluated using a 16% discount rate. Ignore all income taxes.
Required:
a] Using the total cost approach to NPV, should Little Boat, Inc. keep the old boat or purchase the new one (round all numbers to the nearest dollar)?
b] Using the incremental cost approach to NPV, should Little Boat, Inc. keep the old boat or purchase the new one (round all numbers to the nearest dollar)?
c] Are the results in (a) and (b) different? Why or why not?