Rudy's boat rentals is considering replacing its 5 year old Lowe fishing boats with top of the line Boston Whalers. The Lowe boats have five years of remaining life and will being depreciated at $2,000 per year over the next five years. If they are not replaced, and would have zero salvage value at that time. The boats can currently be sold for $12,000 each. The new Boston Whalers would each cost $25,000 and because of expected increase rentals would have an expected life of only five years and no additional working capital would be required. The boats would be depereciated straight-line to a zero salvage value. They could actually be sold for $10,000 in five years, The new boats are expected to increase revenue by $4,000 per year and have an associated increase in expenses of $1,000 per year. Rudy's required rate of return is 11% and his marginal tax rate is 40%. Conduct your analysis on the replacement of one boat.
What is your inital cash flow? a. -13,800 b. -25,000 c. -13,000 d. -10,000
What is your year one after tax cash flow? a. $5,000 b. $10,000 c. $2,200 d. $3,800
What is the terminal cash flow (not including the year 5 operating cash flow) a. $10,000 b. $6,000 c. $-4,000 d. $22,000