Question

deep channel ferry company is evaluating whether to purchase a more fuel-efficient boat or continue to use the boat they currently own. both boats are identical except for the engine. the fuel-efficient boat costs $620,000, has an estimated service life of five years, has no salvage value, and will have variable operating costs of $100,000 per year. the boat currently owned had an original cost of $320,000, has an existing book value of $160,000, has an estimated remaining service life of five years, has no salvage value at the end of its service life, has a current disposal value (now) of $120,000, and has variable operating costs of $200,000 per year. ignoring present value and tax considerations, what should deep channel do?

Answer 1

The Deep Channel Ferry Company is evaluating whether to buy a new fuel-efficient boat or to continue using their current boat. The costs over the next five years for both options are identical at $1,120,000. Therefore, the decision could be based on non-financial factors as both boats present the same financial cost when not considering factors like tax or present value considerations.

Step-by-step explanation:

The Deep Channel Ferry Company needs to decide whether to purchase a more fuel-efficient boat or to continue using its current boat. To evaluate this decision, we need to compare the costs associated with both options over the next five years, since that is the remaining service life of the current boat and the estimated service life of the new boat.

For the new boat:

• Initial purchase cost: $620,000
• Annual operating costs: $100,000 x 5 = $500,000
• Total cost over five years: $620,000 + $500,000 = $1,120,000

For the current boat:

• Disposal value now: $120,000
• Cost of forgoing disposal value (opportunity cost): $120,000
• Annual operating costs: $200,000 x 5 = $1,000,000
• Total cost over five years if kept: $1,000,000 + $120,000 = $1,120,000

Since the total costs over five years are the same for both boats and there are no other financial considerations mentioned (like tax or present value considerations), Deep Channel Ferry Company could base their decision on non-financial factors such as environmental benefits, public image, and long-term savings after the five-year mark. However, if only the next five years are considered, there is no clear financial advantage to purchasing the new fuel-efficient boat.