Reference no: EM132803388
Calculating 'cash flows over the life'
Koala Enterprises operates eco-tourism boat tours. It is evaluating whether to purchase a new jetboat to operate scenic thrill rides around Hamilton Island. The jetboat costs $1,500,000. The jetboat project is expected to last for ten years. Koala Enterprises currently has two other boat tours operating (the snorkelling boat tour and glass bottom boat tour).
Last year Koala Enterprises spent $7,000 on market research to assess consumer interest in jet boat rides around Hamilton Island. The CEO recommends this cost be included in this project evaluation and be spread over the ten years. The market research indicates that the introduction of the jetboat rides will reduce annual sales associated with glass bottom boat tour by 10% of its current level of $440,000 per annum.
Annual revenues from the jetboat rides are anticipated to be $750,000. The jetboat rides will increase Koala Enterprises' total annual operating costs from $400,000 to $650,000. Marketing costs for the company will remain at the current level of $150,000 per year. The CEO suggests spreading these costs equally over the three boat tours.
ATO rules state the jetboat can be depreciated to zero over a 15-year life. Administration expenses associated with the jetboats will cause Koala Enterprises' total yearly administration expense to increase by $10,000 to $30,000.
Assume the company tax rate is 30%.
What are the 'cash flows over the life'?