Reference no: EM133014961

Question - XYZ Park Entertainment Inc. operates a tour and sightseeing business in Palawan. Their trademark is the use of trolley buses. Each vehicle has its own identity and is specially made for the company. Queenly, the name of the oldest bus, was purchased 15 years ago and has five years of its estimated life remaining. The company paid 350,000.00 for Queenly whose current market value is $200,000.

Queenly is expected to generate an annual net income of 220,000 before taxes for the remainder of its useful life.

Management wants to replace Queenly with a modern-looking vehicle called Kingly. Kingly has a purchase price of 1,200,000 and a useful life of 20 years. Net income before tax is projected to be as follows:

Years Annual net income

1 to 5 ?450,000

6 to 10 500,000

11 to 20 600,000

Assume that:

-All cash flows occur at year-end;

-The company uses a straight line depreciation method;

-The vehicle's salvage value equals 10 percent of the purchase price;

-The minimum desired after tax rate of return is 16 percent;

-The company is in the 32 percent income tax bracket.

Required -

-Compute the net present value of the future cash flows from Queenly?

-What is the present value of cash flows that would result if Kingly were purchased?

-Should the company keep Queenly or purchase Kingly?