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How much is the present value of new and second hand boats

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Question - A fishing company is going to buy some boats. The second hand boats will cost $1 million and last three years. Additional second hand boats can be bought in the future with the same price. The prices of new boats will be $3 million and last ten years. Both second hand boats and new boats will produce net benefit of $800,000 every year. The boats are purchased in year 0 and the relevant discount rate is 7% (round to whole number when calculating)

Required -

1) How much is the present value of the new and second hand boats?

2) Calculate and compare the equivalent annuity values for both options. Should the company buy the used ones or new ones?

Reference no: EM133155595

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