Reference no: EM132584407

Point 1: The Jai Company provides a ferry service across the river Ganga. One of its ferry boats is in poor condition. The ferry boats can be renovated at a accost of Rs. 20,000. Further repairs and overhaul of the motor will be needed five years from now at a cost of Rs. 8,000. In all, the ferry will be usable for 10 years if this work is done. At the end of ten years, the ferry will have to be scrapped at salvage value of approximately Rs. 5000.

Point 2: It will cost Rs. 16,000 each year to operate the ferry. As an alternative, Jai Company can purchase a new ferry boat at a cost of Rs. 40,000. It will have a life of 10 years, but will also require some repairs at the end of five years. It is estimated that these repairs will amount to Rs. 2500. At the end of 10 years, it is estimated that the ferry will have a scrap value of Rs. 5000. It will cost Rs. 12,000 each year to operate the ferry. The company requires a return of at least 18% on all investments.

Question 1: Should the company purchase the new ferry or renovate the old one?