Humbolt Shipping Line, Ltd. based in Hamburg, Germany, must continually make significant capital investments in ships. Some of these decisions require comparisons of strategic alternatives. For example, not all of the company’s ships are the same size. Different-sized ships offer alternative advantages and disadvantages. Suppose the company is currently trying to decide between two investment options. It is weighing the purchase of three extremely large ships for a total of €2,500,000 versus five smaller ships for a total of €1,400,000. Information regarding these two alternatives is provided below: Three larger shipd Five smaller ships Initial investment 2,500,000€ 1,400,000€ Estimated useful life 20 years 20 years Annual revenues(accural) 500,000 € 380,000€ Annual expenses(accural) 200,000€ 180,000€ Annual cash inflows 550,000€ 430,000€ Annual cash outflows 222,250€ 206,350€ Estimated salvage value* 500,000€ 0€ Discount rate 9% 9% Instructions Calculate the following parameters of these proposals: cash payback net present value 2.Discuss the implications of your findings. *Estimated Salvage Value: the estimated sales price of the ships after its designated years of use

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Humbolt Shipping Line, Ltd. based in Hamburg, Germany, must continually make significant capital investments in ships. Some of these decisions require comparisons of strategic alternatives. For example, not all of the company’s ships are the same size. Different-sized ships offer alternative advantages and disadvantages. Suppose the company is currently trying to decide between two investment options. It is weighing the purchase of three extremely large ships for a total of €2,500,000 versus five smaller ships for a total of €1,400,000. Information regarding these two alternatives is provided below:

	Three larger shipd	Five smaller ships
Initial investment	2,500,000€	1,400,000€
Estimated useful life	20 years	20 years
Annual revenues(accural)	500,000 €	380,000€
Annual expenses(accural)	200,000€	180,000€
Annual cash inflows	550,000€	430,000€
Annual cash outflows	222,250€	206,350€
Estimated salvage value*	500,000€	0€
Discount rate	9%	9%

Instructions

Calculate the following parameters of these proposals:
1. cash payback
2. net present value

2.Discuss the implications of your findings.

*Estimated Salvage Value: the estimated sales price of the ships after its designated years of use

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