Parramatta Scenic Cruises Pty Ltd (PSC) is a family-owned ferrybusiness that operates on Sydney’s Pa

Parramatta Scenic Cruises Pty Ltd (PSC) is a family-owned ferrybusiness that operates on Sydney’s Parramatta River. Jane Jetsonfounded the company when she arrived in Australia and remains theChief Executive Officer. Jane’s two children, Judy and Elroy,occupy key management roles in PSC. Judy Jetson is the ChiefFinancial Officer and Elroy Jetson is the tax accountant. PSCreported sales of $11 million for the 2017 financial year. 2) PSC is investigating a proposal to renew part of their fleetthat involves replacing an existing ferry with a new, faster,330-seat ferry costing $3 million. Judy is concerned that the netprofit of the new ferry won’t generate a fast enough paybackperiod. Therefore, she has discussed her concerns with Jane. Janecarefully explains to Judy the many reasons that profitability isnot a good measure of financial success. Judy then prepares toconduct a rigorous cost-benefit analysis to ensure that the newferry is financially viable. 3) Last month, Judy and Jane paid for a study by SeaWay ConsultingP/L at a cost of $487,000 and the study concluded that the largeand growing tourism market will generate sufficient demand for anew ferry. Today, PSC must decide if they will proceed with theinvestment in the new ferry and the associated sale of theirexisting ferry. 4) Elroy is really excited about the new ferry. It is a 34-metre,119 tonnes displacement ferry capable of 35 knots with two cabinsand four outside decks with a capacity for 330 passengers.According to the Australian Taxation Office (ATO) the new ferry hasa sixteen-year life for taxation purposes. 5) NSW Maritime requires that all vessels have a Certificate ofOperation that indicates that the vessel has been inspected andfound to comply with the minimum standards set out in NSW maritimelegislation. The compulsory certificate is required before PSCcommences operations with the new ferry. Certification requires PSCto spend $200,000 on safety equipment. The certificate expires fouryears later at which time the ferry must be recertified and thesafety equipment replaced at an estimated cost of $200,000.Recertification must occur every four years. 6) Because of limitations on the number of vessels at particularwharves on the Parramatta River the new ferry will replace anexisting ferry. Even though the new ferry has an effective life offifteen years, the Jetson family will operate the ferry for tenyears only. Jane has arranged for the sale of the existing ferryfor $300,000 today. If they don’t proceed with the new ferry PSCwill continue to operate the existing ferry for ten years. Theexisting ferry was purchased six years ago for $2 million. Elroystates that the annual depreciation expense of $200,000 per annumis based on the ten-year tax life at the time of purchase. Theexisting ferry has a current book value of $800,000. 7) Elroy has suggested that because the new ferry is analysed overa ten-year time period they need to ensure that they recover allthe costs they have incurred to date. Therefore, he recommends the$487,000 SeaWay Consulting fee be allocated equally over theten-year analysis period. 8) PSC will borrow $2 million using a secured ten-yearinterest-only loan at an interest rate of 5% per annum to partlyfinance the new ferry. The loan requires annual interest paymentsof $100,000 starting in one year’s time. Today, inventory will needto increase by $110,000 to $610,000. Accounts receivable willincrease to $750,000 from the current figure of $660,000. 9) At the moment PSC is leasing their Harris Park wharf facility toan unrelated entity for $85,000 p.a. The introduction of the newferry will require that PSC use the wharf on a full-time basis. Inthis case, PSC must terminate the lease agreement. There is debateamong the family members if this lease agreement is an example of asunk cost or not. 10) At the moment, the existing ferry generates annual cash salesof $1,400,000. This sales figure is predicted to remain constantfor each of the next ten years. The new ferry is predicted togenerate cash sales in year one of $1.8 million in year 1 and thissales forecast is anticipated to increase by 4% per annum for theforeseeable future. 11) Judy has gathered some information regarding current andexpected costs. At the moment, fixed costs are $400,000 per annum.Fixed costs would rise to $500,000 in year one with the new ferry.PSC is confident that they can reduce the increase in fixed costsby 2% p.a. after the first year. Wages expense is currently$900,000 each year and is predicted to increase to $1.4 millionwith the introduction of the new ferry. Judy reminds the familyabout the importance of incremental cash flow items when performinga financial analysis. 12) The current annual maintenance cost of the existing ferry is$63,000. The new ferry will require no maintenance in the firstthree years of its life because it is covered by a manufacturer’sthree-year warranty. However, after the warranty expires in year 4the annual maintenance expense will be $87,000. Jane has advisedthat PSC has an insurance policy that will insure any number of thecompany’s vessels at a fixed annual fee of $145,000. 13) It costs $175,000 a year to operate PSC’s head office andmarina on the Parramatta River at Harris Park. With carefulmanagement PSC believes they will not require any additionalpersonnel in headquarters if they purchase the new ferry. In anycase, the annual head office operating expense will increase byjust 2% each year. 14) The ATO classifies the safety equipment required for theCertificate of Operation as a business expense, and that expensesincurred in running PSC are tax deductible in the year the expenseis incurred. 15) SeaWay Consulting’s report estimates that the new ferry willhave a market value of $1 million in ten years’ time. The existingferry has a book value of $800,000 today and can be sold for$300,000 today. PSC will use these sale proceeds to distribute a$300,000 dividend to its shareholders today. SeaWay Consultingadvises that in ten years’ time the existing ferry would beworthless. 16) The company tax rate is 30% and the required rate of return is12%. Capital Budgeting Information Present an itemised breakdown (and the total) for each of thefollowing: 1. The cash flows at the start. 2. The cash flows over the life. 3. The cash flows at the end. 4. The NPV of the new ferry and an explanation of yourrecommendation. . . .

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