Little Boat, Inc. has a boat that is worn out. It must be either overhauled or replaced with a new boat. You have been given the following information:

If the company keeps and overhauls the old boat, it will be useable for eight more years. If the company buys a new boat it will be used for eight years and then traded on another boat. Depreciation is computed on a straight line basis. All alternatives are evaluated using a 16% discount rate. Ignore all income taxes.

Required:

a. Using the total cost approach to NPV, should Little Boat, Inc. keep the old boat or purchase the new one (round all numbers to the nearest dollar)?

b. Using the incremental cost approach to NPV, should Little Boat, Inc. keep the old boat or purchase the new one (round all numbers to the nearest dollar)?

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Old Boat New Boat 45,000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now 31,500 17,250 10,500 15,000 7,500 13,500 1,500 6,000