Moray Ferries Ltd own a single ship which provides a short sea ferry service for passengers, private vehicles and commercial traffic. The present ship is nearing the end of its useful life and the company is considering the purchase of a new ship.
The forecast operating budgets using the present ship are as follows:

The ships being considered as a replacement are as described below.
1 Ship A. Cost £10m
This ship is of similar capacity to the one being replaced, but being a more modern ship it is expected that extra business would be attracted from competitors. It is anticipated therefore that estimated revenue receipts would be 10% higher in each year of the present forecast. There would be no change in operating payments.
2 Ship B. Cost £14m
This modern ship has a carrying capacity 30% greater than the present ship. It is expected that private traffic receipts would increase by £1/2m a year in each year of the forecast. Commercial traffic receipts are expected to increase by 15% in each of the first two years and by 30% in each of the remaining years.
Operating payments would increase by 20% in each year of the forecast. 

Additional information:
3 The company’s cost of capital is 15% per annum.
4 It is company policy to assume that ships have a life of 20 years.
5 It should be assumed that all costs are paid and revenues received at the end of each year.

6 The following is an extract from the present value table for £1:

7 All calculations should be made correct to three places of decimals.

Required:
(a) Revised operating budgets for 2017–2021 for each of the alternatives being considered.
(b) Appropriate computations using the net present value method for each of the ships, A and B.
(c) A report providing a recommendation to the management of Moray Ferries Ltd as to which course of action should be followed. Your report should include any reservations that you may have.

Transcribed Image Text:

Estimated revenue receipts Private traffic Commercial traffic Estimated operating payments 2017 £m N 35 || 2 4 1 2018 £m 35 N 4 2 2019 £m 4.5 4.5 9.0 6.5 2.5 2020 £m 6 5 11 7.5 3.5 2021 £m 7 6 13 9 4