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 per cent 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 per cent greater than the present ship. It is expected that private traffic receipts would increase by £'/2m a year in each year of the forecast. Commercial traffic receipts are expected to increase by 15 per cent in each of the first two years and by 30 per cent in each of the remaining years.
Operating payments would increase by 20 per cent in each year of the forecast.
Additional information:
3 The company’s cost of capital is 15 per cent 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 2005-2009 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) Areport 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 2005 2006 2007 2008 2009 m m m m Em 235 47 347 52 4.5 6 4.5 5 9.0 11 13 6.5 7.5 2.5 3.5 76394