A marina on Lake Michigan is considering purchasing a boat to rent during the summer months to water skiers. The marina requires a 15% annual return on such investments. The boat is expected to generate cash flows of $2500 a month during the months of July and August and $1000 a month for June and September. The boat will last two years and then be worthless. If the marina plans to purchase the boat on June 1 of this year, what is the present value of the boat investment to the marina (what is the right price it should pay to get a 15% annual return on the investment)? If the cost of the boat is $17,500, do you think the marina should make the investment? (by convention the cash flows generated by the boat are assumed to occur at the end of each month).

Suggestions

Considering that the marina plans to purchase the boat on June 1:

CF1 the first cash flow is expected to be generated at the end of June, one month from time 0 (June 1^st) therefore Ill discount it back for one period

CF 2 the second cash flows is expected to be generated by the end of July, two months from time 0 therefore Ill discount it back for two periods.

CF3 The third cash flow arrives at the end of August, three months from time 0 therefore Ill discount it back for three periods.

CF4 the fourth cash flow is expected to be generated four months from today therefore.

CF13 the fifth cash flow is expected to be generated at the end of June next year, thirteen months from Today (I must discount it back for 13 periods n= 13)

CF14

CF15

CF16