Another alternative was to buy a new boat for $100,000. At the end of 5 years, the alternatives with the new boat would be the same as those with the existing boat. It could be sold for $50,000 or refurbished and kept for either 5 or 10 more years, with an overhaul when it was 10 years old if it were kept for 15 years.

A newer boat would attract more charter business and bring higher weekly fees. Barbara and Jim estimated that revenue per year during the first 5 years of a boat's life would be $50,000, but revenue would decline to $45,000 a year in the second 5 years and $40,000 a year in the third 5 years. The opposite would happen with operating expenses. Annual operating expenses would be $20,000 during the first 5 years, $25,000 during the second 5 years, and $30,000 during the third 5 years.

A new boat would be nice. The Zandts would have to spend less time on maintenance, and would have more time for pleasure. Also, it was fun to buy a new boat. On the other hand, their net worth was $200,000, and they were hesitant to sink half of it into one investment. A boat dealer had suggested that they could avoid the use of their capital by making a 25 percent down payment and borrowing the rest at a 12 percent annual interest rate. This, though, did not seem wise when they were only earning 10 percent on their own investments, which they guessed to be of similar risk to a boat. The dealer pointed out that the interest payments would be tax deductible, but the Zandts were in an income category that made taxes a negligible consideration.

Case Questions

1. List the alternatives to the Zandts.

2. Identify cash flows, net present value, and equivalent annuity for each alternative.