Question
Grape Corporation (GRA) operates helicopter tours. It is evaluating whether to purchase a new helicopter to operate scenic tours around Hamilton Island. GRA currently has
Grape Corporation (GRA) operates helicopter tours. It is evaluating whether to purchase a new helicopter to operate scenic tours around Hamilton Island. GRA currently has two other helicopter tours operating (the Brisbane tour and the Cairns tour).
The Hamilton Island helicopter costs $500,000, is expected to be used for a 12 year project duration, and the tax office rules state this helicopter can be depreciated to zero over a 16-year life. Administrative costs for the company will remain at the current level of $150,000 per year.
The CEO of GRA wants the market research costs of $9,000 incurred last year to be split evenly during the Hamilton Island helicopters useful life.
Advertising costs associated with the new Hamilton Island helicopter will cause GRAs total yearly advertising expense to increase by $100,000 to $250,000. In addition, the Hamilton Island helicopter tour is anticipated to have annual costs of $210,000, and annual sales of $600,000.
Due to cannibalisation, the introduction of the Hamilton Island helicopter tour will reduce annual sales associated with the Brisbane and Cairns helicopter tours by a combined total of $200,000 per annum. Assume the company tax rate is 30%.
What are the 'cash flows over the life'?
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