Singh National Brokers Inc. has decided to purchase a boat. Management has narrowed the choice down to two boats namely the Bluenose and the Sky-rider. The Bluenose will cost $100,000, and is expected to bring the firm $50,000 in additional revenue cash flows per year over the next five years. The Sky-rider, at $250,000, is far more expensive, but is expected to lead to revenue cash flows of $80,000 in the first year and $135,000 in each of the following four years. At the end of five years, the company will give the boat to its president. Singhs cost of capital is 10% and its tax rate is 40%. (Ignore CCA implications.)

Required: Using Payback and NPV methods, rank each boat as 1 or 2 in terms of choice.

(6marks)

Ranking Method

Bluenose

Sky-rider

Payback

1 or 2?

1 or 2?

Net Present Value