Singh National Brokers Inc. has decided to purchase a catamaran, in order to entertain clients when they visit the Caribbean office in Barbados. Management has narrowed the choice down to two boats manufactured by Luxury Boats Inc., 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 additional 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 44%. (Ignore CCA implications.)

Required: **READ VERY CAREFULLY** 1) (10 marks) (a) Place your answer for each of the proposals by ranking method in the table below. (b) For each ranking method, what is the better choice? Bluenose or Sky-rider? Circle the better choice. (There should be only ONE answer circled PER row.)

Ranking Method Bluenose Sky-rider Payback Net Present Value Internal Rate of Return Profitability Index

(NOTE: Show all your work on the next page. No marks without supporting calculations.)

2) (2 marks)

Why is the NPV regarded as the primary capital budgeting decision criterion?