Humbolt Shipping Line, Ltd. based in Hamburg, Germany, must continually make significant capital investments in ships. Some of these decisions require comparisons of strategic alternatives. For example, not all of the company’s ships are the same size. Different-sized ships offer alternative advantages and disadvantages. Suppose the company is currently trying to decide between two investment options. It is weighing the purchase of three extremely large ships for a total of €2,500,000 versus five smaller ships for a total of €1,400,000. Information regarding these two alternatives is provided below: Three larger shipd Five smaller ships Initial investment 2,500,000€ 1,400,000€ Estimated useful life 20 years 20 years Annual revenues(accural) 500,000 € 380,000€ Annual expenses(accural) 200,000€ 180,000€ Annual cash inflows 550,000€ 430,000€ Annual cash outflows 222,250€ 206,350€ Estimated salvage value* 500,000€ 0€ Discount rate 9% 9% Instructions Calculate the following parameters of these proposals: internal rate of return annual rate of return 2.Discuss the implications of your findings. *Estimated Salvage Value: the estimated sales price of the ships after its designated years of use
Humbolt Shipping Line, Ltd. based in Hamburg, Germany, must continually make significant capital investments in ships. Some of these decisions require comparisons of strategic alternatives. For example, not all of the company’s ships are the same size. Different-sized ships offer alternative advantages and disadvantages. Suppose the company is currently trying to decide between two investment options. It is weighing the purchase of three extremely large ships for a total of €2,500,000 versus five smaller ships for a total of €1,400,000. Information regarding these two alternatives is provided below: Three larger shipd Five smaller ships Initial investment 2,500,000€ 1,400,000€ Estimated useful life 20 years 20 years Annual revenues(accural) 500,000 € 380,000€ Annual expenses(accural) 200,000€ 180,000€ Annual cash inflows 550,000€ 430,000€ Annual cash outflows 222,250€ 206,350€ Estimated salvage value* 500,000€ 0€ Discount rate 9% 9% Instructions Calculate the following parameters of these proposals: internal rate of return annual rate of return 2.Discuss the implications of your findings. *Estimated Salvage Value: the estimated sales price of the ships after its designated years of use
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Humbolt Shipping Line, Ltd. based in Hamburg, Germany, must continually make significant capital investments in ships. Some of these decisions require comparisons of strategic alternatives. For example, not all of the company’s ships are the same size. Different-sized ships offer alternative advantages and disadvantages. Suppose the company is currently trying to decide between two investment options. It is weighing the purchase of three extremely large ships for a total of €2,500,000 versus five smaller ships for a total of €1,400,000.
Information regarding these two alternatives is provided below:
| Three larger shipd | Five smaller ships | |
| Initial investment | 2,500,000€ | 1,400,000€ |
| Estimated useful life | 20 years | 20 years |
| Annual revenues(accural) | 500,000 € | 380,000€ |
| Annual expenses(accural) | 200,000€ | 180,000€ |
| Annual |
550,000€ | 430,000€ |
| Annual |
222,250€ | 206,350€ |
| Estimated salvage value* | 500,000€ | 0€ |
| Discount rate | 9% | 9% |
Instructions
- Calculate the following parameters of these proposals:
internal rate of return - annual rate of return
2.Discuss the implications of your findings.
*Estimated Salvage Value: the estimated sales price of the ships after its designated years of use
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