Reference no: EM13290674

The Graham Ferries Ltd is considering the replacement of its existing fleet of its six steam ferrieswith three hydrofoils. The following estimates of costs, and so on, for each vessel have beencalculated:Steam Ferries Estimates Hydrofoils EstimatesEstimated remaining life 5 years Cost $500,000Estimated scrap value:NowIn 5 years¡¦ timeEstimated life 10 years$50,000 Estimated scrap value:In 5 Years¡¦ timeIn 10 years¡¦ time$10,000 $200,000$100,000Annual net cash flows $100,000 Annual net cash flows $200,000Management is also aware of the development of hovercraft, which the manufacturer estimates willbe available in 5 years¡¦ time. The following estimates of costs, and so on, per hovercraft have beenprovided by the manufacturer:Hovercraft EstimatesCost $600,000Estimated life 15 yearsEstimated disposal value:After 5 years¡¦ operationAfter 15 years¡¦ operation$200,000$50,000Annual net cash flows $250,000It is considered that two of the new hovercraft will be adequate to carry the estimated number ofpassengers. Other information is as follows:„h Management cannot foresee any further developments beyond the hovercraft.„h The annual net cash flows are received at the end of the year.„h The company¡¦s required rate of return is 10 percent per annum.You are required to advise the management whether it should:a. Replace the steam ferries with hydrofoils now and replace the latter with hovercraft in 5years time.b. Retain the steam ferries for 5 years, and the replace them with hovercraft.c. Replace the steam ferries with hydrofoils now, and replace the latter with hovercraft in 10years time.Other alternatives are not to be considered.