ZANDTS’ CHARTER SAILBOAT of 12-hour workdays in suce a comfortable financie' After spending over a decade essful management | position. But they jobs, Barbara and Jim Zandt were inSummary ¢ 208 ka ga strong nood to gt vay the couple ti tc no tine for thomenivo, Feeling ge ny tho couple 0k Sar aint out of St.Thomas inthe Vira eS eyed cud tla vos ante spend hi ives, Fo theme youre hy penal fir vacation tn a sing courses and al of ir spare'time studying, both to enbanco sailing skills and to understand their business. The Zandts learned tha individuals who used the boats as tax shelter invest ‘wooks a year on their boats. By joining sevoral sailing clubs, advertising in most charter sailboats were owned by wealthy nts, spending no more than 4 sailing magazine, and inquiring among their personal contacts, they found a physician who agreod to purchaso a sailboat as an investment. The physician while the Zandts would receive a fs captain, crew, and manager. Dbut the tax laws changed during theadvantagos: trout bear all operating cost e the owe percent of gross charter foes for ther servic The amangeieat worked fina for 6 yor that period Typically, boats wore kept in chartor for 5 years nt af rap deprecation bad boon used up, The owner would then trae fora new Beaton pull the ld bout out of charter service for personal ure, Unfortunately, the new tax la eliminated investment tax credits and decronsed the rate of depreciation. The physician wanted to sll tho 5-year old bont and did not want tormplace it Finding anor investor seomed unlikely in tho new tax environ: Imont Ifthe Zandts wanted t continue in this ifesyle, they would have to buy @ boat themsaves The Zan fend several alma, Thy could buy the cunt boat ©) from the physician for $50,000. twas due for refurbishing, which would cost $10,000. IF they kept this boat for 5 years, it could be sold lor approximately $25,000. If they kop this boat for 10 year, it could be sold for $15.000, but an overhaul after § years would cost $20,000. if Another alternative was to buy a new boat for $100,000. At the end of § **) years, the alternatives with the new boat would be the same as those with the ‘existing boa. It could be sold for $50,000 or refurbished and kept for either 5 or 30:more years, with an overhaul when it was 10 yors old if it were hept for se vars. ‘A newer boat would attract more chartor business and brig higher weekly. 4%) fees, Barbara and jim estimated that revenue per year during the frst 5 years of 8 boat's life would be $50,000, but revenue would decline to $45,000 a year in) the second 5 years and $40,000 a year in the third 5 years, The opposite would Sappen with operating expenses. Annual operating expenses would be $20,000 luring the frst 5 years, $25,000 during the second 5 years, and $30,000 dus the third 5 years i ee A new boat would be nice. The Zandts would have to i j ‘would have to spend less time on pe Baumnce and would have more time for pleasure, Also, it was fun to buy a “aan {he other hand, their ot worth was $200,000, and they were host: io sink half of it into one investment. A boat dealer had ee pe , + had suggested that they bomaysv2id the use of their capital by making a 25 porcent dows payment and borrowing the rest at a 12 ee interest rate. This, though, did not204 © Chapter 7 © Ranking Mutually Exclusive Investments when they were only earning 10 percent on their own investments, seem wise which they guessed to be of similar risk to a boat. The dealer pointed out that the ible, but the Zandts were in an income ‘onsideration. f interest payments would be tax dedui category that made taxes a negligible c Case Questions 1. List the Zandts’ alternatives, 2. Identify cash flows, net present value, and equivalent annuity for each alternative. 3. Discuss the risks that are inherent in each alternative. 4. Do the Zandts have a competitive advantage? Is there anything they can do to create or enhance 4 competitive advantage? 5. Which alternative would you recommend? Why?