Net present value | Accounting homework help

A Private Shipping Company of Bangladesh wants to introduce a passenger ship service for tourism purposes. The Company has two options:

Option 1: One of its passenger ships is in poor condition. This ship can be renovated at an immediate cost of $200,000. Further repairs and an overhaul of the ship will be needed five years from now at a cost of $80,000. In all, the ship will be usable for 10 years if this work is done. At the end of 10 years, the ship will have to be scrapped at a salvage value of approximately $60,000. The scrap value of the ship right now is $70,000. It will cost $300,000 each year to operate the ship, and revenues will total $400,000 annually.

Option 2: As an alternative, the Company can purchase a new ship at a cost of $990,000. The new ship will have a life of 10 years, but it will require some repairs at the end of 5 years. It is estimated that these repairs will amount to $30,000. At the end of 10 years, it is estimated that the ship will have a scrap value of $60,000. It will cost $210,000 each year to operate the ship, and revenues will total $400,000 annually.

The Company requires a return of at least 18% before taxes on all investment projects.

Should the Company purchase the new ship or renovate the old one? Which economic criteria would you select to determine the most profitable course of action? Write specific reasons for your selection.