At least 800 soldiers, two frigates, two missile boats and two S-70C anti-submarine helicopters were mobilized for the drill, which reached its climax as a torpedo launched from "Hai Hu" (Sea Tiger), a Dutch-built Sword Dragon-class submarine, hit its target.
"The purpose of the drill is to examine the attack capabilities of the Sword Dragon-class submarine," the navy said in a statement.
The exercise presided over by naval commander Admiral Chen Pang-chih was televised live to dozens of journalists invited to the naval base, in a gesture apparently intended to boost the navy's image, which was marred after a torpedo missed a target during a similar exercise last year.
In Taipei, President Chen told Edwin Feulner, head of the US Heritage Foundation, his government would strive to acquire sophisticated weaponry.
"We fully understand that in the face of China's rise, particularly its military rise, we have to strengthen our self-defense capabilities," Chen said.
Washington has warned there would be "repercussions" for the United States if Taiwan failed to approve a controversial arms budget.
The amended 340 billion Taiwan dollar (10 billion US) bill, to be submitted for approval in the opposition-controlled parliament this week, calls for the purchase of eight conventional submarines and 12 P-3C submarine-hunting aircraft from the United States over a 15-year period.
Chen from the Democratic Progressive Party had accused the opposition of acting "irresponsibly" in blocking the arms package in the face of what Taipei perceives as a growing military threat from China.
China has deployed up to 730 ballistic missiles opposite the island which it regards as part of its territory, the Pentagon said in a report last month.
In December the legislature's procedure committee killed the original arms procurement bill, which was priced at more than 610 billion Taiwan dollarsbillion US).
The committee again blocked an amended version of the bill, with spending reduced to 480 billion Taiwan dollars, earlier this year.
Some opposition lawmakers said Taiwan could not afford the arms deal while others said the equipment would be delivered too slowly to enable the island to catch up with China's military build-up.
Relations between China and Taiwan, which split in 1949 at the end of a civil war, have worsened since independence-leaning Chen was elected president in 2000. He was re-elected last year.