56575147 economy shipping case answers

DataGiven

Summary of the case

Data Given in the case

Useful life of Cynthia on rehabilitation 20 yearsBook value of Cynthia now $39,500.00Rehabilitation costs $115,000.00Salvage value of Cynthia $25,000.00

Cost of spare parts $43,500.00Rehabilitation costs when spare parts are used $71,500.00Salvage value of spare parts $30,000.00

Annual operating costs of Cynthia $203,150.00

Cost of Diesel Boat $325,000.00Basic parts inventory $75,000.00Life of Diesel Boat 25 yearsOverhaul costs for diesel boat every 10 years $60,000.00Annual operating costs of diesel boat $156,640.00Salvage value of diesel boat at end of 20 years $32,500.00Salvage value of inventory at end of 20 years $37,500.00

Additional costs of converting Cynthia $40,000.00Costs of conversion after rehabilitation $70,000.00Annual operating costs of Cynthia after conversion$191,450.00

Estimated opportunity cost of capital 0.1Income tax rate 0.48

Shareholder Equity ###Short term liability $150,000.00Rate of interest on short term Liability 0.03

Annual rental costs of renting a diesel boat for 15 years$21,700.00Interest charges on renting diesel boat for 15 years $5,700.00Annual rental 16th year onwards $2,850.00

DataGiven

Total cost of renting the boat – rental+operational expenses

Depreciation:Assumption:Though the case pertains to time period of 50's we are using a 20 year depreciation schedule

The schedule runs as follows

Year %age1 3.752 7.223 6.684 6.185 5.716 5.287 4.898 4.529 4.46

10 4.4611 4.4612 4.4613 4.4614 4.4615 4.4616 4.4617 4.4618 4.4619 4.4620 4.4621 2.25

100

OTHER ASSUMPTIONS

Tax rate will remain constant at .48All figures have been stated in real terms, inflation ignored The Operating Expenses reported each year will remain constantOpportunity Cost of Capital is considered as an expenseTax shield is effectively cost saving as the firm can use that against profit made on other boats/ships

DataGiven

DataGiven

Though the case pertains to time period of 50's we are using a 20 year depreciation schedule

Tax shield is effectively cost saving as the firm can use that against profit made on other boats/ships

Income

25,000.00 25,000.00 25,000.00

30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00

4,830.92

5,574.14Total Income 30,000.00 65,405.05 55,000.00 55,000.00 30,000.00 30,000.00 0.00

Expenses

-25,000.00 -25,000.00 -25,000.00 -25,000.00Purchase of diesel boat -325,000.00 -325,000.00

-30,000.00

-115,000.00 -155,000.00 -178,636.36 -71,500.00PV of operating cost -1,729,363.68 -1,333,632.96 -1,421,821.28 -1,421,821.28 -1,630,005.30 -1,659,010.23 -1,729,363.68PV of overhauling -23,132.60 -32,051.22 -32,051.22Inventory -75,000.00 -75,000.00 -75,000.00PV of annual payment -212,596.93

-2,318.84

-2,675.59Tax on income -14,400.00 -31,394.43 -26,400.00 -26,400.00 -14,400.00 -14,400.00 0.00Total expenses -1,883,763.68 -1,793,154.41 -1,880,272.50 -1,767,869.43 -1,824,405.30 -1,877,046.59 -1,855,863.68

Tax shields

830,094.57 640,143.82 682,474.21 682,474.21 782,402.54 796,324.91 830,094.57

8,387.99 8,387.99 8,387.99

24,420.73 32,914.89 46,322.16 15,183.32

102,046.53

11,103.65 15,384.58

REHABILITATING CYNTHIA WITHOUT SPARE PARTS

BUYING DIESEL BOAT FOR 20 YEARS


CONTRACTING DIESEL BOAT FOR 25 YEARS

CONVERTING CYNTHIA IMMEDIATELY

CONVERTING CYNTHIA 1 YR FROM NOW

REHABILITATING CYNTHIA WITH SPARE PARTS

Income by selling Cynthia

Income by selling spare parts

PV Scrap value of diesel boat

PV Scrap value of inventory parts

Opportunity cost of not selling Cynthia

Opportunity cost of not selling spare parts

Cost of converting Cynthia

PV of tax to be paid on undervalued boat

PV of tax to be paid on undervalued inventory

PV of tax shield due to operating expenses

Depreciation of Cynthia's book value

Depreciation of Cynthia after rehabilitation

PV of tax shield from annual payments

PV of tax shield from overhaul expenses

REHABILITATING CYNTHIA WITHOUT SPARE PARTS




CONVERTING CYNTHIA IMMEDIATELY

CONVERTING CYNTHIA 1 YR FROM NOW

REHABILITATING CYNTHIA WITH SPARE PARTS

6,960.00 6,960.00 6,960.00

15,926.56 15,926.56 15,926.56 8,525.59

6,480.00 6,480.00 6,480.00 6,480.00 6,480.00 6,480.00

69,015.10 69,015.10Total Tax Shield 869,383.28 749,629.12 796,240.45 813,887.30 830,185.42 849,127.07 862,191.46

Net Cost -984,380.40 -978,120.23 -1,029,032.04 -898,982.13 -964,219.88 -997,919.52 -993,672.22Annuity factor 8.51 8.51 9.08 9.08 8.51 8.51 8.51

Equivalent annual cost -115,619.03 -114,883.75 -113,366.98 -99,039.56 -113,251.10 -117,209.25 -116,710.38

Loss from selling Cynthia due to difference in MV and BV

PV of tax shield by depreciating inventory

PV of tax shield from spare parts

PV of tax shield by depreciating diesel boat

0.1

Tax Rate 0.48

Opportunity cost of capital

0.1

Opportunity cost of capital

Scenario 1

COST COMPUTATION OF REHABILITATING CYNTHIACase: Without spare parts

OPPURTUNITY COST OF CAPITAL 0.1DISCOUNT FACTOR 1.1

DEPRECIATION OF CYNTHIA

BOOK VALUE OF CYNTHIA

YEAR

123456789

101112131415161718192021

TOTAL DEPRECIATED VALUE

TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA

ADDITIONAL YEARS OF LIFE 20REHABILITATION COST $115,000.00

YEAR

Scenario 1

123456789

101112131415161718192021


PV TAX SHIELD

OPPORTUNITY COST OF NOT SELLING CYNTHIA $25,000.00

ANNUAL OPERATING COSTS $203,120.00OPPURTUNITY COST OF CAPITAL 0.1ANNUITY FACTOR ( .1, 20 YRS) 8.51PV OF OPERATING COSTS $1,729,363.68

TAX SHIELD FROM OPERATING EXPENSES $97,497.60PV OF TAX SHIELD FROM OPERATING EXPENSES $830,094.57PV TAX SHIELD FROM REHAB COSTS $24,420.73NET TAX SHIELD FROM DEPRECIATING CYNTHIA $8,387.99PV OF SELLING SPARE PARTS 30000TAX FOR MONEY ACQUIRED ON SELLING SPARE PARTS 14400

6480NET INCOME FROM SELLING SPARE PARTS 22080CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS

TOTAL COSTS $1,847,283.68TOTAL TAX SHIELDS $862,903.28

TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV

Scenario 1

NET COST $984,380.40EQUIVALENT ANNUAL COSTS $115,619.03

Scenario 1


$39,500.00

DEPRECIATION %WRITE OFF AMNTTAX SHIELD PRESENT VALUE OF TAX SHIELD

3.75 $1,481.25 $711.00 $646.367.22 $2,851.90 $1,368.91 $1,131.336.68 $2,638.60 $1,266.53 $951.566.18 $2,441.10 $1,171.73 $800.315.71 $2,255.45 $1,082.62 $672.225.28 $2,085.60 $1,001.09 $565.094.89 $1,931.55 $927.14 $475.774.52 $1,785.40 $856.99 $399.794.46 $1,761.70 $845.62 $358.624.46 $1,761.70 $845.62 $326.024.46 $1,761.70 $845.62 $296.384.46 $1,761.70 $845.62 $269.444.46 $1,761.70 $845.62 $244.944.46 $1,761.70 $845.62 $222.684.46 $1,761.70 $845.62 $202.434.46 $1,761.70 $845.62 $184.034.46 $1,761.70 $845.62 $167.304.46 $1,761.70 $845.62 $152.094.46 $1,761.70 $845.62 $138.264.46 $1,761.70 $845.62 $125.702.25 $888.75 $426.60 $57.65

TOTAL DEPRECIATED VALUE $39,500.00

TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA $8,387.99

-- THIS IS A CAPITAL EXPENSE TO BE DEPRECIATED OVER 20 YEARS

DEPRECIATION %WRITE OFF AMNTTAX SHIELD PRESENT VALUE OF TAX SHIELD

Scenario 1

3.75 $4,312.50 $2,070.00 $1,881.827.22 $8,303.00 $3,985.44 $3,293.756.68 $7,682.00 $3,687.36 $2,770.376.18 $7,107.00 $3,411.36 $2,330.005.71 $6,566.50 $3,151.92 $1,957.095.28 $6,072.00 $2,914.56 $1,645.194.89 $5,623.50 $2,699.28 $1,385.164.52 $5,198.00 $2,495.04 $1,163.954.46 $5,129.00 $2,461.92 $1,044.094.46 $5,129.00 $2,461.92 $949.184.46 $5,129.00 $2,461.92 $862.894.46 $5,129.00 $2,461.92 $784.444.46 $5,129.00 $2,461.92 $713.134.46 $5,129.00 $2,461.92 $648.304.46 $5,129.00 $2,461.92 $589.364.46 $5,129.00 $2,461.92 $535.794.46 $5,129.00 $2,461.92 $487.084.46 $5,129.00 $2,461.92 $442.804.46 $5,129.00 $2,461.92 $402.544.46 $5,129.00 $2,461.92 $365.952.25 $2,587.50 $1,242.00 $167.83


###

THIS IS PV COSTS-PV ALL TAX SHIELDS

Scenario 1

Scenario 1

PRESENT VALUE OF TAX SHIELD


Scenario 1

Scenario 2

BUYING DIESEL BOAT AND SCRAPING IT IN 20 YRS

OPPURTUNITY COST OF CAPITAL 0.1DISCOUNT FACTOR 1.1ANNUITY FACTOR ( .1, 20 YRS) 8.51

COST ANALYSIS OF DISPENSING CYNTHIA AT T=0

BOOK VALUE OF CYNTHIA $39,500.00SCRAP VALUE $25,000.00NET LOSS MADE $14,500.00TAX SHIELD FROM CYNTHIA $6,960.00

EFFECTIVE COST OF SCRAPING CYNTHIA -6,960.00PV OF SPARE PARTS 30,000.00TAX SHIELD ON LOSS FROM SELLING SPARE PARTS -6,480.00

DIESEL BOAT ANALYSIS

PRICE $325,000.00INVENTORY $75,000.00

Scenario 2


TOTAL TAX SHIELD FROM DEPRECIATING DIESEL BOAT



SCRAP VALUE OF BOAT AT END OF 20 YRS $32,500.00PV OF SCRAP (MARKET) VALUE OF BOAT $4,830.92

SCRAP (MARKET) VALUE OF INVENTORY AT END OF 20 YRS $37,500.00PV OF SCRAP VALUE OF INVENTORY $5,574.14

Scenario 2

ANNUAL OPERATING COST $156,640.00ANNUAL TAX SHIELD FROM OPERATING COST $75,187.20

TAX SHIELD FROM DEPRECIATING BOAT $69,015.10TAX SHIELD FROM DEPRECIATING PARTS $15,926.56

PV OF OPERATING COST ###PV OF TAX SHIELD FROM OPERATING EXPENSES $640,143.82

PV OF OVERHAULING 23132.6TAX SHIELD FROM OVERHAULING 11103.65PV OF TAX TO BE PAID ON UNDERVALUED BOAT AT T=20 $2,318.84PV OF TAX TO BE PAID ON UNDERVALUED INVENTORY PARTS $2,675.59

6,480.00TOTAL INCOME $65,405.05

$31,394.43TOTAL TAX SHIELDS $749,629.12TOTAL EXPENSES ###NET COST $978,120.23

EQUIVALENT ANNUAL COST $114,883.75


TAX FROM INCOME (SELLING CYNTHIA, SPARE PARTS AND THE SCRAP VALUE ON DIESEL BOAT AND INVENTORIES)

Scenario 2

BUYING DIESEL BOAT AND SCRAPING IT IN 20 YRS

DEPRECIATION OF DIESEL BOATYEAR DEPRECIATION %WRITE OFF AMNTTAX SHIELDPRESENT VALUE OF TAX SHIELD

1 3.75 $12,187.50 $5,850.00 $5,318.182 7.22 $23,465.00 $11,263.20 $9,308.433 6.68 $21,710.00 $10,420.80 $7,829.304 6.18 $20,085.00 $9,640.80 $6,584.805 5.71 $18,557.50 $8,907.60 $5,530.926 5.28 $17,160.00 $8,236.80 $4,649.467 4.89 $15,892.50 $7,628.40 $3,914.588 4.52 $14,690.00 $7,051.20 $3,289.449 4.46 $14,495.00 $6,957.60 $2,950.70

10 4.46 $14,495.00 $6,957.60 $2,682.4611 4.46 $14,495.00 $6,957.60 $2,438.6012 4.46 $14,495.00 $6,957.60 $2,216.9113 4.46 $14,495.00 $6,957.60 $2,015.3714 4.46 $14,495.00 $6,957.60 $1,832.1515 4.46 $14,495.00 $6,957.60 $1,665.5916 4.46 $14,495.00 $6,957.60 $1,514.1817 4.46 $14,495.00 $6,957.60 $1,376.52

Scenario 2

18 4.46 $14,495.00 $6,957.60 $1,251.3919 4.46 $14,495.00 $6,957.60 $1,137.6220 4.46 $14,495.00 $6,957.60 $1,034.2021 2.25 $7,312.50 $3,510.00 $474.31

TOTAL DEPRECIATED VALUE ###

TOTAL TAX SHIELD FROM DEPRECIATING DIESEL BOAT ###

DEPRECIATION OF INVENTORY PARTSYEAR DEPRECIATION %WRITE OFF AMNTTAX SHIELDPRESENT VALUE OF TAX SHIELD

1 3.75 $2,812.50 $1,350.00 $1,227.272 7.22 $5,415.00 $2,599.20 $2,148.103 6.68 $5,010.00 $2,404.80 $1,806.764 6.18 $4,635.00 $2,224.80 $1,519.575 5.71 $4,282.50 $2,055.60 $1,276.376 5.28 $3,960.00 $1,900.80 $1,072.957 4.89 $3,667.50 $1,760.40 $903.368 4.52 $3,390.00 $1,627.20 $759.109 4.46 $3,345.00 $1,605.60 $680.93

10 4.46 $3,345.00 $1,605.60 $619.0311 4.46 $3,345.00 $1,605.60 $562.7512 4.46 $3,345.00 $1,605.60 $511.5913 4.46 $3,345.00 $1,605.60 $465.0914 4.46 $3,345.00 $1,605.60 $422.8015 4.46 $3,345.00 $1,605.60 $384.3716 4.46 $3,345.00 $1,605.60 $349.4317 4.46 $3,345.00 $1,605.60 $317.6618 4.46 $3,345.00 $1,605.60 $288.7819 4.46 $3,345.00 $1,605.60 $262.5320 4.46 $3,345.00 $1,605.60 $238.6621 2.25 $1,687.50 $810.00 $109.46


TOTAL TAX SHIELD FROM DEPRECIATING DIESEL BOAT ###

Scenario 2

(SECOND OVERHAULING NOT NEEDED IS BOAT GETS SCRAPED AT T=20)

(PV OF SPARE PARTS AND SELLING CYNTHIA)

Scenario 2


Scenario 3

Page 1

BUYING DIESEL BOAT AND USING IT FOR 25 YRS

OPPURTUNITY COST OF CAPITAL 0.1DISCOUNT FACTOR 1.1ANNUITY FACTOR FOR 25 YRS @ 10 % 9.08

BOOK VALUE OF CYNTHIA $39,500.00SCRAP VALUE $25,000.00NET LOSS MADE $14,500.00TAX SHIELD FROM CYNTHIA $6,960.00

EFFECTIVE COST OF SCRAPING CYNTHIA -6960

MONEY FROM SELLING CYNTHIA AND SPARE PARTS 55000


PRICE $325,000 INVENTORY $75,000

Scenario 3

Page 2





6480TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV

Scenario 3

Page 3

ANNUAL OPERATING COST $156,640

PV OF OPERATING COSTS $1,421,821 PV OF OVERHAULING 32,051.22 $ TAX SHIELD FROM OPERATING EXPENSES 682,474.21 $ TAX SHIELD FROM OVERHAULING EXPENSES 15,384.58 $ TAX ON INCOME 26,400.00 $

TOTAL EXPENSES 1,880,272.50 $ INCOME 55,000.00 $ TOTAL TAX SHIELD 796,240.45 $ NET COST $1,029,032.04

EQUIVALENT ANNUAL COSTS $113,366.98

Scenario 3

Page 4

BUYING DIESEL BOAT AND USING IT FOR 25 YRS

DEPRECIATION OF DIESEL BOATYEAR DEPRECIATION %WRITE OFF AMNTTAX SHIELDPRESENT VALUE OF TAX SHIELD

1 3.75 $12,187.50 $5,850.00 $5,318.18

2 7.22 $23,465.00 $11,263.20 $9,308.43

3 6.68 $21,710.00 $10,420.80 $7,829.30

4 6.18 $20,085.00 $9,640.80 $6,584.80

5 5.71 $18,557.50 $8,907.60 $5,530.92

6 5.28 $17,160.00 $8,236.80 $4,649.46

7 4.89 $15,892.50 $7,628.40 $3,914.58

8 4.52 $14,690.00 $7,051.20 $3,289.44

9 4.46 $14,495.00 $6,957.60 $2,950.70

10 4.46 $14,495.00 $6,957.60 $2,682.46

11 4.46 $14,495.00 $6,957.60 $2,438.60

12 4.46 $14,495.00 $6,957.60 $2,216.91

13 4.46 $14,495.00 $6,957.60 $2,015.37

14 4.46 $14,495.00 $6,957.60 $1,832.15

15 4.46 $14,495.00 $6,957.60 $1,665.59

Scenario 3

Page 5

16 4.46 $14,495.00 $6,957.60 $1,514.18

17 4.46 $14,495.00 $6,957.60 $1,376.52

18 4.46 $14,495.00 $6,957.60 $1,251.39

19 4.46 $14,495.00 $6,957.60 $1,137.62

20 4.46 $14,495.00 $6,957.60 $1,034.20

21 2.25 $7,312.50 $3,510.00 $474.31

TOTAL DEPRECIATED VALUE ###

TOTAL TAX SHIELD FROM DEPRECIATING DIESEL BOAT $69,015.10


1 3.75 $2,812.50 $1,350.00 $1,227.27

2 7.22 $5,415.00 $2,599.20 $2,148.10

3 6.68 $5,010.00 $2,404.80 $1,806.76

4 6.18 $4,635.00 $2,224.80 $1,519.57

5 5.71 $4,282.50 $2,055.60 $1,276.37

6 5.28 $3,960.00 $1,900.80 $1,072.95

7 4.89 $3,667.50 $1,760.40 $903.36

8 4.52 $3,390.00 $1,627.20 $759.10

9 4.46 $3,345.00 $1,605.60 $680.93

10 4.46 $3,345.00 $1,605.60 $619.03

11 4.46 $3,345.00 $1,605.60 $562.75

12 4.46 $3,345.00 $1,605.60 $511.59

13 4.46 $3,345.00 $1,605.60 $465.09

14 4.46 $3,345.00 $1,605.60 $422.80

15 4.46 $3,345.00 $1,605.60 $384.37

16 4.46 $3,345.00 $1,605.60 $349.43

17 4.46 $3,345.00 $1,605.60 $317.66

18 4.46 $3,345.00 $1,605.60 $288.78

19 4.46 $3,345.00 $1,605.60 $262.53

20 4.46 $3,345.00 $1,605.60 $238.66

21 2.25 $1,687.50 $810.00 $109.46


TOTAL TAX SHIELD FROM DEPRECIATING DIESEL BOAT $15,926.56

Scenario 3

Page 6

Scenario 4

Page 7


OPPURTUNITY COST OF CAPITAL 0.1DISCOUNT FACTOR 1.1ANNUITY FACTOR FOR 25 YRS @ 10 % 9.08ANNUITY FACTOR FOR 15 YRS @ 10% 7.61

TAX SHIELD FROM SCRAPING CYNTHIA $6,960.00


INTEREST CHARGES $5,700 ANNUAL PAYMENTS $21,700 TOTAL ANNUAL PAYMENT $27,400 PV OF ANNUITY $208,404.40

SPARE PARTS $75,000 OVERHAUL CHARGES 32,051.22 $

CALCULATION OF PV OF CHARGES FROM 15 TH TO 25 TH YEAR

ANNUITY FACTOR @ 10 % FOR 10 YEARS 6.15CHARGES EACH YEAR FROM 15 TH YEAR ONWARDS $2,850 PV OF EXPENSES IN THE 15 TH YEAR (FROM YR 15 TO 25)$17,513.25 PV OF EXPENSES FROM 15TH TO 25TH YEAR 4,192.53 $

TOTAL PAYMENTS 212,596.93 $

ANNUAL OPERATING COST $156,640

PV OF OPERATING COSTS $1,421,821

6480

TAX SHIELD CALCULATIONANNUAL TAX SHIELD FROM T=1 TO 15 13,152.00 $ PV OF TAX SHIELD FROM T=1 TO 15 100,034.11 $ TAX SHIELD FROM OPERATING EXPENSES 682,474.21 $ ANNUAL TAX SHIELD FROM T=15 TO 25 1,368.00 $


Scenario 4

Page 8

PV OF TAX SHIELD IN THE 15 TH YEAR 8,406.36 $ PV OF TAX SHIELD AT T=0 2,012.42 $ TOTAL TAX SHIELD 813,887.30 $ TOTAL INCOME 55,000.00 $ TAX ON INCOME 26,400.00 $ TOTAL EXPENSES 1,767,869.43 $

NET COSTS $898,982.13ANNUITY FACTOR FOR 25 YRS @ 10 % 9.08EQUIVALENT ANNUAL COSTS $99,039.56

Scenario 4

Page 9


1 3.75 $2,812.50 $1,350.00 $1,227.27

2 7.22 $5,415.00 $2,599.20 $2,148.10

3 6.68 $5,010.00 $2,404.80 $1,806.76

4 6.18 $4,635.00 $2,224.80 $1,519.57

5 5.71 $4,282.50 $2,055.60 $1,276.37

6 5.28 $3,960.00 $1,900.80 $1,072.95

7 4.89 $3,667.50 $1,760.40 $903.36

8 4.52 $3,390.00 $1,627.20 $759.10

9 4.46 $3,345.00 $1,605.60 $680.93

10 4.46 $3,345.00 $1,605.60 $619.03

11 4.46 $3,345.00 $1,605.60 $562.75

12 4.46 $3,345.00 $1,605.60 $511.59

13 4.46 $3,345.00 $1,605.60 $465.09

14 4.46 $3,345.00 $1,605.60 $422.80

15 4.46 $3,345.00 $1,605.60 $384.37

CALCULATION OF PV OF CHARGES FROM 15 TH TO 25 TH YEAR 16 4.46 $3,345.00 $1,605.60 $349.43

17 4.46 $3,345.00 $1,605.60 $317.66

18 4.46 $3,345.00 $1,605.60 $288.78

19 4.46 $3,345.00 $1,605.60 $262.53

-- THIS IS THE VALUE AT T=1520 4.46 $3,345.00 $1,605.60 $238.66

21 2.25 $1,687.50 $810.00 $109.46

$75,000.00 $15,926.56

Scenario 4

Page 10

THIS IS SAME AS $2,012.42

Scenario 4

Page 11


Scenario 4

Page 12

Scenario 5

Page 13

CONVERTING CYNTHIA : WITHOUT SPARE PARTSSELLING SPARE PARTS

CASE 1: CONVERTING NOW


ADDITIONAL COST OF CONVERTING CYNTHIA $40,000.00REHABILITATION COST $115,000.00TOTAL REHAB. COST $155,000.00

WRITING OFF THIS CAPITAL EXPENSE

YEAR DEPRECIATION %

1 3.75

2 7.22

3 6.68

4 6.18

5 5.71

6 5.28

7 4.89

8 4.52

9 4.46

10 4.46

11 4.46

12 4.46

13 4.46

14 4.46

15 4.46

16 4.46

17 4.46

18 4.46

19 4.46

20 4.46

21 2.25


PV TAX SHIELD

Scenario 5

Page 14


BOOK VALUE OF CYNTHIA $39,500.00

YEAR DEPRECIATION %

1 3.75

2 7.22

3 6.68

4 6.18

5 5.71

6 5.28

7 4.89

8 4.52

9 4.46

10 4.46

11 4.46

12 4.46

13 4.46

14 4.46

15 4.46

16 4.46

17 4.46

18 4.46

19 4.46

20 4.46

21 2.25



MARKET VALUE OF CYNTHIA $25,000.00SELLING SPARE PARTS 30000

TAX ON INCOME FROM SELLING SPARE PARTS 14400ANNUAL OPERATING COSTS $191,450.00OPPURTUNITY COST OF CAPITAL 0.1ANNUITY FACTOR ( .1, 20 YRS) 8.51PV OF OPERATING COSTS $1,630,005.30

Scenario 5

Page 15

TAX SHIELD FROM OPERATING EXPENSES $91,896.00PV OF TAX SHIELD FROM OPERATING EXPENSES $782,402.54PV TAX SHIELD FROM REHAB COSTS $32,914.89NET TAX SHIELD FROM DEPRECIATING CYNTHIA $8,387.99

6480CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS

TOTAL COSTS $1,794,405.30TOTAL TAX SHIELDS $830,185.42

NET COST $964,219.88EQUIVALENT ANNUAL COSTS $113,251.10


Scenario 5

Page 16

WRITING OFF THIS CAPITAL EXPENSE

WRITE OFF AMNTTAX SHIELDPRESENT VALUE OF TAX SHIELD

$5,812.50 $2,790.00 $2,536.36

$11,191.00 $5,371.68 $4,439.40

$10,354.00 $4,969.92 $3,733.97

$9,579.00 $4,597.92 $3,140.44

$8,850.50 $4,248.24 $2,637.82

$8,184.00 $3,928.32 $2,217.43

$7,579.50 $3,638.16 $1,866.95

$7,006.00 $3,362.88 $1,568.81

$6,913.00 $3,318.24 $1,407.26

$6,913.00 $3,318.24 $1,279.33

$6,913.00 $3,318.24 $1,163.02

$6,913.00 $3,318.24 $1,057.29

$6,913.00 $3,318.24 $961.18

$6,913.00 $3,318.24 $873.80

$6,913.00 $3,318.24 $794.36

$6,913.00 $3,318.24 $722.15

$6,913.00 $3,318.24 $656.50

$6,913.00 $3,318.24 $596.81

$6,913.00 $3,318.24 $542.56

$6,913.00 $3,318.24 $493.24

$3,487.50 $1,674.00 $226.21

###

###

Scenario 5

Page 17


$1,481.25 $711.00 $646.36

$2,851.90 $1,368.91 $1,131.33

$2,638.60 $1,266.53 $951.56

$2,441.10 $1,171.73 $800.31

$2,255.45 $1,082.62 $672.22

$2,085.60 $1,001.09 $565.09

$1,931.55 $927.14 $475.77

$1,785.40 $856.99 $399.79

$1,761.70 $845.62 $358.62

$1,761.70 $845.62 $326.02

$1,761.70 $845.62 $296.38

$1,761.70 $845.62 $269.44

$1,761.70 $845.62 $244.94

$1,761.70 $845.62 $222.68

$1,761.70 $845.62 $202.43

$1,761.70 $845.62 $184.03

$1,761.70 $845.62 $167.30

$1,761.70 $845.62 $152.09

$1,761.70 $845.62 $138.26

$1,761.70 $845.62 $125.70

$888.75 $426.60 $57.65

###

TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA $8,387.99

Scenario 5

Page 18


Scenario 6

Page 19

CASE 2: CONVERTING CYNTHIA ONE YEAR HENCE

ASSUMPTION : WITHOUT CONVERSION THE COSTS WOULD REMAIN WHAT IS MENTIONED IN SCENARIO 1


ADDITIONAL COST OF CONVERTING CYNTHIA at t=1 $70,000.00PV OF THIS AMOUNT $63,636.36REHABILITATION COST $115,000.00

SINCE 70,000 IS SPEND IN T=1, IT CANT BE WRITTEN OFF AT T=0, SO SEPERATE SCHEDULES


DEPRECITING CYNTHIA AFTER REHABILITATION INCLUDING BOOK VALUE OF CYNTHIA

###

YEAR DEPRECIATION %

1 3.75

2 7.22

3 6.68

4 6.18

5 5.71

6 5.28

7 4.89

8 4.52

9 4.46

10 4.46

11 4.46

12 4.46

13 4.46

14 4.46

15 4.46

16 4.46

17 4.46

18 4.46

19 4.46

20 4.46

21 2.25

Scenario 6

Page 20



WRITING OFF OF 70,000 IN T=1

WRITING OF THIS CAPITAL EXPENSE OVER A PERIOD OF 20 YEARS

YEAR DEPRECIATION %

1 3.75

2 7.22

3 6.68

4 6.18

5 5.71

6 5.28

7 4.89

8 4.52

9 4.46

10 4.46

11 4.46

12 4.46

13 4.46

14 4.46

15 4.46

16 4.46

17 4.46

18 4.46

19 4.46

20 4.46

21 2.25


TOTAL TAX SHIELD

PV TAX SHIELD

MARKET VALUE OF CYNTHIA $25,000.00

Scenario 6

Page 21

OPERATING COST IN THE FITST YEAR $203,120.00ANNUAL OPERATING COSTS THEREAFTER $191,450.00OPPURTUNITY COST OF CAPITAL 0.1ANNUITY FACTOR ( .1, 19 YRS) 8.37VALUE OF ANNUITY AT T=1 $1,601,479.25PV OF OPERATING COSTS FROM T=1 TO 20 $1,455,890.23INCOME FROM SELLING SPARE PARTS 30000TAX TO BE PAID ON INCOME 14400PV OF OPERATING COSTS $1,659,010.23

TAX SHIELD FROM OPERATING EXPENSES $796,324.91TAX SHILED FROM 70000 $ EXPENSES $13,513.45PV TAX SHIELD FROM REHAB COSTS $32,808.71NET TAX SHIELD FROM DEPRECIATING CYNTHIA $842,647.07

6480CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS

TOTAL COSTS $1,877,046.59TOTAL TAX SHIELDS $849,127.07TOTAL INCOME 30000

NET COST $997,919.52

EQUIVALENT ANNUAL COSTS $117,209.25


Scenario 6

Page 22

CASE 2: CONVERTING CYNTHIA ONE YEAR HENCE

ASSUMPTION : WITHOUT CONVERSION THE COSTS WOULD REMAIN WHAT IS MENTIONED IN SCENARIO 1

SINCE 70,000 IS SPEND IN T=1, IT CANT BE WRITTEN OFF AT T=0, SO SEPERATE SCHEDULES


DEPRECITING CYNTHIA AFTER REHABILITATION INCLUDING BOOK VALUE OF CYNTHIA


$5,793.75 $2,781.00 $2,528.18

$11,154.90 $5,354.35 $4,425.08

$10,320.60 $4,953.89 $3,721.93

$9,548.10 $4,583.09 $3,130.31

$8,821.95 $4,234.54 $2,629.31

$8,157.60 $3,915.65 $2,210.28

$7,555.05 $3,626.42 $1,860.93

$6,983.40 $3,352.03 $1,563.75

$6,890.70 $3,307.54 $1,402.72

$6,890.70 $3,307.54 $1,275.20

$6,890.70 $3,307.54 $1,159.27

$6,890.70 $3,307.54 $1,053.88

$6,890.70 $3,307.54 $958.08

$6,890.70 $3,307.54 $870.98

$6,890.70 $3,307.54 $791.80

$6,890.70 $3,307.54 $719.82

$6,890.70 $3,307.54 $654.38

$6,890.70 $3,307.54 $594.89

$6,890.70 $3,307.54 $540.81

$6,890.70 $3,307.54 $491.64

$3,476.25 $1,668.60 $225.48

Scenario 6

Page 23

$154,500.00

TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA ###

WRITING OFF OF 70,000 IN T=1



$2,625.00 $1,260.00 $1,145.45

$5,054.00 $2,425.92 $2,004.89

$4,676.00 $2,244.48 $1,686.31

$4,326.00 $2,076.48 $1,418.26

$3,997.00 $1,918.56 $1,191.27

$3,696.00 $1,774.08 $1,001.42

$3,423.00 $1,643.04 $843.14

$3,164.00 $1,518.72 $708.49

$3,122.00 $1,498.56 $635.54

$3,122.00 $1,498.56 $577.76

$3,122.00 $1,498.56 $525.24

$3,122.00 $1,498.56 $477.49

$3,122.00 $1,498.56 $434.08

$3,122.00 $1,498.56 $394.62

$3,122.00 $1,498.56 $358.74

$3,122.00 $1,498.56 $326.13

$3,122.00 $1,498.56 $296.48

$3,122.00 $1,498.56 $269.53

$3,122.00 $1,498.56 $245.03

$3,122.00 $1,498.56 $222.75

$1,575.00 $756.00 $102.16

$70,000.00

###

###

Scenario 6

Page 24


COST COMPUTATION OF REHABILITATING CYNTHIACase: With spare parts

OPPURTUNITY COST OF CAPITAL 0.1DISCOUNT FACTOR 1.1ANNUITY FACTOR ( .1, 20 YRS) 8.51


BOOK VALUE OF CYNTHIA###

YEAR DEPRECIATION %

1 3.752 7.223 6.684 6.185 5.716 5.287 4.898 4.529 4.46

10 4.4611 4.4612 4.4613 4.4614 4.4615 4.4616 4.4617 4.4618 4.4619 4.4620 4.4621 2.25



REHABILITATION COSTS $71,500.00


YEAR DEPRECIATION %

1 3.75

2 7.223 6.684 6.185 5.716 5.287 4.898 4.529 4.46

10 4.4611 4.4612 4.4613 4.4614 4.4615 4.4616 4.4617 4.4618 4.4619 4.4620 4.4621 2.25


PV TAX SHIELD

Cost of spare parts $43,500.00Salvage value of spare parts $30,000.00

WRITING OFF THE SPARE PARTS OVER 20 YEARS

YEAR DEPRECIATION %

1 3.752 7.223 6.684 6.185 5.716 5.287 4.898 4.529 4.46

10 4.4611 4.4612 4.4613 4.4614 4.4615 4.4616 4.4617 4.46

18 4.4619 4.4620 4.4621 2.25


PV TAX SHIELD

OPPORTUNITY COST OF NOT SELLING CYNTHIA $25,000.00OPPORTUNITY COST OF NOT SELLING SPARE PARTS 30000

ANNUAL OPERATING COSTS $203,120.00PV OF OPERATING COSTS $1,729,363.68TAX SHIELD FROM OPERATING EXPENSES $97,497.60PV OF TAX SHIELD FROM OPERATING EXPENSES$830,094.57

NET TAX SHIELD FROM DEPRECIATING CYNTHIA$32,096.90

TOTAL EXPENSES $1,855,863.68TOTAL TAX SHIELD $862,191.46NET COSTS $993,672.22ANNUITY FACTOR ( .1, 20 YRS) 8.51EQUIVALENT ANNUAL COSTS $116,710.38



$1,481.25 $711.00 $646.36$2,851.90 $1,368.91 $1,131.33$2,638.60 $1,266.53 $951.56$2,441.10 $1,171.73 $800.31$2,255.45 $1,082.62 $672.22$2,085.60 $1,001.09 $565.09$1,931.55 $927.14 $475.77$1,785.40 $856.99 $399.79$1,761.70 $845.62 $358.62$1,761.70 $845.62 $326.02$1,761.70 $845.62 $296.38$1,761.70 $845.62 $269.44$1,761.70 $845.62 $244.94$1,761.70 $845.62 $222.68$1,761.70 $845.62 $202.43$1,761.70 $845.62 $184.03$1,761.70 $845.62 $167.30$1,761.70 $845.62 $152.09$1,761.70 $845.62 $138.26$1,761.70 $845.62 $125.70

$888.75 $426.60 $57.65

$39,500.00

TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA ###



$2,681.25 $1,287.00 $1,170.00

$5,162.30 $2,477.90 $2,047.85$4,776.20 $2,292.58 $1,722.45$4,418.70 $2,120.98 $1,448.66$4,082.65 $1,959.67 $1,216.80$3,775.20 $1,812.10 $1,022.88$3,496.35 $1,678.25 $861.21$3,231.80 $1,551.26 $723.68$3,188.90 $1,530.67 $649.15$3,188.90 $1,530.67 $590.14$3,188.90 $1,530.67 $536.49$3,188.90 $1,530.67 $487.72$3,188.90 $1,530.67 $443.38$3,188.90 $1,530.67 $403.07$3,188.90 $1,530.67 $366.43$3,188.90 $1,530.67 $333.12$3,188.90 $1,530.67 $302.84$3,188.90 $1,530.67 $275.30$3,188.90 $1,530.67 $250.28$3,188.90 $1,530.67 $227.52$1,608.75 $772.20 $104.35

$71,500.00

###

WRITING OFF THE SPARE PARTS OVER 20 YEARS


$1,631.25 $783.00 $711.82$3,140.70 $1,507.54 $1,245.90$2,905.80 $1,394.78 $1,047.92$2,688.30 $1,290.38 $881.35$2,483.85 $1,192.25 $740.29$2,296.80 $1,102.46 $622.31$2,127.15 $1,021.03 $523.95$1,966.20 $943.78 $440.28$1,940.10 $931.25 $394.94$1,940.10 $931.25 $359.04$1,940.10 $931.25 $326.40$1,940.10 $931.25 $296.72$1,940.10 $931.25 $269.75$1,940.10 $931.25 $245.23$1,940.10 $931.25 $222.93$1,940.10 $931.25 $202.67$1,940.10 $931.25 $184.24

$1,940.10 $931.25 $167.49$1,940.10 $931.25 $152.27$1,940.10 $931.25 $138.42

$978.75 $469.80 $63.48

$43,500.00

###

SUMMARY

Page 1

SUMMARY OF THE SCENARIOS

DESCRIPTION OF SCENARIO NET COSTS

1 REHABILITATING CYNTHIA WITHOUT SPARE PARTS $984,380.40 $115,619.032 BUYING DIESEL BOAT FOR 20 YEARS $978,120.23 $114,883.753 BUYING DIESEL BOAT FOR 25 YEARS $1,029,032.04 $113,366.984 CONTRACTING DIESEL BOAT FOR 25 YEARS $898,982.13 $99,039.565 CONVERTING CYNTHIA IMMEDIATELY $964,219.88 $113,251.106 CONVERTING CYNTHIA 1 YR FROM NOW $997,919.52 $117,209.257 REHABILITATING CYNTHIA WITH SPARE PARTS $993,672.22 $116,710.38

SR. NO.

ANNUAL EQ. COST

THE EQUIVALENT ANNUAL COST IS LOWEST IN CONTRACTING A BOAT SCENARIO. HENCE, CYNTHIA AND THE SPARE PARTS SHOULD BE SOLD. DIESEL BOAT SHOULD BE CONTRACTED FOR 25 YEARS

Economy Shipping Company

It is recommended that Economy Shipping Company (ESC) replace the steamboat, Cynthia, with a new diesel powered boat. The analysis assumed no operating cost in 1950. Although ESC was presumably still in service during this analysis, the costs associated with the project evaluation were not accounted for until 1951. It was also implicitimplicit in the NPV calculations that any upgrade required subsequent to 1950 could be performed without any interruption to the daily operations and were performed at the beginning of the year. Therefore, the stoker upgrade and the engine replacements were considered on Jan 1st of the intended year and did not requireany downtime for the installation.

The evaluation considered four different scenarios: 1. Rehabilitation of Cynthia with the stoker conversion occurring in 1950 2. Rehabilitation of Cynthia with the stoker conversion occurring in 1952 3. Purchase of a new diesel-powered boat with 2 shifts, 12-hour working day 4. Purchase of a new diesel-powered boat with 3 shifts, 8-hour working day

Since ESC was considering other projects with a rate of return of 10%, each of the above options were considered using the same rate of return. The company’s balance sheet suggests that management wasvery conservative. The debt-to-equity ratio in 1950 was 0.075, indicating that the company could easily borrowat the going rate of 3% without fear of bankruptcy. Moreover, the company had sufficient funds to purchase four new diesel-powered boats. Overall, ECS was in a very strong position to quickly upgrade their fleet and gain any advantage that may come with the new diesel-powered boats. The influence of the union to change the working hours for the crew members is noteworthy in this analysis. If the union succeeded, the steamboats would not be capable of accommodating the 3-shift requirement and therefore be noncompliant with the new regulation. If the new regulation had fines associated for any vessel notin compliance with the new guidelines, the results for the steamboat scenarios would only get worse. In thiscase, the diesel-powered boats could accommodate the anticipated ruling and therefore continue to operate without fear of being unlawful.

Another disadvantage against rehabilitating Cynthia was its age. At the time of the decision the steamboat had already been in operation for 23 years. Although, the realizable cost to renovate the steamboat was alreadyknown, the intangible aspect of this alternative was the status of the boat once refurbished. It should be notedthat with any overhaul, there are still aspects to the boat that will remain old and will eventually fail. The maintenance and repairs listed in the case appear to indicate general maintenance and not a catastrophic event as is suggested. The cost of another large repair that is associated with age has not been calculated for but must be understood as a variable to the rehabilitation options. The tax savings associated with purchasing the new diesel-powered boat is yet another advantage over the steamboat. With a lower operating cost and higher depreciation (see appendix) the purchasing option savesapproximately $11,500 less in taxes (option 4 vs. option 1). During the 25-year useful life of the boat, Economy will save $287,500. The equivalent annual cost (EAC) analysis was used to evaluate each option. The rehabilitation options had a useful life of 20 years, whereas the purchasing options had a useful life of 25 years. The replacement techniquewould have required a 100-year analysis. Instead, the EAC procedure returns an annualized cost for each project and allows both the rehabilitation options and the purchasing options to be compared without muchhassle.Between the two rehabilitation options, the option of immediately converting to stoker firing resulted in the lowest NPV (-$970, 889 vs. -$988,249). The additional $30K associated with waiting the two years before performing the stoker conversion explains the discrepancy between these two options. The immediatestoker conversion resulted in an equivalent annual cost of $114,040. Compared to the two purchasing options ($110,833, $111,402) the cost of the rehabilitation option was slightly higher. Although both of the purchasing options were optimal compared to the alternative of rehabilitating Cynthia, the

the effect that the union’s proposition would have on the shipping industry would obviously increase the costof doing business. If the controller’s instincts are correct, the NPV calculation for the purchasing option would increase by $4,850 and the EAC would increase by $570. Although these dollars would eat into the profit, the alternative may be far more costly if fines are administered for those vessels not in compliance. While theanalysis may suggest that the two main options (overhaul vs. purchase) are close in cost, it is obvious thatall the intangibles associated with this case that the purchase of the new diesel powered boats guarantees asuccessful future, whereas the steamboat option is dependent on unlikely events.http://www.123helpme.com/view.asp?id=97850

http://www.123helpme.com/view.asp?id=97850

Economy Shipping

Economy Shipping Company (Abridged)

Question 1. What are the relevant cash flows under each of the two alternatives? And in what years do they occur?

Alternative 1: Rehabilitation of the Conway

We decided to divide this alternative in two parts. Part A is Rehabilitation without parts and Part B is Rehabilitation with parts.

Facts/Assumptions

• Conway’s additional useful life of 20 years.

• Book value of Conway: $39,500

• Market value of Conway: $25,000. This is the Opportunity Cost of not selling the Conway at year 0.

• Rehabilitation costs: $115,000. If spare parts are used, rehabilitation costs would be $71,500.

• Book value of spare parts if used on the Conway: $43,500.

• Market value of spare parts: $30,000. This is the Opportunity Cost of not selling the spare parts at year 0.

• Annual operating costs of Conway: $203,150

• No dismantling and scrapping costs at the end of useful life (This will be covered by the value of the scrap and used parts).

• Return of 10% after taxes.

• Tax rate: 48%

• Book cost of Conway, including rehabilitation costs, would be depreciated over a 20-year period.

• Depreciation according to the straight line method = (Cost - Residual value) / Useful life. For the rehabilitation alternative, residual value is zero at the end of year 20.

• ATCF(After-tax cash flow) will be calculated using the formula = Operating Costs after taxes plus Tax shields from depreciation.

Part A: Rehabilitation without parts

Depreciation =(39500+115000)/20 = $7725 per year.

Tax shield from depreciation = $7725*0.48 = $3708 per year

Here are the depreciation cash flows, the tax shields from depreciation and their present value:

|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX |

| | | | |SHIELD |

|BOOK VALUE |$39,500.00 | | | |

| | | | | |

|1 |5 |$1,975.00 |$948.00 |$861.82 |

|2 |5 |$1,975.00 |$948.00 |$783.47 |

|3 |5 |$1,975.00 |$948.00 |$712.25 |

|4 |5 |$1,975.00 |$948.00 |$647.50 |

|5 |5 |$1,975.00 |$948.00 |$588.63 |

|6 |5 |$1,975.00 |$948.00 |$535.12 |

|7 |5 |$1,975.00 |$948.00 |$486.47 |

|8 |5 |$1,975.00 |$948.00 |$442.25 |

|9 |5 |$1,975.00 |$948.00 |$402.04 |

|10 |5 |$1,975.00 |$948.00 |$365.50 |

|11 |5 |$1,975.00 |$948.00 |$332.27 |

|12 |5 |$1,975.00 |$948.00 |$302.06 |

|13 |5 |$1,975.00 |$948.00 |$274.60 |

|14 |5 |$1,975.00 |$948.00 |$249.64 |

|15 |5 |$1,975.00 |$948.00 |$226.94 |

|16 |5 |$1,975.00 |$948.00 |$206.31 |

|17 |5 |$1,975.00 |$948.00 |$187.56 |

|18 |5 |$1,975.00 |$948.00 |$170.51 |

|19 |5 |$1,975.00 |$948.00 |$155.01 |

|20 |5 |$1,975.00 |$948.00 |$140.91 |

|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX SHIELD|

|1 |5 |$5,750.00 |$2,760.00 |$2,509.09 |

|2 |5 |$5,750.00 |$2,760.00 |$2,280.99 |

| | | | | |

|REHAB COSTS | |$115,000 | | |

| | | | | |

|3 |5 |$5,750.00 |$2,760.00 |$2,073.63 |

|4 |5 |$5,750.00 |$2,760.00 |$1,885.12 |

|5 |5 |$5,750.00 |$2,760.00 |$1,713.74 |

|6 |5 |$5,750.00 |$2,760.00 |$1,557.95 |

|7 |5 |$5,750.00 |$2,760.00 |$1,416.32 |

|8 |5 |$5,750.00 |$2,760.00 |$1,287.56 |

|9 |5 |$5,750.00 |$2,760.00 |$1,170.51 |

|10 |5 |$5,750.00 |$2,760.00 |$1,064.10 |

|11 |5 |$5,750.00 |$2,760.00 |$967.36 |

|12 |5 |$5,750.00 |$2,760.00 |$879.42 |

|13 |5 |$5,750.00 |$2,760.00 |$799.47 |

|14 |5 |$5,750.00 |$2,760.00 |$726.79 |

|15 |5 |$5,750.00 |$2,760.00 |$660.72 |

|16 |5 |$5,750.00 |$2,760.00 |$600.66 |

|17 |5 |$5,750.00 |$2,760.00 |$546.05 |

|18 |5 |$5,750.00 |$2,760.00 |$496.41 |

|19 |5 |$5,750.00 |$2,760.00 |$451.28 |

|20 |5 |$5,750.00 |$2,760.00 |$410.26 |

The relevant cash flows for Rehabilitation of Conway without parts are:

| |0 |1 |2 |3 |

|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX SHIELD|

|1 |5 |$3,575.00 |$1,716.00 |$1,560.00 |

|2 |5 |$3,575.00 |$1,716.00 |$1,418.18 |

|3 |5 |$3,575.00 |$1,716.00 |$1,289.26 |

|4 |5 |$3,575.00 |$1,716.00 |$1,172.05 |

|5 |5 |$3,575.00 |$1,716.00 |$1,065.50 |

| | | | | |

|6 |5 |$3,575.00 |$1,716.00 |$968.64 |

|7 |5 |$3,575.00 |$1,716.00 |$880.58 |

|8 |5 |$3,575.00 |$1,716.00 |$800.53 |

|9 |5 |$3,575.00 |$1,716.00 |$727.75 |

|10 |5 |$3,575.00 |$1,716.00 |$661.59 |

|11 |5 |$3,575.00 |$1,716.00 |$601.45 |

|12 |5 |$3,575.00 |$1,716.00 |$546.77 |

|13 |5 |$3,575.00 |$1,716.00 |$497.06 |

|14 |5 |$3,575.00 |$1,716.00 |$451.88 |

|15 |5 |$3,575.00 |$1,716.00 |$410.80 |

|16 |5 |$3,575.00 |$1,716.00 |$373.45 |

|17 |5 |$3,575.00 |$1,716.00 |$339.50 |

|18 |5 |$3,575.00 |$1,716.00 |$308.64 |

|19 |5 |$3,575.00 |$1,716.00 |$280.58 |

|20 |5 |$3,575.00 |$1,716.00 |$255.07 |

|Spare parts costs | $ 43,500.00 |Market Value |$30,000 |

|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX |

| | | | |SHIELD |

|1 |5 |$2,175.00 |$1,044.00 |$949.09 |

|2 |5 |$2,175.00 |$1,044.00 |$862.81 |

|3 |5 |$2,175.00 |$1,044.00 |$784.37 |

|4 |5 |$2,175.00 |$1,044.00 |$713.07 |

|5 |5 |$2,175.00 |$1,044.00 |$648.24 |

|6 |5 |$2,175.00 |$1,044.00 |$589.31 |

|7 |5 |$2,175.00 |$1,044.00 |$535.74 |

| | | | | |

|8 |5 |$2,175.00 |$1,044.00 |$487.03 |

|9 |5 |$2,175.00 |$1,044.00 |$442.76 |

|10 |5 |$2,175.00 |$1,044.00 |$402.51 |

|11 |5 |$2,175.00 |$1,044.00 |$365.92 |

|12 |5 |$2,175.00 |$1,044.00 |$332.65 |

|13 |5 |$2,175.00 |$1,044.00 |$302.41 |

|14 |5 |$2,175.00 |$1,044.00 |$274.92 |

|15 |5 |$2,175.00 |$1,044.00 |$249.93 |

|16 |5 |$2,175.00 |$1,044.00 |$227.20 |

|17 |5 |$2,175.00 |$1,044.00 |$206.55 |

|18 |5 |$2,175.00 |$1,044.00 |$187.77 |

|19 |5 |$2,175.00 |$1,044.00 |$170.70 |

|20 |5 |$2,175.00 |$1,044.00 |$155.18 |

The relevant cash flows for Rehabilitation of Conway with parts are:

| |0 |1 |

|Alternative 1 |Rehabilitation without|($916,170) |

| |parts | |

| |Rehabilitation with |($903,898) |

| |parts | |

|Alternative 2 |1 diesel boat |($888,448) |

| |3 diesel boats |($2,640,126) |

We recommend the purchase of 1 diesel-boat since this option offers the lowest cost for the company. All NPVs are negative because revenue data was not provided and therefore all cash flows are outflows.

Question 1. What are the relevant cash flows under each of the two alternatives? And in what years do they occur?

We decided to divide this alternative in two parts. Part A is Rehabilitation without parts and Part B is Rehabilitation with parts.

• No dismantling and scrapping costs at the end of useful life (This will be covered by the value of the scrap and used parts).

• Depreciation according to the straight line method = (Cost - Residual value) / Useful life. For the rehabilitation alternative, residual value is zero at the end of year 20.

• ATCF(After-tax cash flow) will be calculated using the formula = Operating Costs after taxes plus Tax shields from depreciation.

We recommend the purchase of 1 diesel-boat since this option offers the lowest cost for the company. All NPVs are negative because revenue data was not provided and therefore all cash flows are outflows.

BOOK VALUE $39,500.00

Year Tax Shield

1 5 $1,975.00 $948.00 $861.82 2 5 $1,975.00 $948.00 $783.47 3 5 $1,975.00 $948.00 $712.25 4 5 $1,975.00 $948.00 $647.50 5 5 $1,975.00 $948.00 $588.63 6 5 $1,975.00 $948.00 $535.12 7 5 $1,975.00 $948.00 $486.47 8 5 $1,975.00 $948.00 $442.25 9 5 $1,975.00 $948.00 $402.04

10 5 $1,975.00 $948.00 $365.50 11 5 $1,975.00 $948.00 $332.27 12 5 $1,975.00 $948.00 $302.06 13 5 $1,975.00 $948.00 $274.60 14 5 $1,975.00 $948.00 $249.64 15 5 $1,975.00 $948.00 $226.94 16 5 $1,975.00 $948.00 $206.31 17 5 $1,975.00 $948.00 $187.56 18 5 $1,975.00 $948.00 $170.51 19 5 $1,975.00 $948.00 $155.01 20 5 $1,975.00 $948.00 $140.91

REHAB COSTS $115,000

Year Tax Shield

1 5 $5,750.00 $2,760.00 $2,509.09 2 5 $5,750.00 $2,760.00 $2,280.99 3 5 $5,750.00 $2,760.00 $2,073.63 4 5 $5,750.00 $2,760.00 $1,885.12 5 5 $5,750.00 $2,760.00 $1,713.74 6 5 $5,750.00 $2,760.00 $1,557.95 7 5 $5,750.00 $2,760.00 $1,416.32 8 5 $5,750.00 $2,760.00 $1,287.56 9 5 $5,750.00 $2,760.00 $1,170.51

10 5 $5,750.00 $2,760.00 $1,064.10 11 5 $5,750.00 $2,760.00 $967.36 12 5 $5,750.00 $2,760.00 $879.42 13 5 $5,750.00 $2,760.00 $799.47 14 5 $5,750.00 $2,760.00 $726.79 15 5 $5,750.00 $2,760.00 $660.72 16 5 $5,750.00 $2,760.00 $600.66 17 5 $5,750.00 $2,760.00 $546.05 18 5 $5,750.00 $2,760.00 $496.41 19 5 $5,750.00 $2,760.00 $451.28 20 5 $5,750.00 $2,760.00 $410.26

Depreciation %

Write Off Amnt

Present Value to Tax

Shield

Depreciation %

Write Off Amnt


Shield

The relevant cash flows for Rehabilitation of Conway without parts are:0 1 2 3

Year Tax Shield

1 5 $3,575.00 $1,716.00 $1,560.00 2 5 $3,575.00 $1,716.00 $1,418.18 3 5 $3,575.00 $1,716.00 $1,289.26 4 5 $3,575.00 $1,716.00 $1,172.05 5 5 $3,575.00 $1,716.00 $1,065.50 6 5 $3,575.00 $1,716.00 $968.64 7 5 $3,575.00 $1,716.00 $880.58 8 5 $3,575.00 $1,716.00 $800.53 9 5 $3,575.00 $1,716.00 $727.75

10 5 $3,575.00 $1,716.00 $661.59 11 5 $3,575.00 $1,716.00 $601.45 12 5 $3,575.00 $1,716.00 $546.77 13 5 $3,575.00 $1,716.00 $497.06 14 5 $3,575.00 $1,716.00 $451.88 15 5 $3,575.00 $1,716.00 $410.80 16 5 $3,575.00 $1,716.00 $373.45 17 5 $3,575.00 $1,716.00 $339.50 18 5 $3,575.00 $1,716.00 $308.64 19 5 $3,575.00 $1,716.00 $280.58 20 5 $3,575.00 $1,716.00 $255.07

Spare parts costs $43,500.00 Market Value $30,000.00

Year Tax Shield

1 5 $2,175.00 $1,044.00 $949.09 2 5 $2,175.00 $1,044.00 $862.81 3 5 $2,175.00 $1,044.00 $784.37 4 5 $2,175.00 $1,044.00 $713.07 5 5 $2,175.00 $1,044.00 $648.24 6 5 $2,175.00 $1,044.00 $589.31 7 5 $2,175.00 $1,044.00 $535.74 8 5 $2,175.00 $1,044.00 $487.03 9 5 $2,175.00 $1,044.00 $442.76

10 5 $2,175.00 $1,044.00 $402.51 11 5 $2,175.00 $1,044.00 $365.92 12 5 $2,175.00 $1,044.00 $332.65 13 5 $2,175.00 $1,044.00 $302.41 14 5 $2,175.00 $1,044.00 $274.92 15 5 $2,175.00 $1,044.00 $249.93 16 5 $2,175.00 $1,044.00 $227.20 17 5 $2,175.00 $1,044.00 $206.55

Depreciation %

Write Off Amnt


Shield

Depreciation %

Write Off Amnt


Shield

18 5 $2,175.00 $1,044.00 $187.77 19 5 $2,175.00 $1,044.00 $170.70 20 5 $2,175.00 $1,044.00 $155.18

56575147 economy shipping case answers

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