Economy Shipping Case Answers PDF

DataGiven
Summary of the case

Data Given in the case
Useful life of Cynthia on rehabilitation 20 years

Book value of Cynthia now $39,500.00
Rehabilitation costs $115,000.00
Salvage value of Cynthia $25,000.00
Cost of spare parts $43,500.00

Rehabilitation costs when spare parts are used $71,500.00
Salvage value of spare parts $30,000.00
Annual operating costs of Cynthia $203,150.00
Cost of Diesel Boat $325,000.00

Basic parts inventory $75,000.00
Life of Diesel Boat 25 years
Overhaul costs for diesel boat every 10 years $60,000.00
Annual operating costs of diesel boat $156,640.00
Salvage value of diesel boat at end of 20 years $32,500.00
Salvage value of inventory at end of 20 years $37,500.00
Additional costs of converting Cynthia $40,000.00

Costs of conversion after rehabilitation $70,000.00
Annual operating costs of Cynthia after conversion$191,450.00
Estimated opportunity cost of capital 0.1

Income tax rate 0.48
Shareholder Equity ###

Short term liability $150,000.00
Rate of interest on short term Liability 0.03
Annual rental costs of renting a diesel boat for 15 years

$21,700.00
Interest charges on renting diesel boat for 15 years $5,700.00
Annual rental 16th year onwards $2,850.00
Page 1
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 %age
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
100
OTHER ASSUMPTIONS
Tax rate will remain constant at .48

All figures have been stated in real terms, inflation ignored
The Operating Expenses reported each year will remain constant
Opportunity Cost of Capital is considered as an expense
Tax shield is effectively cost saving as the firm can use that against profit made on other boats/ships
Page 2
DataGiven
Page 3
DataGiven
tion schedule
on other boats/ships
Page 4
REHABILITATING BUYING DIESEL BUYING DIESEL CONTRACTING CONVERTING CONVERTING REHABILITATING
CYNTHIA WITHOUT BOAT FOR 20 BOAT FOR 25 DIESEL BOAT FOR CYNTHIA CYNTHIA 1 YR CYNTHIA WITH
SPARE PARTS YEARS YEARS 25 YEARS IMMEDIATELY FROM NOW SPARE PARTS
Income
Income by selling
Cynthia 25,000.00 25,000.00 25,000.00
Income by selling spare
parts 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00 30,000.00
PV Scrap value of diesel
boat 4,830.92
PV Scrap value of
inventory parts 5,574.14
Total Income 30,000.00 65,405.05 55,000.00 55,000.00 30,000.00 30,000.00 0.00
Expenses
Opportunity cost of not
selling Cynthia -25,000.00 -25,000.00 -25,000.00 -25,000.00
Purchase of diesel boat -325,000.00 -325,000.00
Opportunity cost of not
selling spare parts -30,000.00
Cost of converting
Cynthia -115,000.00 -155,000.00 -178,636.36 -71,500.00
PV 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 -1,729,363.68
PV of overhauling -23,132.60 -32,051.22 -32,051.22
Inventory -75,000.00 -75,000.00 -75,000.00
PV of annual payment -212,596.93
PV of tax to be paid on
undervalued boat -2,318.84
PV of tax to be paid on
undervalued inventory -2,675.59
Tax on income -14,400.00 -31,394.43 -26,400.00 -26,400.00 -14,400.00 -14,400.00 0.00
Total 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
PV of tax shield due to
operating expenses 830,094.57 640,143.82 682,474.21 682,474.21 782,402.54 796,324.91 830,094.57
Depreciation of Cynthia's
book value 8,387.99 8,387.99 8,387.99
Depreciation of Cynthia
after rehabilitation 24,420.73 32,914.89 46,322.16 15,183.32
PV of tax shield from
annual payments 102,046.53
overhaul expenses 11,103.65 15,384.58
REHABILITATING BUYING DIESEL BUYING DIESEL CONTRACTING CONVERTING CONVERTING REHABILITATING
CYNTHIA WITHOUT BOAT FOR 20 BOAT FOR 25 DIESEL BOAT FOR CYNTHIA CYNTHIA 1 YR CYNTHIA WITH
SPARE PARTS YEARS YEARS 25 YEARS IMMEDIATELY FROM NOW SPARE PARTS
Loss from selling Cynthia
due to difference in MV
and BV 6,960.00 6,960.00 6,960.00
PV of tax shield by
depreciating inventory 15,926.56 15,926.56 15,926.56 8,525.59
spare parts 6,480.00 6,480.00 6,480.00 6,480.00 6,480.00 6,480.00
PV of tax shield by
depreciating diesel boat 69,015.10 69,015.10
Total 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 -993,672.22

Annuity 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
Opportunit
y cost of
capital 0.1
Tax Rate 0.48

Opportunit
y cost of
capital 0.1
Scenario 1
COST COMPUTATION OF REHABILITATING CYNTHIA

Case: Without spare parts
OPPURTUNITY COST OF CAPITAL 0.1

DISCOUNT FACTOR 1.1
DEPRECIATION OF CYNTHIA
BOOK VALUE OF CYNTHIA
YEAR
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA
ADDITIONAL YEARS OF LIFE 20

REHABILITATION COST $115,000.00
YEAR
Page 9
Scenario 1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
PV TAX SHIELD
OPPORTUNITY COST OF NOT SELLING CYNTHIA $25,000.00
ANNUAL OPERATING COSTS $203,120.00

ANNUITY FACTOR ( .1, 20 YRS) 8.51
PV OF OPERATING COSTS $1,729,363.68
TAX SHIELD FROM OPERATING EXPENSES $97,497.60

PV OF TAX SHIELD FROM OPERATING EXPENSES $830,094.57
PV TAX SHIELD FROM REHAB COSTS $24,420.73
NET TAX SHIELD FROM DEPRECIATING CYNTHIA $8,387.99
PV OF SELLING SPARE PARTS 30000
TAX FOR MONEY ACQUIRED ON SELLING SPARE PARTS 14400
TAX SHIELD FROM LOSS INCURRED ON SELLING
SPARE PARTS DUE TO DIFFERENCE IN BV AND
MV 6480
NET INCOME FROM SELLING SPARE PARTS 22080
CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS
TOTAL COSTS $1,847,283.68

TOTAL TAX SHIELDS $862,903.28
Page 10
Scenario 1
NET COST $984,380.40

EQUIVALENT ANNUAL COSTS $115,619.03
Page 11
Scenario 1
ATION OF CYNTHIA
$39,500.00
DEPRECIATION %WRITE OFF AMNT

TAX SHIELD PRESENT VALUE OF TAX SHIELD
3.75 $1,481.25 $711.00 $646.36

7.22 $2,851.90 $1,368.91 $1,131.33
6.68 $2,638.60 $1,266.53 $951.56
6.18 $2,441.10 $1,171.73 $800.31
5.71 $2,255.45 $1,082.62 $672.22
5.28 $2,085.60 $1,001.09 $565.09
4.89 $1,931.55 $927.14 $475.77
4.52 $1,785.40 $856.99 $399.79
4.46 $1,761.70 $845.62 $358.62
4.46 $1,761.70 $845.62 $326.02
4.46 $1,761.70 $845.62 $296.38
4.46 $1,761.70 $845.62 $269.44
4.46 $1,761.70 $845.62 $244.94
4.46 $1,761.70 $845.62 $222.68
4.46 $1,761.70 $845.62 $202.43
4.46 $1,761.70 $845.62 $184.03
4.46 $1,761.70 $845.62 $167.30
4.46 $1,761.70 $845.62 $152.09
4.46 $1,761.70 $845.62 $138.26
4.46 $1,761.70 $845.62 $125.70
2.25 $888.75 $426.60 $57.65
ECIATED VALUE $39,500.00
HIELD BY DEPRECIATING CYNTHIA $8,387.99
-- THIS IS A CAPITAL EXPENSE TO BE DEPRECIATED OVER 20 YEARS
DEPRECIATION %WRITE OFF AMNT

TAX SHIELD PRESENT VALUE OF TAX SHIELD
Page 12
Scenario 1
3.75 $4,312.50 $2,070.00 $1,881.82

7.22 $8,303.00 $3,985.44 $3,293.75
6.68 $7,682.00 $3,687.36 $2,770.37
6.18 $7,107.00 $3,411.36 $2,330.00
5.71 $6,566.50 $3,151.92 $1,957.09
5.28 $6,072.00 $2,914.56 $1,645.19
4.89 $5,623.50 $2,699.28 $1,385.16
4.52 $5,198.00 $2,495.04 $1,163.95
4.46 $5,129.00 $2,461.92 $1,044.09
4.46 $5,129.00 $2,461.92 $949.18
4.46 $5,129.00 $2,461.92 $862.89
4.46 $5,129.00 $2,461.92 $784.44
4.46 $5,129.00 $2,461.92 $713.13
4.46 $5,129.00 $2,461.92 $648.30
4.46 $5,129.00 $2,461.92 $589.36
4.46 $5,129.00 $2,461.92 $535.79
4.46 $5,129.00 $2,461.92 $487.08
4.46 $5,129.00 $2,461.92 $442.80
4.46 $5,129.00 $2,461.92 $402.54
4.46 $5,129.00 $2,461.92 $365.95
2.25 $2,587.50 $1,242.00 $167.83
ECIATED VALUE $115,000.00
###
COSTS-PV ALL TAX SHIELDS
Page 13
Scenario 1
Page 14
Scenario 1
AX SHIELD
AX SHIELD
Page 15
Scenario 1
Page 16
Scenario 1
Page 17
Scenario 2
BUYING DIESEL BOAT AND SCRAPING IT IN 20 YRS

DISCOUNT FACTOR 1.1
COST ANALYSIS OF DISPENSING CYNTHIA AT T=0
BOOK VALUE OF CYNTHIA $39,500.00

SCRAP VALUE $25,000.00
NET LOSS MADE $14,500.00
TAX SHIELD FROM CYNTHIA $6,960.00
EFFECTIVE COST OF SCRAPING CYNTHIA -6,960.00

PV OF SPARE PARTS 30,000.00
TAX SHIELD ON LOSS FROM SELLING SPARE PARTS -6,480.00
DIESEL BOAT ANALYSIS
PRICE $325,000.00
INVENTORY $75,000.00
Page 18
Scenario 2
TOTAL TAX SHIELD FROM DEPR
TOTAL TAX SHIELD FROM DEPR
SCRAP VALUE OF BOAT AT END OF 20 YRS $32,500.00

PV OF SCRAP (MARKET) VALUE OF BOAT $4,830.92
SCRAP (MARKET) VALUE OF INVENTORY AT END OF 20 YRS $37,500.00

PV OF SCRAP VALUE OF INVENTORY $5,574.14
Page 19
Scenario 2
ANNUAL OPERATING COST $156,640.00

ANNUAL TAX SHIELD FROM OPERATING COST $75,187.20
TAX SHIELD FROM DEPRECIATING BOAT $69,015.10

TAX SHIELD FROM DEPRECIATING PARTS $15,926.56
PV OF OPERATING COST ###

PV OF OVERHAULING 23132.6
TAX SHIELD FROM OVERHAULING 11103.65
PV OF TAX TO BE PAID ON UNDERVALUED BOAT AT T=20 $2,318.84
PV OF TAX TO BE PAID ON UNDERVALUED INVENTORY PARTS $2,675.59
TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS
DUE TO DIFFERENCE IN BV AND MV 6,480.00
TOTAL INCOME $65,405.05
TAX FROM INCOME (SELLING CYNTHIA, SPARE PARTS AND THE
SCRAP VALUE ON DIESEL BOAT AND INVENTORIES) $31,394.43
TOTAL EXPENSES ###
NET COST $978,120.23
EQUIVALENT ANNUAL COST $114,883.75
Page 20
Scenario 2
N 20 YRS
DEPRECIATION OF DIESEL BOAT

YEAR DEPRECIATION
WRITE
% OFF TAX
AMNTSHIELD
PRESENT 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
16 4.46 $14,495.00 $6,957.60 $1,514.18
17 4.46 $14,495.00 $6,957.60 $1,376.52
Page 21
Scenario 2
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
AL DEPRECIATED VALUE ###
AL TAX SHIELD FROM DEPRECIATING DIESEL BOAT ###
DEPRECIATION OF INVENTORY PARTS

YEAR DEPRECIATION
WRITE
% OFF TAX
AMNTSHIELD
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
AL DEPRECIATED VALUE $75,000.00
AL TAX SHIELD FROM DEPRECIATING DIESEL BOAT ###
Page 22
Scenario 2
(SECOND OVERHAULING NOT NEEDED IS BOAT GETS SCRAPED AT T=20)
(PV OF SPARE PARTS AND SELLING CYNTHIA)
Page 23
Scenario 2
AX SHIELD
Page 24
Scenario 2
AX SHIELD
Page 25
Scenario 2
Page 26
Scenario 3
BUYING DIESEL BOAT AND USING IT FOR 25 YRS

DISCOUNT FACTOR 1.1
ANNUITY FACTOR FOR 25 YRS @ 10 % 9.08

SCRAP VALUE $25,000.00
NET LOSS MADE $14,500.00
TAX 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
Page 1
Scenario 3
TOTAL TAX SHIELD FROM DEPREC
TOTAL TAX SHIELD FROM DEPREC

TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE
PARTS DUE TO DIFFERENCE IN BV AND MV 6480
Page 2
Scenario 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
Page 3
Scenario 3
25 YRS
DEPRECIATION OF DIESEL BOAT

YEAR DEPRECIATION
WRITE%OFF AMNT
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
Page 4
Scenario 3
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
PRECIATED VALUE ###
X SHIELD FROM DEPRECIATING DIESEL BOAT $69,015.10

YEAR DEPRECIATION
WRITE
%OFF AMNT
TAX SHIELD
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
PRECIATED VALUE $75,000.00
X SHIELD FROM DEPRECIATING DIESEL BOAT $15,926.56
Page 5
Scenario 3
Page 6
Scenario 4
CONTRACTING DIESEL BOAT FOR 25 YEARS

DISCOUNT FACTOR 1.1
ANNUITY 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 6.15

CHARGES 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

SPARE PARTS DUE TO DIFFERENCE IN BV AND MV 6480
TAX SHIELD CALCULATION

ANNUAL 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 $
Page 7
Scenario 4
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 $898,982.13

Page 8
Scenario 4

YEAR DEPRECIATION
WRITE%OFF AMNT
TAX SHIELD
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
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 AT20
T=15 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
Page 9
Scenario 4
THIS IS SAME AS $2,012.42
Page 10
Scenario 4
ALUE OF TAX SHIELD
Page 11
Scenario 4
Page 12
Scenario 5
CONVERTING CYNTHIA : WITHOUT SPARE PARTS

SELLING SPARE PARTS
CASE 1: CONVERTING NOW

DISCOUNT FACTOR 1.1
ADDITIONAL COST OF CONVERTING CYNTHIA $40,000.00

TOTAL 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
Page 13
Scenario 5
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 $25,000.00

SELLING SPARE PARTS 30000
TAX ON INCOME FROM SELLING SPARE PARTS 14400
Page 14
Scenario 5

TAX SHIELD FROM LOSS INCURRED ON
SELLING SPARE PARTS DUE TO DIFFERENCE
IN BV AND MV 6480
NET COST $964,219.88

Page 15
Scenario 5
PITAL EXPENSE
WRITE OFFTAX
AMNT
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
###
###
Page 16
Scenario 5
WRITE OFFTAX
AMNT
SHIELD
$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
###
CIATING CYNTHIA $8,387.99
Page 17
Scenario 5
TAX SHIELDS
Page 18
Scenario 6
CASE 2: CONVERTING CYNTHIA ONE YEAR HENCE

ASSUMPTION : WITHOUT CONVERSION THE COSTS WOULD REMAIN WHAT IS MENTIONED

DISCOUNT FACTOR 1.1
ADDITIONAL COST OF CONVERTING CYNTHIA at t=1 $70,000.00

PV OF THIS AMOUNT $63,636.36
SINCE 70,000 IS SPEND IN T=1, IT CANT BE WRITTEN OFF AT T=0, SO SEPERATE SCHEDU
DEPRECITING CYNTHIA AFTER REHABILITATION

###
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
Page 19
Scenario 6
WRITING OFF OF 70,000 IN T=1
WRITING OF THIS CAPITAL EXPENS
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
Page 20
Scenario 6
OPERATING COST IN THE FITST YEAR $203,120.00

ANNUAL OPERATING COSTS THEREAFTER $191,450.00
VALUE OF ANNUITY AT T=1 $1,601,479.25
PV OF OPERATING COSTS FROM T=1 TO 20 $1,455,890.23
INCOME FROM SELLING SPARE PARTS 30000
TAX TO BE PAID ON INCOME 14400

TAX SHILED FROM 70000 $ EXPENSES $13,513.45

SPARE PARTS DUE TO DIFFERENCE IN BV AND MV 6480
TOTAL INCOME 30000
NET COST $997,919.52
Page 21
Scenario 6
AR HENCE
WHAT IS MENTIONED IN SCENARIO 1
SO SEPERATE SCHEDULES
OF CYNTHIA
HIA AFTER REHABILITATION INCLUDING BOOK VALUE OF CYNTHIA
WRITE OFF AMNT

TAX SHIELD
$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
Page 22
Scenario 6
$154,500.00
BY DEPRECIATING CYNTHIA ###
OF 70,000 IN T=1
HIS CAPITAL EXPENSE OVER A PERIOD OF 20 YEARS
WRITE OFF AMNT

TAX SHIELD
$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
###
###
Page 23
Scenario 6
-PV ALL TAX SHIELDS
Page 24
COST COMPUTATION OF REHABILITATING CYNTHIA
Case: With spare parts

DISCOUNT FACTOR 1.1
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
TOTAL TAX SHIELD BY DEPRECIATING C
REHABILITATION COSTS $71,500.00
WRITING OF THIS CAPITAL EX
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
Cost of spare parts $43,500.00

Salvage value of spare parts $30,000.00
WRITING OFF THE SPARE PAR
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
OPPORTUNITY COST OF NOT SELLING CYNTHIA $25,000.00

OPPORTUNITY COST OF NOT SELLING SPARE PARTS 30000

PV OF TAX SHIELD FROM OPERATING EXPENSES
$830,094.57
NET TAX SHIELD FROM DEPRECIATING CYNTHIA$32,096.90
TOTAL EXPENSES $1,855,863.68

TOTAL TAX SHIELD $862,191.46
NET COSTS $993,672.22
CIATION OF CYNTHIA
WRITE OFF TAX

AMNTSHIELD
$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
X SHIELD BY DEPRECIATING CYNTHIA ###
G OF THIS CAPITAL EXPENSE OVER A PERIOD OF 20 YEARS
WRITE OFF TAX

AMNTSHIELD
$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
###
G OFF THE SPARE PARTS OVER 20 YEARS
WRITE OFF TAX

AMNTSHIELD
$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
SUMMARY OF THE SCENARIOS
SR. ANNUAL EQ.

DESCRIPTION OF SCENARIO NET COSTS
NO. COST
1 REHABILITATING CYNTHIA WITHOUT SPARE PARTS $984,380.40 $115,619.03

2 BUYING DIESEL BOAT FOR 20 YEARS $978,120.23 $114,883.75
3 BUYING DIESEL BOAT FOR 25 YEARS $1,029,032.04 $113,366.98
4 CONTRACTING DIESEL BOAT FOR 25 YEARS $898,982.13 $99,039.56
5 CONVERTING CYNTHIA IMMEDIATELY $964,219.88 $113,251.10
6 CONVERTING CYNTHIA 1 YR FROM NOW $997,919.52 $117,209.25
7 REHABILITATING CYNTHIA WITH SPARE PARTS $993,672.22 $116,710.38
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
Page 1
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 implicit
implicit 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 require
any 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 was
very conservative. The debt-to-equity ratio in 1950 was 0.075, indicating that the company could easily borrow
at 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 not
in compliance with the new guidelines, the results for the steamboat scenarios would only get worse. In this
case, 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 already
known, the intangible aspect of this alternative was the status of the boat once refurbished. It should be noted
that 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 saves
approximately $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 technique
would 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 much
hassle.
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 immediate
stoker 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 cost
of 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 the
analysis may suggest that the two main options (overhaul vs. purchase) are close in cost, it is obvious that
all the intangibles associated with this case that the purchase of the new diesel powered boats guarantees a
successful future, whereas the steamboat option is dependent on unlikely events.
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, resi
• ATCF(After-tax cash flow) will be calculated using the formula = Operating Costs after taxes plus Tax shields from depreciatio
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:
|BOOK VALUE |$39,500.00 | | | |
|| | | | |
|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF 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 |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 |

|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 b
do they occur?
Rehabilitation with parts.
scrap and used parts).
abilitation alternative, residual value is zero at the end of year 20.
x shields from depreciation.

y. All NPVs are negative because revenue data was not provided and therefore all cash flows are outflows.
BOOK VALUE $39,500.00
Present
Depreciation Write Off
Year Tax Shield Value to Tax
% Amnt
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
Present
% Amnt
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
The relevant cash flows for Rehabilitation of Conway without parts are:
0 1 2 3
Present
% Amnt
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
Present
% Amnt
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

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DataGiven

Summary of the case

Useful life of Cynthia on rehabilitation 20 years

Cost of spare parts $43,500.00

Annual operating costs of Cynthia $203,150.00

Cost of Diesel Boat $325,000.00

Additional costs of converting Cynthia $40,000.00

Estimated opportunity cost of capital 0.1

Shareholder Equity ###

Annual rental costs of renting a diesel boat for 15 years

Total cost of renting the boat – rental+operational expenses

The schedule runs as follows

Tax rate will remain constant at .48

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

Tax Rate 0.48

COST COMPUTATION OF REHABILITATING CYNTHIA

OPPURTUNITY COST OF CAPITAL 0.1

BOOK VALUE OF CYNTHIA

TOTAL DEPRECIATED VALUE

TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA

ADDITIONAL YEARS OF LIFE 20

TOTAL DEPRECIATED VALUE

OPPORTUNITY COST OF NOT SELLING CYNTHIA $25,000.00

ANNUAL OPERATING COSTS $203,120.00

TAX SHIELD FROM OPERATING EXPENSES $97,497.60

TOTAL COSTS $1,847,283.68

NET COST $984,380.40

DEPRECIATION %WRITE OFF AMNT

3.75 $1,481.25 $711.00 $646.36

ECIATED VALUE $39,500.00

HIELD BY DEPRECIATING CYNTHIA $8,387.99

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

DEPRECIATION %WRITE OFF AMNT

3.75 $4,312.50 $2,070.00 $1,881.82

ECIATED VALUE $115,000.00

COSTS-PV ALL TAX SHIELDS

BUYING DIESEL BOAT AND SCRAPING IT IN 20 YRS

OPPURTUNITY COST OF CAPITAL 0.1

COST ANALYSIS OF DISPENSING CYNTHIA AT T=0

BOOK VALUE OF CYNTHIA $39,500.00

EFFECTIVE COST OF SCRAPING CYNTHIA -6,960.00

DIESEL BOAT ANALYSIS

TOTAL DEPRECIATED VALUE

TOTAL TAX SHIELD FROM DEPR

TOTAL DEPRECIATED VALUE

TOTAL TAX SHIELD FROM DEPR

SCRAP VALUE OF BOAT AT END OF 20 YRS $32,500.00

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

ANNUAL OPERATING COST $156,640.00

TAX SHIELD FROM DEPRECIATING BOAT $69,015.10

PV OF OPERATING COST ###

EQUIVALENT ANNUAL COST $114,883.75

DEPRECIATION OF DIESEL BOAT

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

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

AL DEPRECIATED VALUE ###

AL TAX SHIELD FROM DEPRECIATING DIESEL BOAT ###

DEPRECIATION OF INVENTORY PARTS

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

AL DEPRECIATED VALUE $75,000.00

AL TAX SHIELD FROM DEPRECIATING DIESEL BOAT ###

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

(PV OF SPARE PARTS AND SELLING CYNTHIA)