Problem:
Based on the following data/assumptions:
Refurbishment an Existing Boat
|
1. Useful life
|
20 years
|
|
2. Rehabilitation costs
|
$115,000
|
|
3. Estimated value of existing new spare parts that could be used to offset the rehabilitation costs
|
$43,500
|
|
4. Dismantling and scrapping of old parts offset by salvage
|
|
|
5. Straight-line depreciation of book and rehabilitation costs over 20 years
|
|
|
6. Depreciable basis
|
$154,500
|
|
7. Existing book value of Conway
|
$39,500
|
Or Purchase New Boat
|
1. Existing book value of Conway
|
$39,500
|
|
2. Salvage value of Conway
|
$25,000
|
|
3. Market value of Conway spare parts
|
$30,000
|
|
4. Annual operating costs of Conway
|
$203,150
|
|
5. Annual operating costs of new boat
|
$156,640
|
|
6. Invoice of new boat
|
$325,000
|
|
7. Additional new spare parts inventory
|
$75,000
|
|
8. Engine overhaul (YR 10)
|
$60,000
|
|
9. Salvage value of new boat (YR 20)
|
$32,500
|
|
10. Salvage value of new boat parts (YR 20)
|
$37,500
|
|
11. Straight-line depreciation schedule:
|
|
|
Hull
|
25 years
|
|
Parts inventory
|
25 years
|
|
Engines
|
10 years
|
|
12. Depreciable basis of hull
|
$265,000
|
General Assumptions:
|
1. Cost-of-capital (after-tax)
|
10%
|
|
2. Tax rate
|
40%
|
|
3. Inflation escalator
|
3.0%
|
|
4. Tax shields can be used against other income.
|
|
I need to develop two NPV analyses, one for the rehabilitation of the existing boat and one for the purchase of a new boat. The data should be consolidated as follows:
• YR 0, YR 1, YR 2, YR 10, and YR 20
• NPV of rehabilitation (actually net cost since the rehabilitation is in YR 0, undiscounted cash flows)
• NPV of new boat purchase