Racette & Sons (R&S), a Colorado shipyard, has approached RNI with a design incorporating a Kort nozzle, extensively automated navigation and power control systems, and much more comfortable accommodations for the crew. R&S is offering the new vessel for a fixed price of $3,000,000, payable half immediately and half on delivery in one year. Estimated annual operating costs of the new vessel are in Table 5. The operating cost estimates in the table are current for March 2016, but will increase with inflation. The crew would require additional training to handle the new vessel’s more complex and sophisticated equipment. Training would result in a one-time cost of $50,000 payable one year following delivery of the new vessel. This cost is tax deductible. The estimated operating costs for the new vessel assume that it would be operated in the same way as the old ship the Maracas. However, the new vessel will be able to handle a larger load on some routes, which is expected to generate additional revenues, net of additional operating costs, of approximately $175,000 per year in the first year of operation. These revenues are expected to grow at the rate of inflation (1.25% a year). Revenues and operating costs from the new vessel will begin one year after it is delivered. The new vessel is estimated to have a useful service life of 20 years, but it will be depreciated for tax purposes according to the 7-year MACRS schedule. The new vessel is not expected to have any resale value at the end of its 20-year useful life. All revenues and costs (including depreciation) associated with the new vessel will begin one year after it is delivered.
Table 5: Operating Costs of New Vessel:
Fuel $380,000
Labor and benefits 330,000
Maintenance 70,000
Other 105,000
Total: $885,000
Calculate the present value of buying and operating the new vessel. What, if any, additional information would be useful to you in your analysis? Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 2.