Calculate the NPV of the proposed overhaul of the Vital Spark, with and without the new engine and control system. To do the calculation, you will have to prepare a spreadsheet table showing all costs after taxes over the vessels remaining economic life. Take special care with your assumptions about depreciation tax shields and inflation.

New Economy Transport (A) The New Economy Transport Company (NETCO) was formed in 1959 to carry cargo and passengers between ports in the Pacific Northwest and Alaska. By 2018, its fleet had grown to four vessels, including a small dry-cargo vessel, the Vital Spark. The Vital Spark is 25 years old and budly in need of an overhaul. Peter Handy, the finance director, has just been pre sented with a proposal that would require the following expenditures: Mr. Handy believes that all these out lays could be written off immediately for tax purposes. NETCO's chief engineer, McPhail, estimates the postoverhaul operating costs as follows: These costs generally increase with inflation, which is forecasted at 2.5% a year. The Vital Spark is carried on NETCO's books at a net depreciated value of only $100,000. but could probably be sold "as is," along with an extensive inventory of spare parts, for $200,000. The book value of the spare parts imentory is $40,000. Sale of the Vital Spark would generate an immediate tax liability on the difference between sale price and book value. The chief engineer also suggests instal lation of a brand-new engine and control system, which would cost an extra $600,000. 16 This additional equipment would not substantially improve the Vital Spark's performance, but would result in the following reduced an mal fuel, labor, and maintenance costs: Overhaul of the Vital Spark would take it out of service for several months. The overhauled vessel would resume commercial service next year. Based on past experience, Mr. Handy believes that it would generate revenues of about $1.4 million next year, increasing with inflation thereafter. But the Vital Spark cannot continue forever. Even if overhauled, its useful life is probably no more than 10 years, 12 years at the most. Its salvage value when finally taken out of service will be trivial. NETCO is a conservatively financed firm in a mature business. It normally evaluates capital investments using an 11% cost of capital. This is a nominal, not a real, rate. NETCO's tax rate is 21%. New Economy Transport (A) The New Economy Transport Company (NETCO) was formed in 1959 to carry cargo and passengers between ports in the Pacific Northwest and Alaska. By 2018, its fleet had grown to four vessels, including a small dry-cargo vessel, the Vital Spark. The Vital Spark is 25 years old and budly in need of an overhaul. Peter Handy, the finance director, has just been pre sented with a proposal that would require the following expenditures: Mr. Handy believes that all these out lays could be written off immediately for tax purposes. NETCO's chief engineer, McPhail, estimates the postoverhaul operating costs as follows: These costs generally increase with inflation, which is forecasted at 2.5% a year. The Vital Spark is carried on NETCO's books at a net depreciated value of only $100,000. but could probably be sold "as is," along with an extensive inventory of spare parts, for $200,000. The book value of the spare parts imentory is $40,000. Sale of the Vital Spark would generate an immediate tax liability on the difference between sale price and book value. The chief engineer also suggests instal lation of a brand-new engine and control system, which would cost an extra $600,000. 16 This additional equipment would not substantially improve the Vital Spark's performance, but would result in the following reduced an mal fuel, labor, and maintenance costs: Overhaul of the Vital Spark would take it out of service for several months. The overhauled vessel would resume commercial service next year. Based on past experience, Mr. Handy believes that it would generate revenues of about $1.4 million next year, increasing with inflation thereafter. But the Vital Spark cannot continue forever. Even if overhauled, its useful life is probably no more than 10 years, 12 years at the most. Its salvage value when finally taken out of service will be trivial. NETCO is a conservatively financed firm in a mature business. It normally evaluates capital investments using an 11% cost of capital. This is a nominal, not a real, rate. NETCO's tax rate is 21%