Capital Budget $at$ Rio Negro, Inc:. 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 Maracas.

However, the new vessel will be able to handle a larger load on some routes, which is expected to generate

additional revenues of approximately $$175,000$ per year in the first year of operation. These revenues are expected

to grow at the rate of inflation. 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.

The Maracas is carried on RNI$$s books at a book value of only $$100,000$ and the book value of the spare parts is

$$40,000.$ The Maracas could probably be sold now $$as is$,$ together with its extensive inventory of spare parts, for

$$200,000.$

Mr$.$ John stepped out on the foredeck of the Maracas as she chugged down the Cook Inlet. $$A rusty old tub,$$ he

muttered, $$but she$$s never let us down. I$$ll bet we could keep her going until next year while Racette & Sons are

building her replacement. We could use up the spare parts $($$$40,000)$ to keep her going and we should even be able

to sell or scrap her for book value when her replacement arrives.$$

RNI evaluates capital investments of this type using a $8\mathrm{.}5\%$ cost of capital. $($This is a nominal, not real, rate.$)$ RCI$$s

tax rate is $35\%.$

Help with # $5.$ 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 $2.$