New Economy Transport (B) There is no question that the Vital Spark needs an overhaul soon. However, Mr. Handy feels it unwise to proceed without also considering the purchase of a new vessel. Cohn and Doyle, Inc., a Wisconsin shipyard, has approached NETCO with a design incorporating a Kort nozzle, exten- sively automated navigation and power control systems, and much more comfortable accommoda- tions for the crew. Estimated annual operating costs of the new vessel are: Fuel Labor and benefits Maintenance Other $380,000 330,000 70,000 105,000 $885,000 The crew would require additional training to handle the new vessel's more complex and sophisti- cated equipment. Training would probably cost $50,000 next year. The estimated operating costs for the new vessel assume that it would be operated in the same way as the Vital Spark. However, the new vessel should be able to handle a larger load on some routes, which could generate additional revenues, net of additional out-of-pocket costs, of as much as $100,000 per year. Moreover, a new vessel would have a useful service life of 20 years or more Cohn and Doyle offered the new vessel for a fixed price of $3,000,000, payable half immedi- ately and half on delivery next year. This additional outlay would also qualify for tax depreciation in the seven-year MACRS class. Chapter 6 Making Investment Decisions with the Net Present Value Rule Mr. Handy stepped out on the foredeck of the Vital Spark 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 Cohn and Doyle are building her replacement. We could use up the spare parts to keep her going. We might even be able to sell or scrap her for book value when her replacement arrives. "But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a 20-year NPV spreadsheet, but I don't have a clue how the replacement will be used in 2030 or 2035. Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the cost of buying and operating the proposed replacement." QUESTIONS 1. Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for 20 years. What should Mr. Handy do if the replacement's annual costs are the same or lower? 2. Suppose the replacement's equivalent annual costs are higher than the Vital Spark's. What additional information should Mr. Handy seek in this case? New Economy Transport (B) There is no question that the Vital Spark needs an overhaul soon. However, Mr. Handy feels it unwise to proceed without also considering the purchase of a new vessel. Cohn and Doyle, Inc., a Wisconsin shipyard, has approached NETCO with a design incorporating a Kort nozzle, exten- sively automated navigation and power control systems, and much more comfortable accommoda- tions for the crew. Estimated annual operating costs of the new vessel are: Fuel Labor and benefits Maintenance Other $380,000 330,000 70,000 105,000 $885,000 The crew would require additional training to handle the new vessel's more complex and sophisti- cated equipment. Training would probably cost $50,000 next year. The estimated operating costs for the new vessel assume that it would be operated in the same way as the Vital Spark. However, the new vessel should be able to handle a larger load on some routes, which could generate additional revenues, net of additional out-of-pocket costs, of as much as $100,000 per year. Moreover, a new vessel would have a useful service life of 20 years or more Cohn and Doyle offered the new vessel for a fixed price of $3,000,000, payable half immedi- ately and half on delivery next year. This additional outlay would also qualify for tax depreciation in the seven-year MACRS class. Chapter 6 Making Investment Decisions with the Net Present Value Rule Mr. Handy stepped out on the foredeck of the Vital Spark 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 Cohn and Doyle are building her replacement. We could use up the spare parts to keep her going. We might even be able to sell or scrap her for book value when her replacement arrives. "But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a 20-year NPV spreadsheet, but I don't have a clue how the replacement will be used in 2030 or 2035. Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the cost of buying and operating the proposed replacement." QUESTIONS 1. Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for 20 years. What should Mr. Handy do if the replacement's annual costs are the same or lower? 2. Suppose the replacement's equivalent annual costs are higher than the Vital Spark's. What additional information should Mr. Handy seek in this case