The Northeast Transport Company $($netco$)$ was formed in $1959$ to carry cargo and passengers between ports in the Eastern Caribbean. By $2018,$ its fleet had grown to four vessels, including a small dry$-$cargo vessel, the ReRe Spark. The ReRe Sparkis $33$ years old and badly in need of an overhaul. Peter Handy, the financedirector, has just been presented with a proposal that would require the following expenditures: Overhaul engine and generators

$$340,000$

Replace radar and other electronic equipment

$75,000$

Repairs to hull and superstructure

$310,000$

Painting and other repairs

$95,000$

Total $$820,000$

Mr$.$ Handy believes that all these outlays could be depreciated for tax purposes in the seven$-$year MACRS class.

NETCO's chief engineer, McPhail, estimates the post$-$overhaul operating costs as follows:

Fuel

$450,000$$

Labor and benefits

$480,000$

Maintenance

$141,000$

Other

$110,000$

Total $$1,181,000$

These costs generally increase with inflation, which is forecasted at $2\mathrm{.}5\%$ a year. The ReRe 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 $$200,000.$ The book value of the spare parts inventory is $$40,000.$ Sale of the ReRe Spark would generate an immediate tax liability on the difference between sale price and book value.

The chief engineer also suggests installation of a brand$-$new engine and control system, which would cost an extra $$600,000.$This additional equipment would not substantially improve the ReRe Spark's performance, but would result in the following reduced annual fuel, labor, and maintenance costs: Fuel

$400,000$

Labor and benefits

$405,000$

Maintenance

$105,000$

Other

$110,000$

TOTAL $$1,020,000$

Overhaul of the ReRe 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\mathrm{.}4$ million next year, increasing with inflation thereafter.

But the ReRe 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 $21\%.$

QUESTION

Calculate the NPV And The IRR of the proposed overhaul of the Vital Spark, with and without the new engine and control system. $.$what do you think should be the decision of the management of Northeast Transport $?$