Professional Documents
Culture Documents
20 years
$39,500.00
$115,000.00
$25,000.00
$43,500.00
$71,500.00
$30,000.00
$203,150.00
$325,000.00
$75,000.00
25 years
$60,000.00
$156,640.00
$32,500.00
$37,500.00
0.1
0.48
###
$150,000.00
0.03
Page 1
DataGiven
Depreciation:
Assumption:
Though the case pertains to time period of 50's we are using a 20 year depreciation schedule
The schedule runs as follows
Year
%age
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
100
OTHER ASSUMPTIONS
Tax rate will remain constant at .48
All figures have been stated in real terms, inflation ignored
The Operating Expenses reported each year will remain constant
Opportunity Cost of Capital is considered as an expense
Tax shield is effectively cost saving as the firm can use that against profit made on other boats/ships
Page 2
DataGiven
Page 3
DataGiven
tion schedule
on other boats/ships
Page 4
REHABILITATING
CYNTHIA WITHOUT
SPARE PARTS
Income
Income by selling
Cynthia
Income by selling spare
parts
PV Scrap value of diesel
boat
PV Scrap value of
inventory parts
Total Income
30,000.00
BUYING DIESEL
BOAT FOR 20
YEARS
BUYING DIESEL
BOAT FOR 25
YEARS
CONTRACTING
CONVERTING
DIESEL BOAT FOR CYNTHIA
25 YEARS
IMMEDIATELY
CONVERTING
CYNTHIA 1 YR
FROM NOW
REHABILITATING
CYNTHIA WITH
SPARE PARTS
25,000.00
25,000.00
25,000.00
30,000.00
30,000.00
30,000.00
30,000.00
30,000.00
5,574.14
65,405.05
55,000.00
55,000.00
30,000.00
30,000.00
0.00
-25,000.00
-25,000.00
-25,000.00
-325,000.00
-325,000.00
4,830.92
30,000.00
Expenses
Opportunity cost of not
selling Cynthia
Purchase of diesel boat
Opportunity cost of not
selling spare parts
Cost of converting
Cynthia
PV of operating cost
PV of overhauling
Inventory
PV of annual payment
PV of tax to be paid on
undervalued boat
PV of tax to be paid on
undervalued inventory
Tax on income
Total expenses
Tax shields
PV of tax shield due to
operating expenses
Depreciation of Cynthia's
book value
Depreciation of Cynthia
after rehabilitation
PV of tax shield from
annual payments
PV of tax shield from
overhaul expenses
-25,000.00
-30,000.00
-115,000.00
-1,729,363.68
-1,333,632.96
-23,132.60
-75,000.00
-1,421,821.28
-32,051.22
-75,000.00
-1,421,821.28
-32,051.22
-75,000.00
-212,596.93
-155,000.00
-1,630,005.30
-178,636.36
-1,659,010.23
-71,500.00
-1,729,363.68
-2,318.84
-14,400.00
-1,883,763.68
-2,675.59
-31,394.43
-1,793,154.41
-26,400.00
-1,880,272.50
-26,400.00
-1,767,869.43
-14,400.00
-1,824,405.30
-14,400.00
-1,877,046.59
0.00
-1,855,863.68
830,094.57
640,143.82
682,474.21
682,474.21
782,402.54
796,324.91
830,094.57
8,387.99
8,387.99
24,420.73
32,914.89
102,046.53
11,103.65
15,384.58
8,387.99
46,322.16
15,183.32
REHABILITATING
CYNTHIA WITHOUT
SPARE PARTS
Loss from selling Cynthia
due to difference in MV
and BV
PV of tax shield by
depreciating inventory
PV of tax shield from
spare parts
PV of tax shield by
depreciating diesel boat
Total Tax Shield
BUYING DIESEL
BOAT FOR 20
YEARS
BUYING DIESEL
BOAT FOR 25
YEARS
CONTRACTING
CONVERTING
DIESEL BOAT FOR CYNTHIA
25 YEARS
IMMEDIATELY
CONVERTING
CYNTHIA 1 YR
FROM NOW
REHABILITATING
CYNTHIA WITH
SPARE PARTS
6,960.00
6,960.00
6,960.00
15,926.56
15,926.56
15,926.56
6,480.00
6,480.00
6,480.00
6,480.00
6,480.00
6,480.00
869,383.28
69,015.10
749,629.12
69,015.10
796,240.45
813,887.30
830,185.42
849,127.07
862,191.46
Net Cost
Annuity factor
-984,380.40
8.51
-978,120.23
8.51
-1,029,032.04
9.08
-898,982.13
9.08
-964,219.88
8.51
-997,919.52
8.51
-993,672.22
8.51
-115,619.03
-114,883.75
-113,366.98
-99,039.56
-113,251.10
-117,209.25
-116,710.38
8,525.59
Opportunit
y cost of
capital
Tax Rate
0.1
0.48
Opportunit
y cost of
capital
0.1
Scenario 1
0.1
1.1
DEPRECIATION OF CYNTHIA
YEAR
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA
20
$115,000.00
YEAR
Page 9
Scenario 1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
TOTAL DEPRECIATED VALUE
PV TAX SHIELD
$25,000.00
$203,120.00
0.1
8.51
$1,729,363.68
TOTAL COSTS
TOTAL TAX SHIELDS
Page 10
Scenario 1
NET COST
EQUIVALENT ANNUAL COSTS
$984,380.40
$115,619.03
Page 11
Scenario 1
ATION OF CYNTHIA
$39,500.00
ECIATED VALUE
$1,481.25
$2,851.90
$2,638.60
$2,441.10
$2,255.45
$2,085.60
$1,931.55
$1,785.40
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$888.75
$711.00
$1,368.91
$1,266.53
$1,171.73
$1,082.62
$1,001.09
$927.14
$856.99
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$426.60
$646.36
$1,131.33
$951.56
$800.31
$672.22
$565.09
$475.77
$399.79
$358.62
$326.02
$296.38
$269.44
$244.94
$222.68
$202.43
$184.03
$167.30
$152.09
$138.26
$125.70
$57.65
$39,500.00
$8,387.99
Page 12
Scenario 1
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
ECIATED VALUE
$4,312.50
$8,303.00
$7,682.00
$7,107.00
$6,566.50
$6,072.00
$5,623.50
$5,198.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$5,129.00
$2,587.50
$2,070.00
$3,985.44
$3,687.36
$3,411.36
$3,151.92
$2,914.56
$2,699.28
$2,495.04
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$2,461.92
$1,242.00
$1,881.82
$3,293.75
$2,770.37
$2,330.00
$1,957.09
$1,645.19
$1,385.16
$1,163.95
$1,044.09
$949.18
$862.89
$784.44
$713.13
$648.30
$589.36
$535.79
$487.08
$442.80
$402.54
$365.95
$167.83
$115,000.00
###
Page 13
Scenario 1
Page 14
Scenario 1
AX SHIELD
AX SHIELD
Page 15
Scenario 1
Page 16
Scenario 1
Page 17
Scenario 2
0.1
1.1
8.51
$39,500.00
$25,000.00
$14,500.00
$6,960.00
-6,960.00
30,000.00
-6,480.00
PRICE
INVENTORY
$325,000.00
$75,000.00
Page 18
Scenario 2
$32,500.00
$4,830.92
$37,500.00
$5,574.14
Page 19
Scenario 2
PV OF OPERATING COST
PV OF TAX SHIELD FROM OPERATING EXPENSES
$156,640.00
$75,187.20
$69,015.10
$15,926.56
###
$640,143.82
PV OF OVERHAULING
TAX SHIELD FROM OVERHAULING
PV OF TAX TO BE PAID ON UNDERVALUED BOAT AT T=20
PV OF TAX TO BE PAID ON UNDERVALUED INVENTORY PARTS
TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS
DUE TO DIFFERENCE IN BV AND MV
TOTAL INCOME
TAX FROM INCOME (SELLING CYNTHIA, SPARE PARTS AND THE
SCRAP VALUE ON DIESEL BOAT AND INVENTORIES)
TOTAL TAX SHIELDS
TOTAL EXPENSES
NET COST
$31,394.43
$749,629.12
###
$978,120.23
$114,883.75
Page 20
23132.6
11103.65
$2,318.84
$2,675.59
6,480.00
$65,405.05
Scenario 2
N 20 YRS
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
$12,187.50 $5,850.00
$23,465.00 $11,263.20
$21,710.00 $10,420.80
$20,085.00 $9,640.80
$18,557.50 $8,907.60
$17,160.00 $8,236.80
$15,892.50 $7,628.40
$14,690.00 $7,051.20
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
Page 21
$5,318.18
$9,308.43
$7,829.30
$6,584.80
$5,530.92
$4,649.46
$3,914.58
$3,289.44
$2,950.70
$2,682.46
$2,438.60
$2,216.91
$2,015.37
$1,832.15
$1,665.59
$1,514.18
$1,376.52
Scenario 2
18
19
20
21
4.46
4.46
4.46
2.25
AL DEPRECIATED VALUE
$14,495.00
$14,495.00
$14,495.00
$7,312.50
$6,957.60
$6,957.60
$6,957.60
$3,510.00
$1,251.39
$1,137.62
$1,034.20
$474.31
###
###
AL DEPRECIATED VALUE
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
$2,812.50
$5,415.00
$5,010.00
$4,635.00
$4,282.50
$3,960.00
$3,667.50
$3,390.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$1,687.50
$1,350.00
$2,599.20
$2,404.80
$2,224.80
$2,055.60
$1,900.80
$1,760.40
$1,627.20
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$810.00
$1,227.27
$2,148.10
$1,806.76
$1,519.57
$1,276.37
$1,072.95
$903.36
$759.10
$680.93
$619.03
$562.75
$511.59
$465.09
$422.80
$384.37
$349.43
$317.66
$288.78
$262.53
$238.66
$109.46
$75,000.00
###
Page 22
Scenario 2
Page 23
Scenario 2
AX SHIELD
Page 24
Scenario 2
AX SHIELD
Page 25
Scenario 2
Page 26
Scenario 3
0.1
1.1
9.08
$39,500.00
$25,000.00
$14,500.00
$6,960.00
-6960
55000
$325,000
$75,000
Page 1
Scenario 3
Page 2
6480
Scenario 3
$156,640
PV OF OPERATING COSTS
PV OF OVERHAULING
TAX SHIELD FROM OPERATING EXPENSES
TAX SHIELD FROM OVERHAULING EXPENSES
TAX ON INCOME
TOTAL EXPENSES
INCOME
TOTAL TAX SHIELD
NET COST
$1,421,821
32,051.22 $
682,474.21 $
15,384.58 $
26,400.00 $
1,880,272.50 $
55,000.00 $
796,240.45 $
$1,029,032.04
$113,366.98
Page 3
Scenario 3
25 YRS
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
$12,187.50 $5,850.00
$23,465.00 $11,263.20
$21,710.00 $10,420.80
$20,085.00 $9,640.80
$18,557.50 $8,907.60
$17,160.00 $8,236.80
$15,892.50 $7,628.40
$14,690.00 $7,051.20
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
$14,495.00 $6,957.60
Page 4
$5,318.18
$9,308.43
$7,829.30
$6,584.80
$5,530.92
$4,649.46
$3,914.58
$3,289.44
$2,950.70
$2,682.46
$2,438.60
$2,216.91
$2,015.37
$1,832.15
$1,665.59
Scenario 3
16
17
18
19
20
21
4.46
4.46
4.46
4.46
4.46
2.25
PRECIATED VALUE
$14,495.00
$14,495.00
$14,495.00
$14,495.00
$14,495.00
$7,312.50
$6,957.60
$6,957.60
$6,957.60
$6,957.60
$6,957.60
$3,510.00
$1,514.18
$1,376.52
$1,251.39
$1,137.62
$1,034.20
$474.31
###
$69,015.10
PRECIATED VALUE
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
$2,812.50
$5,415.00
$5,010.00
$4,635.00
$4,282.50
$3,960.00
$3,667.50
$3,390.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$3,345.00
$1,687.50
$1,350.00
$2,599.20
$2,404.80
$2,224.80
$2,055.60
$1,900.80
$1,760.40
$1,627.20
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$1,605.60
$810.00
$1,227.27
$2,148.10
$1,806.76
$1,519.57
$1,276.37
$1,072.95
$903.36
$759.10
$680.93
$619.03
$562.75
$511.59
$465.09
$422.80
$384.37
$349.43
$317.66
$288.78
$262.53
$238.66
$109.46
$75,000.00
$15,926.56
Page 5
Scenario 3
Page 6
Scenario 4
0.1
1.1
9.08
7.61
$6,960.00
$5,700
$21,700
$27,400
$208,404.40
SPARE PARTS
OVERHAUL CHARGES
$75,000
32,051.22 $
212,596.93 $
$156,640
PV OF OPERATING COSTS
$1,421,821
Page 7
6480
13,152.00
100,034.11
682,474.21
1,368.00
$
$
$
$
Scenario 4
8,406.36
2,012.42
813,887.30
55,000.00
26,400.00
1,767,869.43
NET COSTS
ANNUITY FACTOR FOR 25 YRS @ 10 %
EQUIVALENT ANNUAL COSTS
$
$
$
$
$
$
$898,982.13
9.08
$99,039.56
Page 8
Scenario 4
TH YEAR
3.75
$2,812.50
$1,350.00
$1,227.27
2
3
4
7.22
6.68
6.18
$5,415.00
$5,010.00
$4,635.00
$2,599.20
$2,404.80
$2,224.80
$2,148.10
$1,806.76
$1,519.57
5.71
$4,282.50
$2,055.60
$1,276.37
5.28
$3,960.00
$1,900.80
$1,072.95
4.89
$3,667.50
$1,760.40
$903.36
4.52
$3,390.00
$1,627.20
$759.10
9
10
4.46
4.46
$3,345.00
$3,345.00
$1,605.60
$1,605.60
$680.93
$619.03
11
4.46
$3,345.00
$1,605.60
$562.75
12
4.46
$3,345.00
$1,605.60
$511.59
13
4.46
$3,345.00
$1,605.60
$465.09
14
4.46
$3,345.00
$1,605.60
$422.80
15
4.46
$3,345.00
$1,605.60
$384.37
16
4.46
$3,345.00
$1,605.60
$349.43
17
4.46
$3,345.00
$1,605.60
$317.66
18
4.46
$3,345.00
$1,605.60
$288.78
19
4.46
$3,345.00
$1,605.60
$262.53
4.46
$3,345.00
$1,605.60
$238.66
2.25
$1,687.50
$810.00
$109.46
$75,000.00
Page 9
$15,926.56
Scenario 4
Page 10
Scenario 4
Page 11
Scenario 4
Page 12
Scenario 5
0.1
1.1
$40,000.00
$115,000.00
$155,000.00
DEPRECIATION %
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Page 13
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
Scenario 5
DEPRECIATION OF CYNTHIA
YEAR
$39,500.00
DEPRECIATION %
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
$25,000.00
30000
14400
$191,450.00
0.1
8.51
$1,630,005.30
Page 14
Scenario 5
$1,794,405.30
$830,185.42
NET COST
EQUIVALENT ANNUAL COSTS
$964,219.88
$113,251.10
Page 15
Scenario 5
PITAL EXPENSE
WRITE OFFTAX
AMNT
SHIELD
PRESENT VALUE OF TAX SHIELD
$5,812.50
$11,191.00
$10,354.00
$9,579.00
$8,850.50
$8,184.00
$7,579.50
$7,006.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$6,913.00
$3,487.50
$2,790.00
$5,371.68
$4,969.92
$4,597.92
$4,248.24
$3,928.32
$3,638.16
$3,362.88
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$3,318.24
$1,674.00
$2,536.36
$4,439.40
$3,733.97
$3,140.44
$2,637.82
$2,217.43
$1,866.95
$1,568.81
$1,407.26
$1,279.33
$1,163.02
$1,057.29
$961.18
$873.80
$794.36
$722.15
$656.50
$596.81
$542.56
$493.24
$226.21
###
###
Page 16
Scenario 5
WRITE OFFTAX
AMNT
SHIELD
PRESENT VALUE OF TAX SHIELD
$1,481.25
$2,851.90
$2,638.60
$2,441.10
$2,255.45
$2,085.60
$1,931.55
$1,785.40
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$1,761.70
$888.75
CIATING CYNTHIA
$711.00
$1,368.91
$1,266.53
$1,171.73
$1,082.62
$1,001.09
$927.14
$856.99
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$845.62
$426.60
$646.36
$1,131.33
$951.56
$800.31
$672.22
$565.09
$475.77
$399.79
$358.62
$326.02
$296.38
$269.44
$244.94
$222.68
$202.43
$184.03
$167.30
$152.09
$138.26
$125.70
$57.65
###
$8,387.99
Page 17
Scenario 5
TAX SHIELDS
Page 18
Scenario 6
0.1
1.1
SINCE 70,000 IS SPEND IN T=1, IT CANT BE WRITTEN OFF AT T=0, SO SEPERATE SCHEDU
DEPRECIATION OF CYNTHIA
YEAR
DEPRECIATION %
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Page 19
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
Scenario 6
TOTAL DEPRECIATED VALUE
YEAR
DEPRECIATION %
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
$25,000.00
Page 20
Scenario 6
$203,120.00
$191,450.00
0.1
8.37
$1,601,479.25
$1,455,890.23
30000
14400
$1,659,010.23
$796,324.91
$13,513.45
$32,808.71
$842,647.07
$1,877,046.59
$849,127.07
TOTAL INCOME
30000
NET COST
$997,919.52
$117,209.25
Page 21
Scenario 6
AR HENCE
WHAT IS MENTIONED IN SCENARIO 1
SO SEPERATE SCHEDULES
OF CYNTHIA
$2,781.00
$5,354.35
$4,953.89
$4,583.09
$4,234.54
$3,915.65
$3,626.42
$3,352.03
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$3,307.54
$1,668.60
$2,528.18
$4,425.08
$3,721.93
$3,130.31
$2,629.31
$2,210.28
$1,860.93
$1,563.75
$1,402.72
$1,275.20
$1,159.27
$1,053.88
$958.08
$870.98
$791.80
$719.82
$654.38
$594.89
$540.81
$491.64
$225.48
Page 22
Scenario 6
$154,500.00
BY DEPRECIATING CYNTHIA
###
OF 70,000 IN T=1
$1,260.00
$2,425.92
$2,244.48
$2,076.48
$1,918.56
$1,774.08
$1,643.04
$1,518.72
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$1,498.56
$756.00
$1,145.45
$2,004.89
$1,686.31
$1,418.26
$1,191.27
$1,001.42
$843.14
$708.49
$635.54
$577.76
$525.24
$477.49
$434.08
$394.62
$358.74
$326.13
$296.48
$269.53
$245.03
$222.75
$102.16
$70,000.00
###
###
Page 23
Scenario 6
Page 24
0.1
1.1
8.51
DEPRECIATION OF CYNTHIA
YEAR
DEPRECIATION %
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
REHABILITATION COSTS
$71,500.00
DEPRECIATION %
1
3.75
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
2.25
$43,500.00
$30,000.00
DEPRECIATION %
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
3.75
7.22
6.68
6.18
5.71
5.28
4.89
4.52
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
4.46
18
19
20
21
4.46
4.46
4.46
2.25
30000
$1,855,863.68
$862,191.46
$993,672.22
8.51
$116,710.38
CIATION OF CYNTHIA
$711.00
$646.36
$1,368.91 $1,131.33
$1,266.53
$951.56
$1,171.73
$800.31
$1,082.62
$672.22
$1,001.09
$565.09
$927.14
$475.77
$856.99
$399.79
$845.62
$358.62
$845.62
$326.02
$845.62
$296.38
$845.62
$269.44
$845.62
$244.94
$845.62
$222.68
$845.62
$202.43
$845.62
$184.03
$845.62
$167.30
$845.62
$152.09
$845.62
$138.26
$845.62
$125.70
$426.60
$57.65
$39,500.00
###
$5,162.30
$4,776.20
$4,418.70
$4,082.65
$3,775.20
$3,496.35
$3,231.80
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$3,188.90
$1,608.75
$2,477.90
$2,292.58
$2,120.98
$1,959.67
$1,812.10
$1,678.25
$1,551.26
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$1,530.67
$772.20
$2,047.85
$1,722.45
$1,448.66
$1,216.80
$1,022.88
$861.21
$723.68
$649.15
$590.14
$536.49
$487.72
$443.38
$403.07
$366.43
$333.12
$302.84
$275.30
$250.28
$227.52
$104.35
$71,500.00
###
$783.00
$711.82
$1,507.54 $1,245.90
$1,394.78 $1,047.92
$1,290.38
$881.35
$1,192.25
$740.29
$1,102.46
$622.31
$1,021.03
$523.95
$943.78
$440.28
$931.25
$394.94
$931.25
$359.04
$931.25
$326.40
$931.25
$296.72
$931.25
$269.75
$931.25
$245.23
$931.25
$222.93
$931.25
$202.67
$931.25
$184.24
$1,940.10
$1,940.10
$1,940.10
$978.75
$931.25
$931.25
$931.25
$469.80
$167.49
$152.27
$138.42
$63.48
$43,500.00
###
SUMMARY
SR.
NO.
1
2
3
4
5
6
7
DESCRIPTION OF SCENARIO
REHABILITATING CYNTHIA WITHOUT SPARE PARTS
BUYING DIESEL BOAT FOR 20 YEARS
BUYING DIESEL BOAT FOR 25 YEARS
CONTRACTING DIESEL BOAT FOR 25 YEARS
CONVERTING CYNTHIA IMMEDIATELY
CONVERTING CYNTHIA 1 YR FROM NOW
REHABILITATING CYNTHIA WITH SPARE PARTS
NET COSTS
$984,380.40
$978,120.23
$1,029,032.04
$898,982.13
$964,219.88
$997,919.52
$993,672.22
Page 1
ANNUAL EQ.
COST
$115,619.03
$114,883.75
$113,366.98
$99,039.56
$113,251.10
$117,209.25
$116,710.38
the effect that the unions proposition would have on the shipping industry would obviously increase the cost
of doing business. If the controllers instincts are correct, the NPV calculation for the purchasing option would
increase by $4,850 and the EAC would increase by $570. Although these dollars would eat into the profit, the
alternative may be far more costly if fines are administered for those vessels not in compliance. While the
analysis may suggest that the two main options (overhaul vs. purchase) are close in cost, it is obvious that
all the intangibles associated with this case that the purchase of the new diesel powered boats guarantees a
successful future, whereas the steamboat option is dependent on unlikely events.
http://www.123helpme.com/view.asp?id=97850
Economy Shipping
Economy Shipping Company (Abridged)
Question 1. What are the relevant cash flows under each of the two alternatives? And in what years do they occur?
Alternative 1: Rehabilitation of the Conway
We decided to divide this alternative in two parts. Part A is Rehabilitation without parts and Part B is Rehabilitation with parts.
Facts/Assumptions
Conways additional useful life of 20 years.
Book value of Conway: $39,500
Market value of Conway: $25,000. This is the Opportunity Cost of not selling the Conway at year 0.
Rehabilitation costs: $115,000. If spare parts are used, rehabilitation costs would be $71,500.
Book value of spare parts if used on the Conway: $43,500.
Market value of spare parts: $30,000. This is the Opportunity Cost of not selling the spare parts at year 0.
Annual operating costs of Conway: $203,150
No dismantling and scrapping costs at the end of useful life (This will be covered by the value of the scrap and used parts).
Return of 10% after taxes.
Tax rate: 48%
Book cost of Conway, including rehabilitation costs, would be depreciated over a 20-year period.
Depreciation according to the straight line method = (Cost - Residual value) / Useful life. For the rehabilitation alternative, resi
ATCF(After-tax cash flow) will be calculated using the formula = Operating Costs after taxes plus Tax shields from depreciatio
Part A: Rehabilitation without parts
Depreciation =(39500+115000)/20 = $7725 per year.
Tax shield from depreciation = $7725*0.48 = $3708 per year
Here are the depreciation cash flows, the tax shields from depreciation and their present value:
|BOOK VALUE |$39,500.00 | | | |
|| | | | |
|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX |
| | | | |SHIELD |
| | | | | |
|1 |5 |$1,975.00 |$948.00 |$861.82 |
|2 |5 |$1,975.00 |$948.00 |$783.47 |
|3 |5 |$1,975.00 |$948.00 |$712.25 |
|4 |5 |$1,975.00 |$948.00 |$647.50 |
|5 |5 |$1,975.00 |$948.00 |$588.63 |
|6 |5 |$1,975.00 |$948.00 |$535.12 |
|7 |5 |$1,975.00 |$948.00 |$486.47 |
|8 |5 |$1,975.00 |$948.00 |$442.25 |
|9 |5 |$1,975.00 |$948.00 |$402.04 |
|10 |5 |$1,975.00 |$948.00 |$365.50 |
|11 |5 |$1,975.00 |$948.00 |$332.27 |
|12 |5 |$1,975.00 |$948.00 |$302.06 |
|13 |5 |$1,975.00 |$948.00 |$274.60 |
|14 |5 |$1,975.00 |$948.00 |$249.64 |
|15 |5 |$1,975.00 |$948.00 |$226.94 |
|16 |5 |$1,975.00 |$948.00 |$206.31 |
|17 |5 |$1,975.00 |$948.00 |$187.56 |
|18 |5 |$1,975.00 |$948.00 |$170.51 |
|19 |5 |$1,975.00 |$948.00 |$155.01 |
|20 |5 |$1,975.00 |$948.00 |$140.91 |
|REHAB COSTS | |$115,000 | | |
|YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX SHIELD|
| | | | | |
|1 |5 |$5,750.00 |$2,760.00 |$2,509.09 |
|2 |5 |$5,750.00 |$2,760.00 |$2,280.99 |
We recommend the purchase of 1 diesel-boat since this option offers the lowest cost for the company. All NPVs are negative b
do they occur?
y. All NPVs are negative because revenue data was not provided and therefore all cash flows are outflows.
BOOK VALUE
$39,500.00
Year
Depreciation
%
Write Off
Amnt
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
$1,975.00
REHAB COSTS
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Depreciation
%
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
Present
Tax Shield Value to Tax
Shield
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$948.00
$861.82
$783.47
$712.25
$647.50
$588.63
$535.12
$486.47
$442.25
$402.04
$365.50
$332.27
$302.06
$274.60
$249.64
$226.94
$206.31
$187.56
$170.51
$155.01
$140.91
$115,000
Write Off
Amnt
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
$5,750.00
Present
Tax Shield Value to Tax
Shield
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,760.00
$2,509.09
$2,280.99
$2,073.63
$1,885.12
$1,713.74
$1,557.95
$1,416.32
$1,287.56
$1,170.51
$1,064.10
$967.36
$879.42
$799.47
$726.79
$660.72
$600.66
$546.05
$496.41
$451.28
$410.26
The relevant cash flows for Rehabilitation of Conway without parts are:
0 1 2 3
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Depreciation
%
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Depreciation
%
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
Write Off
Amnt
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
$3,575.00
Present
Tax Shield Value to Tax
Shield
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,716.00
$1,560.00
$1,418.18
$1,289.26
$1,172.05
$1,065.50
$968.64
$880.58
$800.53
$727.75
$661.59
$601.45
$546.77
$497.06
$451.88
$410.80
$373.45
$339.50
$308.64
$280.58
$255.07
$43,500.00
$30,000.00
Write Off
Amnt
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
$2,175.00
Present
Tax Shield Value to Tax
Shield
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$1,044.00
$949.09
$862.81
$784.37
$713.07
$648.24
$589.31
$535.74
$487.03
$442.76
$402.51
$365.92
$332.65
$302.41
$274.92
$249.93
$227.20
$206.55
18
19
20
5
5
5
$2,175.00
$2,175.00
$2,175.00
$1,044.00
$1,044.00
$1,044.00
$187.77
$170.70
$155.18