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NPV Analyses

Based on the following data/assumptions:
Refurbishment an Existing Boat

1. Useful life 20 years
2. Rehabilitation costs $115,000
3. Estimated value of existing new spare parts that could be used to offset the rehabilitation costs $43,500
4. Dismantling and scrapping of old parts offset by salvage
5. Straight-line depreciation of book and rehabilitation costs over 20 years
6. Depreciable basis $154,500
7. Existing book value of Conway $39,500
Or Purchase New Boat

1. Existing book value of Conway $39,500
2. Salvage value of Conway $25,000
3. Market value of Conway spare parts $30,000
4. Annual operating costs of Conway $203,150
5. Annual operating costs of new boat $156,640
6. Invoice of new boat $325,000
7. Additional new spare parts inventory $75,000
8. Engine overhaul (YR 10) $60,000
9. Salvage value of new boat (YR 20) $32,500
10. Salvage value of new boat parts (YR 20) $37,500
11. Straight-line depreciation schedule:
Hull 25 years
Parts inventory 25 years
Engines 10 years
12. Depreciable basis of hull $265,000
General Assumptions

1. Cost-of-capital (after-tax) 10%
2. Tax rate 40%
3. Inflation escalator 3.0%
4. Tax shields can be used against other income.
I need to develop two NPV analyses, one for the rehabilitation of the existing boat and one for the purchase of a new boat. The data should be consolidated as follows:
• YR 0, YR 1, YR 2, YR 10, and YR 20
• NPV of rehabilitation (actually net cost since the rehabilitation is in YR 0, undiscounted cash flows)
• NPV of new boat purchase

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Solution Preview

Dear Customer,

I have provided detailed steps to solving the problem along with the formatted excel sheet.

Tutorial:

Real discount rate is found from nominal rate (10%) and inflation (3%).
(1 + Real) = (1 + Nominal) * (1 + Inflation)
Real rate = 6.80%

Option1: Rehabilitation

Book value of Conway = $39,500 + $115,000 = $154,500
Initial cash ...

Solution Summary

A detailed explanation has been provided. Also, all formulae have been presented.

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