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
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
I have provided detailed steps to solving the problem along with the formatted excel sheet.
Real discount rate is found from nominal rate (10%) and inflation (3%).
(1 + Real) = (1 + Nominal) * (1 + Inflation)
Real rate = 6.80%
Book value of Conway = $39,500 + $115,000 = $154,500
Initial cash ...
A detailed explanation has been provided. Also, all formulae have been presented.
Net Present Value Analysis
The Vice president of your division wishes to propose the implementation of a new service for your health care organization and has assigned the project to you. You have gathered all the information necessary to submit the proposal as part of the budget process for next year. You have determined that the new service will require an investment $380,000 for equipment and start-up costs. The equipment will have a seven-year life and would provide capacity for 10,600 procedures per year.
You have assessed the market for the new service and have determined that there are already three providers in the market, but that the market is growing and there is some unmet need. You have determined that the market average price for the services is $89.00 per procedure. You have also prepared a pro forma operating budget that shows that the variable costs will be $45.00 per procedure and that fixed costs, excluding depreciation, will be constant at $40,000 for the first 3,400 procedures and will then increase by $25,000 for each increment of 1,200 procedures thereafter.
The vice president has provided you with the following volume estimates and says we should assume that the program would be considered mature and volume would stabilize in year three:
The financial policy of your health care organization stipulates that proposed capital projects must produce a positive cumulative net present value for their first five years of operation using the currently approved discount factor. The discount factor specified for next year's budget proposals is 8%.
A. Complete a net present value analysis of the proposed new service.
B. If the project fulfills the financial policy stated above, prepare a short report of the CFO proposing the inclusion of new service in the capital budget for next year. If the project does not fulfill the stated policy, prepare a short report to the Division Vice President explaining the results of your analysis with any suggestions you might make to improve the viability of the project. In either case, be sure to include appropriate schedules demonstrating your analysis.