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NPV Analyses

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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.


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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Year Procedures
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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.

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