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"But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a 20-year NPV spreadsheet, but I don't have a clue how the replacement will be used by the end of that time. Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the cost of buying and operating the proposed replacement." QUESTIONS 1. Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for 20 years. What should Mr. Handy do if the replacement's annual costs are the same or lower? 2. Suppose the replacement's equivalent annual costs are higher than the Vital Spark's. What additional information should Mr. Handy seek in this case?

"But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a 20-year NPV spreadsheet, but I don't have a clue how the replacement will be used by the end of that time. Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the cost of buying and operating the proposed replacement." QUESTIONS 1. Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for 20 years. What should Mr. Handy do if the replacement's annual costs are the same or lower? 2. Suppose the replacement's equivalent annual costs are higher than the Vital Spark's. What additional information should Mr. Handy seek in this case?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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New Economy Transport (B) There is no question that the Vital Spark needs an overhaul soon. However, Mr. Handy feels it unwise to proceed without also considering the purchase of a new vessel. Cohn and Doyle Inc., a Wisconsin shipyard, has approached NETCO with a design incorporating a Kort nozzle, extensively automated navigation and power control systems, and much more comfortable accommodations for the crew. Estimated annual operating costs of the new vessel are: Fuel Labor and benefits. Maintenance Other $380,000 330,000 70,000 105,000 $885,000 Page 183 The crew would require additional training to handle the new vessel's more complex and sophisticated equipment. Training would. probably cost $50,000 next year. The estimated operating costs for the new vessel assume that it would be operated in the same way as the Vital Spark. However, the new vessel should be able to handle a larger load on some routes, which could generate additional revenues, net of additional out- of-pocket costs, of as much as $100,000 per year. Moreover, a new vessel would have a useful service life of 20 years or more. Cohn and Doyle offered the new vessel for a fixed price of $3,000,000, payable half immediately and half on delivery next year. Mr. Handy stepped out on the foredeck of the Vital Spark as it chugged down the Cook Inlet. "A rusty old tub," he muttered, "but it's never let us down. I'll bet we could keep it going until next year while Cohn and Doyle are building its replacement. We could use up the spare parts to keep it going. We might even be able to sell or scrap it for book value when its replacement arrives.
Transcribed Image Text:New Economy Transport (B) There is no question that the Vital Spark needs an overhaul soon. However, Mr. Handy feels it unwise to proceed without also considering the purchase of a new vessel. Cohn and Doyle Inc., a Wisconsin shipyard, has approached NETCO with a design incorporating a Kort nozzle, extensively automated navigation and power control systems, and much more comfortable accommodations for the crew. Estimated annual operating costs of the new vessel are: Fuel Labor and benefits. Maintenance Other $380,000 330,000 70,000 105,000 $885,000 Page 183 The crew would require additional training to handle the new vessel's more complex and sophisticated equipment. Training would. probably cost $50,000 next year. The estimated operating costs for the new vessel assume that it would be operated in the same way as the Vital Spark. However, the new vessel should be able to handle a larger load on some routes, which could generate additional revenues, net of additional out- of-pocket costs, of as much as $100,000 per year. Moreover, a new vessel would have a useful service life of 20 years or more. Cohn and Doyle offered the new vessel for a fixed price of $3,000,000, payable half immediately and half on delivery next year. Mr. Handy stepped out on the foredeck of the Vital Spark as it chugged down the Cook Inlet. "A rusty old tub," he muttered, "but it's never let us down. I'll bet we could keep it going until next year while Cohn and Doyle are building its replacement. We could use up the spare parts to keep it going. We might even be able to sell or scrap it for book value when its replacement arrives.
"But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a 20-year NPV spreadsheet, but I don't have a clue how the replacement will be used by the end of that time. Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the cost of buying and operating the proposed replacement." QUESTIONS 1. Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for 20 years. What should Mr. Handy do if the replacement's annual costs are the same or lower? 2. Suppose the replacement's equivalent annual costs are higher than the Vital Spark's. What additional information should Mr. Handy seek in this case?
Transcribed Image Text:"But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a 20-year NPV spreadsheet, but I don't have a clue how the replacement will be used by the end of that time. Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the cost of buying and operating the proposed replacement." QUESTIONS 1. Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for 20 years. What should Mr. Handy do if the replacement's annual costs are the same or lower? 2. Suppose the replacement's equivalent annual costs are higher than the Vital Spark's. What additional information should Mr. Handy seek in this case?
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