DataGiven
Summary of the case Data Given in the case Useful life of Cynthia on rehabilitation Book value of Cynthia now Rehabilitation costs Salvage value of Cynthia
Cost of spare parts Rehabilitation costs when spare parts are used Salvage value of spare parts
20 years $39,500.00 $115,000.00 $25,000.00
$43,500.00 $71,500.00 $30,000.00
Annual operating costs of Cynthia
$203,150.00
Cost of Diesel Boat Basic parts inventory Life of Diesel Boat Overhaul costs for diesel boat every 10 years Annual operating costs of diesel boat Salvage value of diesel boat at end of 20 years Salvage value of inventory at end of 20 years
$325,000.00 $75,000.00 25 years $60,000.00 $156,640.00 $32,500.00 $37,500.00
Additional costs of converting Cynthia $40,000.00 Costs of conversion after rehabilitation $70,000.00 Annual operating costs of Cynthia after conversion$191,450.00
Estimated opportunity cost of capital Income tax rate Shareholder Equity Short term liability Rate of interest on short term Liability
0.1 0.48 ### $150,000.00 0.03
Annual rental costs of renting a diesel boat for 15 years $21,700.00 Interest charges on renting diesel boat for 15 years $5,700.00 Annual rental 16th year onwards $2,850.00
Page 1
DataGiven
Total cost of renting the boat – rental+operational expenses
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
Equivalent annual cost
-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
COST COMPUTATION OF REHABILITATING CYNTHIA Case: Without spare parts OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR
0.1 1.1 DEPRECIATION OF CYNTHIA
BOOK VALUE 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
ADDITIONAL YEARS OF LIFE REHABILITATION COST
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
OPPORTUNITY COST OF NOT SELLING CYNTHIA ANNUAL OPERATING COSTS OPPURTUNITY COST OF CAPITAL ANNUITY FACTOR ( .1, 20 YRS) PV OF OPERATING COSTS
$25,000.00 $203,120.00 0.1 8.51 $1,729,363.68
TAX SHIELD FROM OPERATING EXPENSES $97,497.60 PV OF TAX SHIELD FROM OPERATING EXPENSES $830,094.57 PV TAX SHIELD FROM REHAB COSTS $24,420.73 NET TAX SHIELD FROM DEPRECIATING CYNTHIA $8,387.99 PV OF SELLING SPARE PARTS 30000 TAX FOR MONEY ACQUIRED ON SELLING SPARE PARTS 14400 TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV 6480 NET INCOME FROM SELLING SPARE PARTS 22080 CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS $1,847,283.68 $862,903.28
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
DEPRECIATION %WRITE OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD 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
$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
HIELD BY DEPRECIATING CYNTHIA
$8,387.99
-- THIS IS A CAPITAL EXPENSE TO BE DEPRECIATED OVER 20 YEARS
DEPRECIATION %WRITE OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD
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 ###
COSTS-PV ALL TAX SHIELDS
Page 13
Scenario 1
Page 14
Scenario 1
AX SHIELD
AX SHIELD
Page 15
Scenario 1
Page 16
Scenario 1
Page 17
Scenario 2
BUYING DIESEL BOAT AND SCRAPING IT IN 20 YRS OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR ANNUITY FACTOR ( .1, 20 YRS)
0.1 1.1 8.51
COST ANALYSIS OF DISPENSING CYNTHIA AT T=0
BOOK VALUE OF CYNTHIA SCRAP VALUE NET LOSS MADE TAX SHIELD FROM CYNTHIA
$39,500.00 $25,000.00 $14,500.00 $6,960.00
EFFECTIVE COST OF SCRAPING CYNTHIA PV OF SPARE PARTS TAX SHIELD ON LOSS FROM SELLING SPARE PARTS
-6,960.00 30,000.00 -6,480.00
DIESEL BOAT ANALYSIS
PRICE INVENTORY
$325,000.00 $75,000.00
Page 18
Scenario 2
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD FROM DEPR
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD FROM DEPR
SCRAP VALUE OF BOAT AT END OF 20 YRS PV OF SCRAP (MARKET) VALUE OF BOAT
$32,500.00 $4,830.92
SCRAP (MARKET) VALUE OF INVENTORY AT END OF 20 YRS PV OF SCRAP VALUE OF INVENTORY
$37,500.00 $5,574.14
Page 19
Scenario 2
ANNUAL OPERATING COST ANNUAL TAX SHIELD FROM OPERATING COST TAX SHIELD FROM DEPRECIATING BOAT TAX SHIELD FROM DEPRECIATING PARTS
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
EQUIVALENT ANNUAL COST
$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
DEPRECIATION OF DIESEL BOAT YEAR DEPRECIATION WRITE % OFF TAX AMNT SHIELD PRESENT VALUE OF TAX SHIELD 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
$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 TAX SHIELD FROM DEPRECIATING DIESEL BOAT
###
DEPRECIATION OF INVENTORY PARTS YEAR DEPRECIATION WRITE % OFF TAX AMNT SHIELD PRESENT VALUE OF TAX SHIELD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
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
AL TAX SHIELD FROM DEPRECIATING DIESEL BOAT
###
Page 22
Scenario 2
(SECOND OVERHAULING NOT NEEDED IS BOAT GETS SCRAPED AT T=20)
(PV OF SPARE PARTS AND SELLING CYNTHIA)
Page 23
Scenario 2
AX SHIELD
Page 24
Scenario 2
AX SHIELD
Page 25
Scenario 2
Page 26
Scenario 3
BUYING DIESEL BOAT AND USING IT FOR 25 YRS OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR ANNUITY FACTOR FOR 25 YRS @ 10 %
0.1 1.1 9.08
BOOK VALUE OF CYNTHIA SCRAP VALUE NET LOSS MADE TAX SHIELD FROM CYNTHIA
$39,500.00 $25,000.00 $14,500.00 $6,960.00
EFFECTIVE COST OF SCRAPING CYNTHIA
-6960
MONEY FROM SELLING CYNTHIA AND SPARE PARTS
55000
DIESEL BOAT ANALYSIS PRICE INVENTORY
$325,000 $75,000
Page 1
Scenario 3
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD FROM DEPREC
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD FROM DEPREC
TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV
Page 2
6480
Scenario 3
ANNUAL OPERATING COST
$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
EQUIVALENT ANNUAL COSTS
$113,366.98
Page 3
Scenario 3
25 YRS
DEPRECIATION OF DIESEL BOAT YEAR DEPRECIATION WRITE %OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
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
###
X SHIELD FROM DEPRECIATING DIESEL BOAT
$69,015.10
DEPRECIATION OF INVENTORY PARTS YEAR DEPRECIATION WRITE %OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD
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
X SHIELD FROM DEPRECIATING DIESEL BOAT
$15,926.56
Page 5
Scenario 3
Page 6
Scenario 4
CONTRACTING DIESEL BOAT FOR 25 YEARS OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR ANNUITY FACTOR FOR 25 YRS @ 10 % ANNUITY FACTOR FOR 15 YRS @ 10%
0.1 1.1 9.08 7.61
TAX SHIELD FROM SCRAPING CYNTHIA
$6,960.00
DIESEL BOAT ANALYSIS INTEREST CHARGES ANNUAL PAYMENTS TOTAL ANNUAL PAYMENT PV OF ANNUITY
$5,700 $21,700 $27,400 $208,404.40
SPARE PARTS OVERHAUL CHARGES
$75,000 32,051.22 $
CALCULATION OF PV OF CHARGES FROM 15 TH TO 25 TH YEAR ANNUITY FACTOR @ 10 % FOR 10 YEARS 6.15 CHARGES EACH YEAR FROM 15 TH YEAR ONWARDS $2,850 PV OF EXPENSES IN THE 15 TH YEAR (FROM YR 15 TO 25)$17,513.25 PV OF EXPENSES FROM 15TH TO 25TH YEAR 4,192.53 $ TOTAL PAYMENTS
212,596.93 $
ANNUAL OPERATING COST
$156,640
PV OF OPERATING COSTS
$1,421,821
TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV
TAX SHIELD CALCULATION ANNUAL TAX SHIELD FROM T=1 TO 15 PV OF TAX SHIELD FROM T=1 TO 15 TAX SHIELD FROM OPERATING EXPENSES ANNUAL TAX SHIELD FROM T=15 TO 25
Page 7
6480
13,152.00 100,034.11 682,474.21 1,368.00
$ $ $ $
Scenario 4
PV OF TAX SHIELD IN THE 15 TH YEAR PV OF TAX SHIELD AT T=0 TOTAL TAX SHIELD TOTAL INCOME TAX ON INCOME TOTAL EXPENSES
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
DEPRECIATION OF INVENTORY PARTS YEAR DEPRECIATION WRITE %OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD
TH YEAR
1
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
5.71
$4,282.50
$2,055.60
$1,276.37
6
5.28
$3,960.00
$1,900.80
$1,072.95
7
4.89
$3,667.50
$1,760.40
$903.36
8
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
-- THIS IS THE VALUE AT20 T=15 21
$75,000.00
Page 9
$15,926.56
Scenario 4
THIS IS SAME AS $2,012.42
Page 10
Scenario 4
ALUE OF TAX SHIELD
Page 11
Scenario 4
Page 12
Scenario 5
CONVERTING CYNTHIA : WITHOUT SPARE PARTS SELLING SPARE PARTS CASE 1: CONVERTING NOW OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR
0.1 1.1
ADDITIONAL COST OF CONVERTING CYNTHIA REHABILITATION COST TOTAL REHAB. COST
$40,000.00 $115,000.00 $155,000.00
WRITING OFF THIS CAPITAL EXPENSE YEAR
DEPRECIATION % 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
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
BOOK VALUE 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
TOTAL DEPRECIATED VALUE TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA
MARKET VALUE OF CYNTHIA
$25,000.00
SELLING SPARE PARTS TAX ON INCOME FROM SELLING SPARE PARTS
ANNUAL OPERATING COSTS OPPURTUNITY COST OF CAPITAL ANNUITY FACTOR ( .1, 20 YRS) PV OF OPERATING COSTS
30000 14400
$191,450.00 0.1 8.51 $1,630,005.30
Page 14
Scenario 5
TAX SHIELD FROM OPERATING EXPENSES $91,896.00 PV OF TAX SHIELD FROM OPERATING EXPENSES $782,402.54 PV TAX SHIELD FROM REHAB COSTS $32,914.89 NET TAX SHIELD FROM DEPRECIATING CYNTHIA $8,387.99 TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV 6480 CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS TOTAL COSTS TOTAL TAX SHIELDS
$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
CASE 2: CONVERTING CYNTHIA ONE YEAR HENCE ASSUMPTION : WITHOUT CONVERSION THE COSTS WOULD REMAIN WHAT IS MENTIONED OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR
0.1 1.1
ADDITIONAL COST OF CONVERTING CYNTHIA at t=1 $70,000.00 PV OF THIS AMOUNT $63,636.36 REHABILITATION COST $115,000.00
SINCE 70,000 IS SPEND IN T=1, IT CANT BE WRITTEN OFF AT T=0, SO SEPERATE SCHEDU
DEPRECIATION OF CYNTHIA
DEPRECITING CYNTHIA AFTER REHABILITATION ###
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
TOTAL TAX SHIELD BY DEPRECIATING CYNTHIA
WRITING OFF OF 70,000 IN T=1
WRITING OF THIS CAPITAL EXPENS
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
TOTAL DEPRECIATED VALUE TOTAL TAX SHIELD PV TAX SHIELD
MARKET VALUE OF CYNTHIA
$25,000.00 Page 20
Scenario 6
OPERATING COST IN THE FITST YEAR ANNUAL OPERATING COSTS THEREAFTER OPPURTUNITY COST OF CAPITAL ANNUITY FACTOR ( .1, 19 YRS) VALUE OF ANNUITY AT T=1 PV OF OPERATING COSTS FROM T=1 TO 20 INCOME FROM SELLING SPARE PARTS TAX TO BE PAID ON INCOME PV OF OPERATING COSTS TAX SHIELD FROM OPERATING EXPENSES TAX SHILED FROM 70000 $ EXPENSES PV TAX SHIELD FROM REHAB COSTS NET TAX SHIELD FROM DEPRECIATING CYNTHIA
$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
TAX SHIELD FROM LOSS INCURRED ON SELLING SPARE PARTS DUE TO DIFFERENCE IN BV AND MV 6480 CALCULATION OF TOTAL COST AT T=0 THIS IS PV COSTS-PV ALL TAX SHIELDS TOTAL COSTS TOTAL TAX SHIELDS
$1,877,046.59 $849,127.07
TOTAL INCOME
30000
NET COST
$997,919.52
EQUIVALENT ANNUAL COSTS
$117,209.25
Page 21
Scenario 6
AR HENCE WHAT IS MENTIONED IN SCENARIO 1
SO SEPERATE SCHEDULES
OF CYNTHIA
HIA AFTER REHABILITATION INCLUDING BOOK VALUE OF CYNTHIA
WRITE OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD $5,793.75 $11,154.90 $10,320.60 $9,548.10 $8,821.95 $8,157.60 $7,555.05 $6,983.40 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $6,890.70 $3,476.25
$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
HIS CAPITAL EXPENSE OVER A PERIOD OF 20 YEARS
WRITE OFF AMNT TAX SHIELD PRESENT VALUE OF TAX SHIELD $2,625.00 $5,054.00 $4,676.00 $4,326.00 $3,997.00 $3,696.00 $3,423.00 $3,164.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $3,122.00 $1,575.00
$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
-PV ALL TAX SHIELDS
Page 24
COST COMPUTATION OF REHABILITATING CYNTHIA Case: With spare parts OPPURTUNITY COST OF CAPITAL DISCOUNT FACTOR ANNUITY FACTOR ( .1, 20 YRS)
0.1 1.1 8.51 DEPRECIATION OF CYNTHIA
BOOK VALUE 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
TOTAL DEPRECIATED VALUE
TOTAL TAX SHIELD BY DEPRECIATING C
REHABILITATION COSTS
$71,500.00
WRITING OF THIS CAPITAL EX YEAR
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
TOTAL DEPRECIATED VALUE PV TAX SHIELD
Cost of spare parts Salvage value of spare parts
$43,500.00 $30,000.00
WRITING OFF THE SPARE PAR YEAR
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
TOTAL DEPRECIATED VALUE PV TAX SHIELD
OPPORTUNITY COST OF NOT SELLING CYNTHIA $25,000.00 OPPORTUNITY COST OF NOT SELLING SPARE PARTS
30000
ANNUAL OPERATING COSTS $203,120.00 PV OF OPERATING COSTS $1,729,363.68 TAX SHIELD FROM OPERATING EXPENSES $97,497.60 PV OF TAX SHIELD FROM OPERATING EXPENSES $830,094.57
NET TAX SHIELD FROM DEPRECIATING CYNTHIA$32,096.90 TOTAL EXPENSES TOTAL TAX SHIELD NET COSTS ANNUITY FACTOR ( .1, 20 YRS) EQUIVALENT ANNUAL COSTS
$1,855,863.68 $862,191.46 $993,672.22 8.51 $116,710.38
CIATION OF CYNTHIA
WRITE OFF TAX 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
$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
X SHIELD BY DEPRECIATING CYNTHIA
###
G OF THIS CAPITAL EXPENSE OVER A PERIOD OF 20 YEARS WRITE OFF TAX AMNT SHIELD PRESENT VALUE OF TAX SHIELD $2,681.25 $1,287.00 $1,170.00
$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 ###
G OFF THE SPARE PARTS OVER 20 YEARS WRITE OFF TAX AMNT SHIELD PRESENT VALUE OF TAX SHIELD $1,631.25 $3,140.70 $2,905.80 $2,688.30 $2,483.85 $2,296.80 $2,127.15 $1,966.20 $1,940.10 $1,940.10 $1,940.10 $1,940.10 $1,940.10 $1,940.10 $1,940.10 $1,940.10 $1,940.10
$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
SUMMARY OF THE SCENARIOS
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
THE EQUIVALENT ANNUAL COST IS LOWEST IN CONTRACTING A BOAT SCENARIO. HENCE, CYNTHIA AND THE SPARE PARTS SHOULD BE SOLD. DIESEL BOAT SHOULD BE CONTRACTED FOR 25 YEARS
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
Economy Shipping Company It is recommended that Economy Shipping Company (ESC) replace the steamboat, Cynthia, with a new diesel powered boat. The analysis assumed no operating cost in 1950. Although ESC was presumably still in service during this analysis, the costs associated with the project evaluation were not accounted for until 1951. It was also implicit implicit in the NPV calculations that any upgrade required subsequent to 1950 could be performed without any interruption to the daily operations and were performed at the beginning of the year. Therefore, the stoker upgrade and the engine replacements were considered on Jan 1st of the intended year and did not require any downtime for the installation.
The evaluation considered four different scenarios: 1. Rehabilitation of Cynthia with the stoker conversion occurring in 1950 2. Rehabilitation of Cynthia with the stoker conversion occurring in 1952 3. Purchase of a new diesel-powered boat with 2 shifts, 12-hour working day 4. Purchase of a new diesel-powered boat with 3 shifts, 8-hour working day Since ESC was considering other projects with a rate of return of 10%, each of the above options were considered using the same rate of return. The company’s balance sheet suggests that management was very conservative. The debt-to-equity ratio in 1950 was 0.075, indicating that the company could easily borrow at the going rate of 3% without fear of bankruptcy. Moreover, the company had sufficient funds to purchase four new diesel-powered boats. Overall, ECS was in a very strong position to quickly upgrade their fleet and gain any advantage that may come with the new diesel-powered boats. The influence of the union to change the working hours for the crew members is noteworthy in this analysis. If the union succeeded, the steamboats would not be capable of accommodating the 3-shift requirement and therefore be noncompliant with the new regulation. If the new regulation had fines associated for any vessel not in compliance with the new guidelines, the results for the steamboat scenarios would only get worse. In this case, the diesel-powered boats could accommodate the anticipated ruling and therefore continue to operate without fear of being unlawful. Another disadvantage against rehabilitating Cynthia was its age. At the time of the decision the steamboat had already been in operation for 23 years. Although, the realizable cost to renovate the steamboat was already known, the intangible aspect of this alternative was the status of the boat once refurbished. It should be noted that with any overhaul, there are still aspects to the boat that will remain old and will eventually fail. The maintenance and repairs listed in the case appear to indicate general maintenance and not a catastrophic event as is suggested. The cost of another large repair that is associated with age has not been calculated for but must be understood as a variable to the rehabilitation options. The tax savings associated with purchasing the new diesel-powered boat is yet another advantage over the steamboat. With a lower operating cost and higher depreciation (see appendix) the purchasing option saves approximately $11,500 less in taxes (option 4 vs. option 1). During the 25-year useful life of the boat, Economy will save $287,500. The equivalent annual cost (EAC) analysis was used to evaluate each option. The rehabilitation options had a useful life of 20 years, whereas the purchasing options had a useful life of 25 years. The replacement technique would have required a 100-year analysis. Instead, the EAC procedure returns an annualized cost for each project and allows both the rehabilitation options and the purchasing options to be compared without much hassle. Between the two rehabilitation options, the option of immediately converting to stoker firing resulted in the lowest NPV (-$970, 889 vs. -$988,249). The additional $30K associated with waiting the two years before performing the stoker conversion explains the discrepancy between these two options. The immediate stoker conversion resulted in an equivalent annual cost of $114,040. Compared to the two purchasing options ($110,833, $111,402) the cost of the rehabilitation option was slightly higher. Although both of the purchasing options were optimal compared to the alternative of rehabilitating Cynthia, the
the effect that the union’s proposition would have on the shipping industry would obviously increase the cost of doing business. If the controller’s 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 • Conway’s 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 |
|3 |5 |$5,750.00 |$2,760.00 |$2,073.63 | |4 |5 |$5,750.00 |$2,760.00 |$1,885.12 | |5 |5 |$5,750.00 |$2,760.00 |$1,713.74 | |6 |5 |$5,750.00 |$2,760.00 |$1,557.95 | |7 |5 |$5,750.00 |$2,760.00 |$1,416.32 | |8 |5 |$5,750.00 |$2,760.00 |$1,287.56 | |9 |5 |$5,750.00 |$2,760.00 |$1,170.51 | |10 |5 |$5,750.00 |$2,760.00 |$1,064.10 | |11 |5 |$5,750.00 |$2,760.00 |$967.36 | |12 |5 |$5,750.00 |$2,760.00 |$879.42 | |13 |5 |$5,750.00 |$2,760.00 |$799.47 | |14 |5 |$5,750.00 |$2,760.00 |$726.79 | |15 |5 |$5,750.00 |$2,760.00 |$660.72 | |16 |5 |$5,750.00 |$2,760.00 |$600.66 | |17 |5 |$5,750.00 |$2,760.00 |$546.05 | |18 |5 |$5,750.00 |$2,760.00 |$496.41 | |19 |5 |$5,750.00 |$2,760.00 |$451.28 | |20 |5 |$5,750.00 |$2,760.00 |$410.26 | The relevant cash flows for Rehabilitation of Conway without parts are: | |0 |1 |2 |3 | |YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX SHIELD| | | | | | | |1 |5 |$3,575.00 |$1,716.00 |$1,560.00 | |2 |5 |$3,575.00 |$1,716.00 |$1,418.18 | |3 |5 |$3,575.00 |$1,716.00 |$1,289.26 | |4 |5 |$3,575.00 |$1,716.00 |$1,172.05 | |5 |5 |$3,575.00 |$1,716.00 |$1,065.50 |
|6 |5 |$3,575.00 |$1,716.00 |$968.64 | |7 |5 |$3,575.00 |$1,716.00 |$880.58 | |8 |5 |$3,575.00 |$1,716.00 |$800.53 | |9 |5 |$3,575.00 |$1,716.00 |$727.75 | |10 |5 |$3,575.00 |$1,716.00 |$661.59 | |11 |5 |$3,575.00 |$1,716.00 |$601.45 | |12 |5 |$3,575.00 |$1,716.00 |$546.77 | |13 |5 |$3,575.00 |$1,716.00 |$497.06 | |14 |5 |$3,575.00 |$1,716.00 |$451.88 | |15 |5 |$3,575.00 |$1,716.00 |$410.80 | |16 |5 |$3,575.00 |$1,716.00 |$373.45 | |17 |5 |$3,575.00 |$1,716.00 |$339.50 | |18 |5 |$3,575.00 |$1,716.00 |$308.64 | |19 |5 |$3,575.00 |$1,716.00 |$280.58 | |20 |5 |$3,575.00 |$1,716.00 |$255.07 | |Spare parts costs | $ 43,500.00 |Market Value |$30,000 | |YEAR |DEPRECIATION % |WRITE OFF AMNT |TAX SHIELD |PV OF TAX | | | | | |SHIELD | | | | | | | |1 |5 |$2,175.00 |$1,044.00 |$949.09 | |2 |5 |$2,175.00 |$1,044.00 |$862.81 | |3 |5 |$2,175.00 |$1,044.00 |$784.37 | |4 |5 |$2,175.00 |$1,044.00 |$713.07 | |5 |5 |$2,175.00 |$1,044.00 |$648.24 | |6 |5 |$2,175.00 |$1,044.00 |$589.31 | |7 |5 |$2,175.00 |$1,044.00 |$535.74 |
|8 |5 |$2,175.00 |$1,044.00 |$487.03 | |9 |5 |$2,175.00 |$1,044.00 |$442.76 | |10 |5 |$2,175.00 |$1,044.00 |$402.51 | |11 |5 |$2,175.00 |$1,044.00 |$365.92 | |12 |5 |$2,175.00 |$1,044.00 |$332.65 | |13 |5 |$2,175.00 |$1,044.00 |$302.41 | |14 |5 |$2,175.00 |$1,044.00 |$274.92 | |15 |5 |$2,175.00 |$1,044.00 |$249.93 | |16 |5 |$2,175.00 |$1,044.00 |$227.20 | |17 |5 |$2,175.00 |$1,044.00 |$206.55 | |18 |5 |$2,175.00 |$1,044.00 |$187.77 | |19 |5 |$2,175.00 |$1,044.00 |$170.70 | |20 |5 |$2,175.00 |$1,044.00 |$155.18 | The relevant cash flows for Rehabilitation of Conway with parts are: | |0 |1 | |Alternative 1 |Rehabilitation without|($916,170) | | |parts | | | |Rehabilitation with |($903,898) | | |parts | | |Alternative 2 |1 diesel boat |($888,448) | | |3 diesel boats |($2,640,126) |
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?
Rehabilitation with parts.
scrap and used parts).
abilitation alternative, residual value is zero at the end of year 20.
x shields from depreciation.
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
Spare parts costs Market Value
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
