I must have the formula / calculation view from the spreadsheet to solve the questions. So
instead of just seeing that cell A25 is $XX.00, it should show the formula i.e. =A1*B2+A1.
Thank you!
Rio Claro, Inc. (RCI) is in the business of transporting cargo between ports in California and
Washington. Its fleet includes a small dry-cargo vessel, theMaracas. The Maracas is 25 years old
and badly in need of an overhaul.
It is March 2016, and Michael John, the finance director, has just been presented with a proposal
that would require the one-time expenditures shown below in Table 1. If the proposal is
accepted, these expenditures will be made in the next few days. Mr. John believes that all these
outlays could be depreciated for tax purposes in the seven-year MACRS class (see Table 2 below
for rates). Overhaul of theMaracas will begin as soon as the expenditures in Table1 are made, but
the vessel will be out of service for several months. The overhauled vessel would resume
commercial service in one year. RCI’s chief engineer’s estimates of the post-overhaul operating
costs are in Table 3.
In addition to the overhaul described above, the chief engineer suggests installation of a brand-
new engine and control system. Installation of this new engine would cost an extra $600,000
(This additional outlay would also qualify for tax depreciation in the seven-year MACRS class.).
However, if the additional equipment is installed, it would result in reduced fuel, labor, and
maintenance costs as shown in Table 4.
The operating cost estimates in Tables 3 and 4 are current for March 2016. However, these costs
will increase with inflation, which is forecasted at 1.25% a year. Depreciation and operating
costs attributable to the overhaul of theMaracaswill begin one year after the vessel is put back
into commercial service. The revenues from operating the vessel will be the same for both types
of overhaul.
Even with the proposed overhaul, the Maracas cannot continue forever. After the overhaul, its
remaining useful life is estimated to be only 12 years. Its salvage value when finally taken out of
service will be trivial. Thus, Mr. John feels it is unwise to proceed without also considering the
purchase of a new vessel. Racette & Sons (R&S), a Colorado shipyard, has approached RCI with
a design incorporating a Kort nozzle, extensively automated navigation and power control
systems, and much more comfortable accommodations for the crew. R&S is offering the new
vessel for a fixed price of $3,000,000, payable half immediately and half on delivery in one year.
Estimated annual operating costs of the new vessel are in Table 5. The operating cost estimates
in the table are current for March 2016, but will increase with inflation.
The crew would require additional training to handle the new vessel’s more complex and
sophisticated equipment. Training would result in a one-time cost of $50,000 payable one year
following delivery of the new vessel. This cost is tax deductib.
Transparency, Recognition and the role of eSealing - Ildiko Mazar and Koen No...
I must have the formula calculation view from the spreadsheet to s.pdf
1. I must have the formula / calculation view from the spreadsheet to solve the questions. So
instead of just seeing that cell A25 is $XX.00, it should show the formula i.e. =A1*B2+A1.
Thank you!
Rio Claro, Inc. (RCI) is in the business of transporting cargo between ports in California and
Washington. Its fleet includes a small dry-cargo vessel, theMaracas. The Maracas is 25 years old
and badly in need of an overhaul.
It is March 2016, and Michael John, the finance director, has just been presented with a proposal
that would require the one-time expenditures shown below in Table 1. If the proposal is
accepted, these expenditures will be made in the next few days. Mr. John believes that all these
outlays could be depreciated for tax purposes in the seven-year MACRS class (see Table 2 below
for rates). Overhaul of theMaracas will begin as soon as the expenditures in Table1 are made, but
the vessel will be out of service for several months. The overhauled vessel would resume
commercial service in one year. RCI’s chief engineer’s estimates of the post-overhaul operating
costs are in Table 3.
In addition to the overhaul described above, the chief engineer suggests installation of a brand-
new engine and control system. Installation of this new engine would cost an extra $600,000
(This additional outlay would also qualify for tax depreciation in the seven-year MACRS class.).
However, if the additional equipment is installed, it would result in reduced fuel, labor, and
maintenance costs as shown in Table 4.
The operating cost estimates in Tables 3 and 4 are current for March 2016. However, these costs
will increase with inflation, which is forecasted at 1.25% a year. Depreciation and operating
costs attributable to the overhaul of theMaracaswill begin one year after the vessel is put back
into commercial service. The revenues from operating the vessel will be the same for both types
of overhaul.
Even with the proposed overhaul, the Maracas cannot continue forever. After the overhaul, its
remaining useful life is estimated to be only 12 years. Its salvage value when finally taken out of
service will be trivial. Thus, Mr. John feels it is unwise to proceed without also considering the
purchase of a new vessel. Racette & Sons (R&S), a Colorado shipyard, has approached RCI with
a design incorporating a Kort nozzle, extensively automated navigation and power control
systems, and much more comfortable accommodations for the crew. R&S is offering the new
vessel for a fixed price of $3,000,000, payable half immediately and half on delivery in one year.
Estimated annual operating costs of the new vessel are in Table 5. The operating cost estimates
in the table are current for March 2016, but will increase with inflation.
The crew would require additional training to handle the new vessel’s more complex and
sophisticated equipment. Training would result in a one-time cost of $50,000 payable one year
2. following delivery of the new vessel. This cost is tax deductible.
The estimated operating costs for the new vessel assume that it would be operated in the same
way as the Maracas. However, the new vessel will be able to handle a larger load on some
routes, which is expected to generate additional revenues, net of additional operating costs, of
approximately $175,000 per year in the first year of operation. These revenues are expected to
grow at the rate of inflation. Revenues and operating costs from the new vessel will begin one
year after it is delivered. The new vessel is estimated to have a useful service life of 20 years, but
it will be depreciated for tax purposes according to the 7-year MACRS schedule. The new vessel
is not expected to have any resale value at the end of its 20-year useful life. All revenues and
costs (including depreciation) associated with the new vessel will begin one year after it is
delivered.
The Maracas is carried on RCI’s books at a book value of only $100,000, but could probably be
sold “as is,” together with its extensive inventory of spare parts, for $200,000. The book value of
the spare parts inventory is $40,000.
Mr. John stepped out on the foredeck of the Maracas as she chugged down the Cook Inlet. “A
rusty old tub,” he muttered, “but she’s never let us down. I’ll bet we could keep her going until
next year while Racette & Sons are building her replacement. We could use up the spare parts to
keep her going. We should even be able to sell or scrap her for book value when her replacement
arrives.”
RCI evaluates capital investments of this type using a 8.5% cost of capital. (This is a nominal,
not real, rate.) RCI’s tax rate is 35%.
Table 1: Overhaul Expenditures
Overhaul engine and generators
$340,000
Replace radar and other electronic equipment
75,000
Repairs to hull and superstructure
310,000
Painting and other repairs
95,000
$820,000
Table 2: Depreciation (in %) for the 7-year Modified Accelerated Cost Recovery System
Year 1
14.29
Year 2
24.49
3. Year 3
17.49
Year 4
12.49
Year 5
8.93
Year 6
8.93
Year 7
8.93
Year 8
4.45
Table 3: Post-overhaul Operating Costs (Basic Overhaul)
Fuel
$450,000
Labor and benefits
480,000
Maintenance
141,000
Other
110,000
$1,181,000
Table 4: Post-overhaul Operating Costs (Overhaul plus new engine & contro system)
Fuel
$400,000
Labor and benefits
405,000
Maintenance
105,000
Other
110,000
$1,020,000
Table 5: Operating Costs of New Vessel
Fuel
$380,000
4. Labor and benefits
330,000
Maintenance
70,000
Other
105,000
$885,000
Please take the time to answer all questions correctly and I will provide a very high rating.
QUESTIONS (Show all work/calculations):
What is the present value of the proposed overhaul of the Maracas WITH the new engine and
control system? Show all work and cash flows used.
What is the present value of the proposed overhaul of the Maracas WITHOUT the new engine
and control system? Show all work and cash flows used.
Should the company do the basic overhaul, or the expanded overhaul with the new engine and
control system? Show all work and cash flows used. Choose only 1.
What is the present value of buying and operating the new vessel? Show all work and cash flows
used.
What is the equivalent annual costs:
(a) overhauling and operating the Maracas for 12 more years (WITH and WITHOUT the new
engine and control system) and,
(b) buying and operating the proposed replacement vessel for 20 years?(You should use the real
discount rate for this analysis). Show all work and cash flows used.
Based on your calculations, which of the 3 options should the company choose? Why?
Overhaul engine and generators
$340,000
Replace radar and other electronic equipment
75,000
Repairs to hull and superstructure
310,000
Painting and other repairs
95,000
$820,000
Solution
Answer
5. Notes
RCI evaluates capital investments of this type using a 8.5% cost of capital. (This is a nominal,
not real, rate.)
(1 + nominal rate) = (1 + real rate) (1 + inflation rate)
(1 + 0.085) = (1+ Real rate) ( 1+ 0.0125)
(1.085) = (1+ Real rate) (1.0125)
(1+ Real rate) = (1.085)/ (1.0125)
(1+ Real rate) = 1.071605
Real discount rate = 0.071605
Real Discount rate = 7.1605%
Answer 1
What is the present value of the proposed overhaul of the Maracas WITH the new engine and
control system?Show all work and cash flows used.
Year
Overhaul Cost
New Engine and Control system
Total Captial Cost
MACR Depreciation rate
Depreciation
Depreciation Tax Benefits
A
B
C
D
E
F
A+B
C*D
E*0.35
0
1
820000
600000
1420000
14.29%
202918
15. -767650
0
-767650
0.467324
-358741
12
0
-767650
0
-767650
0.436097
-334770
Net Present Value
-6639735
Answer 3
The company should do the expanded overhaul with the new engine and control system as net
Present value is more positive (-62,50,484) for expanded overhaul with the new engine and
control system compared to basic overhaul (-66,39,735).
Year
Overhaul Cost
New Engine and Control system
Total Captial Cost
MACR Depreciation rate
Depreciation
Depreciation Tax Benefits
A
B
C
D
E
F
A+B
C*D
E*0.35
0
1
