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Ms. Bertha Tromp
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This 2 page Class Notes was uploaded by Ms. Bertha Tromp on Monday September 28, 2015. The Class Notes belongs to FNCE100 at University of Pennsylvania taught by Staff in Fall. Since its upload, it has received 38 views. For similar materials see /class/215365/fnce100-university-of-pennsylvania in Finance at University of Pennsylvania.
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Date Created: 09/28/15
FNCE 100 Fall 2009 MacKinlay New Economy Transport Revised The New Economy Transport Company NETCO was formed in 1952 to carry cargo and passengers between ports in the Pacific Northwest By 2009 its fleet had grown to four vessels one of which was a small dry cargo vessel the Vital Spark The Vital Spark is badly in heed of an overhaul Peter Handy the finance director has just been presented with a proposal which would require the following expenditures at the start of 20101 Install new engine and associated equipment 915000 Replace radar and other electronic equipment 250000 Repairs to hull and superstructure 640000 Painting and other maintenance 180000 1985000 NETCO s chief engineer McPhail estimates the postoverhaul operating costs for 2010 as follows2 Fuel 1300000 Labor and benefits 1800000 Maintenance 450000 Other 180000 3730000 The Vital Spark is carried on NETCO s books at a net value of only 465000 but could probably be sold as is for 765000 If the Vital Spark is overhauled the 465000 book value will be depreciated at a rate of 155000 per year for three years 20102012 There is no question that the Vital Spark needs a new engine and general overhaul for the 2010 season However Mr Handy feels it unwise to proceed without also considering the purchase of a new boat Cohn and Doyle Tnc a Wisconsin shipyard has approached NETCO with a new design incorporating a Kort nozzle extensively automated navigation and power control systems and much more comfortable 1 The repairs and painting and other maintenance can be expensed in 2010 The new engine radar and other equipment falls into the fiveyear MACRS class and must be depreciated starting in 2010 The overhaul can be done Without losing any operating time In future years estimates of costs and revenues will increase with in ation Mr Handy s bankers have suggested that in ation will average 3 percent a year accommodations for the crew3 Estimated annual operating costs of the new boat for 2010 are Fuel 1200000 Labor and benefits 1485000 Maintenance 180000 Other 120000 2985000 The crew would require additional training to handle the new boat s more complex and sophisticated equipment and this would probably lead to additional costs of 185000 at the beginning of 2010 The estimated operating costs for the new boat assume that it would be operated in the same way as the Vital Spark However the new boat should be able to handle a larger load on some routes and this will generate additional revenues net of additional outofpocket costs of about 300000 per year Moreover a new boat would have a useful service life of 15 years After 15 years it would not have any value The Vital Spark with an overhaul could not last that long 7 probably only 10 years At that point it would be worth only its scrap value of about 140000 Cohn and Doyle have offered the new boat for a fixed price of 9200000 payable on delivery at the start of 2010 NETCO is a private company soundly financed and consistently profitable Cash on hand is sufficient to rehabilitate the Vital Spark but not to buy the new boat However Mr Handy is confident that the funds necessary to purchase the new boat can be readily obtained in the capital markets NETCO has estimated that its opportunity cost of capital for major business investments is currently 15 Mr Handy feels that this is a reasonable number to use for the drycargo business Required Calculate equivalent annual costs of the two alternatives 7 overhauling the current boat and buying a brandnew boat To do the calculation prepare a spreadsheet table showing all costs after taxes over each investment s economic life Make assumptions as necessary Be sure to include the effects of inflation The tax rate for NETCO is 35 Due Date Tuesday November 3 2009 3 The new boat falls into the 5year MACRS class
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