In sing whether Ocean Carriers should buy the new capsize bearer for the possible client. we completed a NPV analysis of the new vas as follows: We assumed the first payment would be made on December 31. 2000. For the gross that could be expected we utilized the given expected day-to-day hire rate. which best represents Ocean Carriers hereafter hard currency flows. We came to the OPREVE multiplying the one-year operating yearss ( 357 in old ages 1 to 5 ; 353 in old ages 6 to 10 etc. ) by the expected day-to-day hire rate. The day-to-day operating costs for the vas were provided for twelvemonth 1 at $ 4. 000. For old ages 2-25. we foremost converted the existent into the nominal growing rate of 4. 03 % and so used it to work out the day-to-day operating costs. The OPEXP we calculated by multiplying the day-to-day operating costs by 365 yearss ( harmonizing to the instance guidelines costs incurred 365 yearss a twelvemonth ) . Survey costs were calculated utilizing the information in the instance. We assumed that the study will be run at the terminal of 2007. 2012. 2017 and 2022 and therefore the depreciation of the study costs would get down the subsequent twelvemonth. Besides. we did non see the study costs for the last twelvemonth in the sum of $ 1. 250. 000. since this investing would be ineffectual given the scrapping in the same twelvemonth.
Harmonizing to the instructions. the study costs were depreciated utilizing straight-line depreciation over the life of the study. Depreciation of the vas was besides calculated utilizing straight-line depreciation over 25 old ages. We calculated revenue enhancements at the given revenue enhancement rate of 35 % and 0 % severally. We assumed the initial spending of networking capital would take topographic point in twelvemonth 2. therefore at the same clip of taking ownership of the vas. All net working capital will be liquidated at the terminal of twelvemonth 25. merely before trashing the vas. The CAPEX after Tax Scrap Value was computed by subtracting the applicable revenue enhancement rate of 35 % or 0 % from the bit value at twelvemonth 26. Free hard currency flows were calculated utilizing the recommended price reduction rate of 9 % . Both. the amount of the PV and the NPV computation lead to the same consequence. which is a negative NPV of ( $ 6. 872. 290. 61 ) at a revenue enhancement rate of 35 % . severally a positive NPV of $ 977. 267. 30 at a revenue enhancement rate of 0 % . However. with respect to the first scenario ( revenue enhancement rate of 35 % ) . we besides computed the NPV without sing revenue enhancements in the twelvemonth 25. Technically. this is necessary because the EBIT in the twelvemonth 25 is negative and no revenue enhancements are owed to the IRS. In this scenario. the NPV is somewhat superior to the first 1. In decision. at a revenue enhancement rate of 35 % Ocean Carriers’ NPV is negative. Therefore. Ocean Carriers should non get the vas. On the contrary. utilizing a revenue enhancement rate of 0 % consequences in a positive NPV. a fact which should tend Ocean Carriers to buy the vas. Drumhead Answer to Problem 2a
For replying the inquiry whether Ocean Carriers should sell or trash the vas at twelvemonth 15 at the monetary value of $ 5m we completed some extra NPV computations. The replies were completed utilizing a revenue enhancement rate of 0 % as instructed. Besides. we held. mutatis mutandis. all premises in job 1 to be still accurate. Additionally. we assumed that the purchaser would buy the vas on December 31. 2017. bear the study costs and supply the initial on the job capital. Finally. we besides assumed that similar to job 1 the depreciation of the CAPEX every bit good as of the study cost would get down the twelvemonth following the acquisition. In order to calculate out the maximal purchase monetary value the purchaser is willing to pay. we foremost computed the staying maximal possible NPV of the vas.
This we achieved by calculating the buyer’s NPV at a ( fictional ) gross revenues monetary value of $ 0. We ended up with a maximal NPV of $ 3. 407. 548. 38. We so calculated the tantamount maximal purchase monetary value at twelvemonth 17 utilizing the formula $ 3. 407. 548. 38 * 1. 0917 = $ 14. 746. 620. 22. In a farther measure. we calculated the seller’s NPV utilizing the above upper limit gross revenues monetary value of $ 14. 746. 620. 22. which resulted in $ 977. 267. 30. Finally. we computed the NPV of the “scrapping-scenario” which was ( $ 1. 274. 915 ) . In add-on. we besides calculated the seller’s break-even point which was $ 10. 517. 366. In decision. Ocean Carriers will maximise its value if it is able to sell the vas after twelvemonth 15 at a monetary value of $ 14. 746. 620. 22. Even at a monetary value of merely $ 10. 517. 366 its NPV will be $ 0. intending neither value creative activity nor devastation takes topographic point. Both purchase monetary values turn out to be more advantageous compared to the “scrapping-scenario” which consequences in a negative NPV of ( $ 1. 274. 915 ) .
Drumhead Answer to Problem 2b
The NPV ( as of clip 0 ) of all hard currency flows to Ocean Carriers in instance it decides to sell the bearer at the maximal monetary value of $ 14. 746. 620 after twelvemonth 15 is indistinguishable with the deliberate NPV in inquiry 1 ( at a revenue enhancement rate of 0 % ) . This is because the NPV of the vas in the twelvemonth 15 equals the value of the hereafter hard currency flows of the old ages 14 to 25.