Vandalay shipping Industry is considering replacing an existing ship with new more efficient one. The existing ship is two years old and was purchased at an installed cost of $120000. This ship falls in to the MACRS five years recovery period and expected to have remaining useful life of five years. The new ship can be purchased at $210,000 and require $10000 for installation. This ship has a useful life of 5 years and can be depreciated under MACRS using five years recovery period. The old ship can be sold for $140000, without incurring any removal cost. The new ship required some additional working capital requirements, account payables will increase by $116,000, and account receivables would by $80000 and inventories by $60000. After five years the new ship would be sold to net $58000 after removal and Cleanup cost, and before taxes. The company has to pay 40% tax rate on their income.
The estimated profit of both ships before depreciation and taxes is given below.
|
Profit before Depreciation and Taxes |
||
|
Year |
Old Ship |
New Ship |
|
1 |
$86,000 |
$52,000 |
|
2 |
86000 |
48000 |
|
3 |
86000 |
44000 |
|
4 |
86000 |
40000 |
|
5 |
86000 |
36000 |
a. Calculate the Initial, interim and terminal year Cash outflows associated with the new ship.
b. Calculate NPVs at a 10 percent discount rate and the other using a 15 percent discount rate
