Capital Budgeting at Rio Negro Inc Report

please calculate and answer questions 4 & 5.  answer the questions under the following headings 

Present Value of Basic Overhaul and Overhaul with upgrades

Present Value of New Vessel

Equivalent Annual Cost of the three options

Usefulness of the Equivalent Annual Cost method

Mini Case #1: Capital Budgeting at Rio Negro, Inc.
Operating cost$1,181,000
basic overhaul #1
Operating cost$1,020,000
at overhaul plus new engine #2
Operating cost of$885,000
new vessel
Inflation
1.25%
Tax rate
35%
Nominal rate
8.50%
Real rate
7.16%
Exhibit 1
Option 1 – Basic Overhaul
Year
0
1
2
3
4
5
Operating Cost$$########## ########## ########## ##########
Depreciation -117,178.00 -200,818.00 -143,418.00 -102,418.00
EBT
########## ########## ########## ##########
Taxes
-464,760.64 -499,331.49 -484,604.56 -475,684.66
Net Income
-863,126.90 -927,329.91 -899,979.89 -883,414.37
Add Back Depreciation
117,178.00 200,818.00 143,418.00 102,418.00
OCF
########## ########## ########## ##########
Overhaul costs-820,000.00
Total Cash Flows
########## $NPV
########## ########## ########## ##########
##########
Option 2 – Expanded Overhaul
Year
0
Operating Cost$$Depreciation EBT
Tax
Net Income
Add Back Depreciation
OCF
$-
1
2
3
4
5
########## ########## ########## ##########
-202,918.00 -347,758.00 -248,358.00 -177,358.00
########## ########## ########## ##########
-437,002.08 -492,270.84 -462,112.79 -441,952.63
-811,575.29 -914,217.28 -858,209.46 -820,769.17
202,918.00 347,758.00 248,358.00 177,358.00
########## ########## ########## ##########
Overhaul costs##########
Total Cash Flows
########## $NPV
##########
########## ########## ########## ##########
Exhibit 2
Option 3 – New Vessel
Year
Revenue
$Operating CostTraining
Depreciation
EBT
Tax
Net Income
Add Back Depreciation
OCF
0
1
$-
2
3
4
5
########## ########## ########## ##########
-907,263.28 -918,604.07 -930,086.62 -941,712.71
-50,000.00 -428,700.00 -734,700.00 -524,700.00 -374,700.00
########## ########## ########## ##########
-423,837.15 -516,640.80 -446,384.50 -397,168.74
-787,126.13 -959,475.77 -828,999.78 -737,599.09
428,700.00 734,700.00 524,700.00 374,700.00
-358,426.13 -224,775.77 -304,299.78 -362,899.09
New Machine ########## ##########
Old Machine
100,000.00
Total Cash Flows
########## ########## ########## ########## ########## ##########
NPV
##########
Exhibit 3
Real interest rate
7.16%
Option 1 – Basic Overhaul
NPV
##########
EAC
##########
Option 2 – Expanded Overhaul
NPV
##########
EAC
##########
Option 3 – New Vessel
NPV
##########
EAC
##########
6
7
8
9
10
11
12
########## ########## ########## ########## ########## ########## ##########
-73,226.00 -73,226.00 -73,226.00 -36,490.00 ########## ########## ########## ########## ########## ########## ##########
-470,965.44 -476,532.14 -482,168.43 -475,017.57 -468,024.15 -473,874.45 -479,797.88
-874,650.10 -884,988.26 -895,455.66 -882,175.49 -869,187.70 -880,052.55 -891,053.21
73,226.00
73,226.00
73,226.00
36,490.00 ########## ########## ########## ########## ########## ########## ##########
########## ########## ########## ########## ########## ########## ##########
6
7
8
9
10
11
12
########## ########## ########## ########## ########## ########## ##########
-126,806.00 -126,806.00 -126,806.00 -63,190.00 ########## ########## ########## ########## ########## ########## ##########
-429,007.90 -433,815.72 -438,683.64 -421,346.81 -404,220.69 -409,273.44 -414,389.36
-796,728.95 -805,657.76 -814,698.19 -782,501.21 -750,695.56 -760,079.25 -769,580.25
126,806.00 126,806.00 126,806.00
63,190.00 ########## ########## ########## ########## ########## ########## ##########
########## ########## ########## ########## ########## ########## ##########
6
7
8
9
10
11
12
########## ########## ########## ########## ########## ########## ##########
-953,484.11 -965,402.67 -977,470.20 -989,688.58 ########## ########## ##########
-267,900.00 -267,900.00 -267,900.00 -133,500.00 ########## ########## ########## -932,289.74 -808,774.62 -818,884.30 -829,120.35
-363,114.04 -366,480.90 -369,889.85 -326,301.41 -283,071.12 -286,609.50 -290,192.12
-674,354.64 -680,607.39 -686,938.29 -605,988.33 -525,703.50 -532,274.79 -538,928.23
267,900.00 267,900.00 267,900.00 133,500.00 -406,454.64 -412,707.39 -419,038.29 -472,488.33 -525,703.50 -532,274.79 -538,928.23
########## ########## ########## ########## ########## ########## ##########
13
##########
##########
-485,795.35
-902,191.37
##########
Depreciation Table
Year 1
0.1429
Year 2
0.2449
Year 3
0.1749
Year 4
0.1249
Year 5
0.0893
Year 6
0.0893
Year 7
0.0893
Year 8
0.0445
##########
13
##########
##########
-419,569.23
-779,200.00
##########
##########
Depreciation Table
Year 1
0.1429
Year 2
0.2449
Year 3
0.1749
Year 4
0.1249
Year 5
0.0893
Year 6
0.0893
Year 7
0.0893
Year 8
0.0445
13
14
15
16
########## ########## ########## ##########
########## ########## ########## ##########
-839,484.36 -849,977.91 -860,602.64 -871,360.17
-293,819.53 -297,492.27 -301,210.92 -304,976.06
-545,664.83 -552,485.64 -559,391.71 -566,384.11
-545,664.83 -552,485.64 -559,391.71 -566,384.11
########## ########## ########## ##########
4.). Calculate the present value of the proposed overhaul
NOMINAL RATE
8.50%
Option 1). BASIC OVERHAUL
Year
Tax Rate @ 35%
65%
Notes
Amount
Depreciation Total AmountDisc Rate 8.5%PV
0 initial purchase 820,000
1
820,000
operating costs 1,181,000
76,166
1,257,166
0.92
1,158,678
1 operating costs##########
plus 1.25% increase
130,532
1,326,294
0.85
1,126,628
2 operating costs##########
plus 1.25% increase
93,222
1,303,931
0.78
1,020,858
3 operating costs##########
plus 1.25% increase
66,572
1,292,415
0.72
932,574
4 operating costs##########
plus 1.25% increase
47,597
1,288,763
0.67
857,086
5 operating costs##########
plus 1.25% increase
47,597
1,304,278
0.61
799,451
6 operating costs##########
plus 1.25% increase
47,597
1,319,986
0.56
745,695
7 operating costs##########
plus 1.25% increase
23,719
1,312,013
0.52
683,125
PRESENT VALUE OF BASIC OVERHAUL
CASH FLOW YEAR
0
Operating Costs (from above)
Depreciation
EBT
Tax @ 35%
Net Income
Add Back Depreciation
Operating Cash Flow
Overhaul costs
1
8,144,095
2
-1,210,710
-117,178
-1,327,888
-464,761
-863,127
117,178
-745,949
3
-1,225,843
-200,818
-1,426,661
-499,331
-927,330
200,818
-726,512
4
-1,241,166
-143,418
-1,384,584
-484,605
-899,980
143,418
-756,562
5
-1,256,681
-102,418
-1,359,099
-475,685
-883,414
102,418
-780,996
-745,949
-726,512
-756,562
-780,996
-820,000
TOTAL CASH FLOWS
-820,000 NPV
##########
MACRS
Depreciation in
Depr
% Amt
Year
0
1
2
3
4
5
6
7
14.29%
24.49%
17.49%
12.49%
8.93%
8.93%
8.93%
Book Value
820,000
$117,178
702,822
$200,818
502,004
$143,418
358,586
$102,418
256,168
$73,226
182,942
$73,226
109,716
$73,226
36,490
8
9
10
11
12
4.45%
$36,490 –
Rate
8.50%
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
6
-1,272,390
-73,226
-1,345,616
-470,965
-874,650
73,226
-801,424
7
-1,288,294
-73,226
-1,361,520
-476,532
-884,988
73,226
-811,762
8
-1,304,398
-73,226
-1,377,624
-482,168
-895,456
73,226
-822,230
-801,424
-811,762
-822,230
1
0.92
0.85
0.78
0.72
0.67
0.61
0.56
0.52
0.48
0.44
0.41
0.38
0.35
9
10
11
12
-1,320,703 -1,337,212 -1,353,927 -1,370,851
-36,490
-1,357,193 -1,337,212 -1,353,927 -1,370,851
-475,018
-468,024
-473,874
-479,798
-882,175
-869,188
-880,053
-891,053
36,490 -845,685
-869,188
-880,053
-891,053
-845,685
-869,188
-880,053
-891,053
13
-1,387,987
-1,387,987
-485,795
-902,191
-902,191
-902,191
4.) Calculate the present value of the proposed overhaul with new engine
Nominal Interest Rate
8.50%
Option 2). BASIC OVERHAUL w. NEW ENGINE
Tax Rate @ 35%
65%
Year
Notes
Amount
Depreciation Total AmountDisc Rate 8.5%PV
0 initial purchase 1,420,000
1
1,420,000
operating costs 1,020,000
131,897
1,151,897
0.92
1,061,656
1 operating costs##########
plus 1.25% increase
226,043
1,258,793
0.85
1,069,288
2 operating costs##########
plus 1.25% increase
161,433
1,207,092
0.78
945,042
3 operating costs##########
plus 1.25% increase
115,283
1,174,013
0.72
847,137
4 operating costs##########
plus 1.25% increase
82,424
1,154,388
0.67
767,721
5 operating costs##########
plus 1.25% increase
82,424
1,167,788
0.61
715,790
6 operating costs##########
plus 1.25% increase
82,424
1,181,355
0.56
667,378
7 operating costs##########
plus 1.25% increase
41,074
1,153,741
0.52
600,718
PRESENT VALUE OF OVERHAUL W/ ENGINE 8,094,730
CASH FLOW YEAR
0
Operating Costs (from above)
Depreciation
EBT
Tax @ 35%
Net Income
Add Back Depreciation
Operating Cash Flow
1
2
-1,045,659
-202,918
-1,248,577
-437,002
-811,575
202,918
-608,657
3
-1,058,730
-347,758
-1,406,488
-492,271
-914,217
347,758
-566,459
4
-1,071,964
-248,358
-1,320,322
-462,113
-858,209
248,358
-609,851
5
-1,085,364
-177,358
-1,262,722
-441,953
-820,769
177,358
-643,411
-608,657
-566,459
-609,851
-643,411
Overhaul costs -1,420,000
TOTAL CASH FLOWS
-1,420,000 NPV
-6,331,514
MACRS
Depreciation in
Depr
% Amt
Year
0
1
2
3
4
5
6
7
14.29%
24.49%
17.49%
12.49%
8.93%
8.93%
8.93%
Book Value
1,420,000
$202,918
1,217,082
$347,758
869,324
$248,358
620,966
$177,358
443,608
$126,806
316,802
$126,806
189,996
$126,806
63,190
8
9
10
11
12
4.45%
$63,190 –
Rate
8.50%
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
6
-1,098,931
-126,806
-1,225,737
-429,008
-796,729
126,806
-669,923
7
-1,112,667
-126,806
-1,239,473
-433,816
-805,658
126,806
-678,852
8
-1,126,576
-126,806
-1,253,382
-438,684
-814,698
126,806
-687,892
-669,923
-678,852
-687,892
1
0.92
0.85
0.78
0.72
0.67
0.61
0.56
0.52
0.48
0.44
0.41
0.38
0.35
9
10
11
12
-1,140,658 -1,154,916 -1,169,353 -1,183,970
-63,190
-1,203,848 -1,154,916 -1,169,353 -1,183,970
-421,347
-404,221
-409,273
-414,389
-782,501
-750,696
-760,079
-769,580
63,190 -719,311
-750,696
-760,079
-769,580
-719,311
-750,696
-760,079
-769,580
13
-1,198,769
-1,198,769
-419,569
-779,200
-779,200
-779,200
5) Purchase a new vessel
Rate
8.50%
Operating costs 885,000
Year 1
896,062.50
Original Cost
3,000,000
Depr Rate
CASH FLOW YEAR
Revenue
0
1
Operating Costs (from above)
Depreciation
Training
EBT
Tax @ 35%
Net Income
Add Back Depreciation
Operating Cash Flow
New Vessel
-1,500,000
Salvage Value
TOTAL CASH FLOWS
-1,500,000
NPV
-7,056,362
-1,500,000
100,000
-1,400,000
14.29%
2
175,000
24.49%
3
177,188
17.49%
4
179,402
12.49%
5
181,645
907,263.28
-428,700
-50,000
-1,210,963
-423,837
-787,126
428,700
-358,426
918,604.07
-734,700
930,086.62
-524,700
941,712.71
-374,700
-1,476,117
-516,641
-959,476
734,700
-224,776
-1,275,384
-446,384
-829,000
524,700
-304,300
-1,134,768
-397,169
-737,599
374,700
-362,899
-358,426
-224,776
-304,300
-362,899
8.93%
6
183,915
8.93%
7
186,214
8.93%
8
188,542
4.45%
9
190,899
953,484.11
-267,900
965,402.67
-267,900
977,470.20
-267,900
-1,037,469
-363,114
-674,355
267,900
-406,455
-1,047,088
-366,481
-680,607
267,900
-412,707
-1,056,828
-369,890
-686,938
267,900
-419,038
-932,290
-326,301
-605,988
133,500 -472,488
-808,775
-283,071
-525,704
-525,704
-532,275
-538,928
-406,455
-412,707
-419,038
-472,488
-525,704
-532,275
-538,928
10
193,285
11
195,701
12
198,147
989,688.58 ########## ########## ##########
-133,500
-818,884
-286,610
-532,275
–
-829,120
-290,192
-538,928
–
13
200,624
14
203,132
15
205,671
16
208,242
17
210,845
18
213,481
19
216,149
########## ########## ########## ########## ########## ########## ##########
-839,484
-293,820
-545,665
–
-849,978
-297,492
-552,486
–
-860,603
-301,211
-559,392
–
-871,360
-304,976
-566,384
–
-882,252
-308,788
-573,464
–
-893,280
-312,648
-580,632
–
-904,446
-316,556
-587,890
–
-545,665
-552,486
-559,392
-566,384
-573,464
-580,632
-587,890
-545,665
-552,486
-559,392
-566,384
-573,464
-580,632
-587,890
20
218,851
21
221,587
########## ##########
-915,752
-320,513
-595,239
–
-927,199
-324,520
-602,679
–
-595,239
-602,679
-595,239
-602,679