NETCO Financial Analysis

Topics: Depreciation, Net present value, Investment Pages: 21 (1383 words) Published: April 20, 2014

ECOLE HASSANIA DES
TRAVAUX PUBLICS

Introduction to finance
NETCO Analysis

Done by JAMAL Zalagh
Supervised by Dr OTHMAN Cole

Summary

• Introduction of NETCO company
• NETCO Investment options
• Financial analysis of NETCO options
• Recommendation for NETCO management

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

Introduction of NETCO company

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

NETCO (The New Economy Transport Company )
The New Economy Transport Company was formed in 1955 to carry cargo and passengers between ports in the Pacific Northwest and Alaska. By 2008 its fleet had grown to four vessels, including a small dry-cargo vessel, the Vital Spark.

The Vital spark had been operating for the last 25 years, and is badly in need of an overhaul. The company management is analysing several projects to overhaul the Vital Spark or to purchase of a new vessel in replacement of the old one. Before making any financial decision, the management should analyse the environment factors affecting the maritime transport industry.

The management face a real issue of making investment decisions.

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

NETCO Investment options

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

NETCO Investment options
By 2008, the company management is studying several options to overhaul the Vital Spark or to replace it by a new vessel.
There are 4 option including the part B of the case study which are:

Project 1: Overhaul Vital Spark without the new engine and the system control

Project 2: Overhaul Vital spark with the new engine and the system control

Project 3: Purchase of a new vessel and operating the Vital spark for one more year

Project 4: Purchase of a new vessel and stop immediately operating the Vital spark

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

Project 1: Overhaul Vital Spark without the new engine and the system control The first proposal require the following expenditures:
Overhaul engine and generators
Replace radar and other electronic equipment
Repairs to hull and superstructure
Painting and other repairs

$340
$75
$310
$95
$820

These expenditures could be depreciated in the seven-year MACRS class. And operating costs for the Vital Spark would be (in thousands): Fuel
Labor and benefits
Maintenance
Other

$450
$480
$141
$110
$1,181

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

Project 1: Overhaul Vital Spark without the new engine and the system control (2)

These expenses would increase with inflation, which is forecasted at 2.5% a year.

After the overhaul, the Vital Spark could operate at most for 12 additional years and when the vessel will be taken from service the salvage value would be insignificant. The Vessel would re-enter the service next year.

Revenues from operating the Vital Spark are forecasted at 1.4 Millions $ a year and would increase with inflation.

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

Project 2: Overhaul Vital spark with the new engine and the system control

For the second proposal the company is studying the installation of a new engine and control system on addition to the first proposal. This equipment would cost an extra 600 K$ and would reduce operating costs:

Overhaul engine and generators
Replace radar and other electronic equipment
Repairs to hull and superstructure
Painting and other repairs
new engine and control system

$340
$75
$310
$95
$600
$1,420

CALA Multicast Course November 2007

All Rights Reserved © Alcatel-Lucent 2007.

Project 2: Overhaul Vital spark with the new engine and the system control (2) For the second proposal the company is studying the...
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