New Economy Transport

Pages: 2 (475 words) Published: October 1, 2008
Sebastian Krug, s082349 New Economy Transport 1
1 NET (A) - Question 1
As you can see on the rst spreadsheet the NPV of the overhaul with the new engine and control system (1:117:413; 38 Euro) is higher than the NPV without the new stu (480:211; 75 Euro). In this case Mr. Handy should choose the overhaul with the new stu .

First of all the entire calculation is in real numbers. I've done it in nominal numbers too (with the same results) but it was too much to hand in.
The assumptions I've made are that the useful life of the Vital Spark is 12 years, the overhaul cost for the overhaul with new stu is 600:000,- (engine and control system) + 310:000,- (repairs to hull) + 95:000,- (painting) = 1:005:000,-. I assumed also that the repairs plus the paintings are tax-deductible in both cases. The real cost of capital is

1 + i =
1 + r
1 + 
1 + 0; 11
1 + 0; 025
=) i  0; 083. (1)
2 NET (B) - Question 1
Here I've taken over the NVP for the overhaul with new stu from the question above for the composition because it was the better one there. I've done the calculation with equivalent annual cash
ows because it would be dicult to take into account
the higher revenues of the new vessel. It's all in real numbers too. The EACF of the new vessel (177:969; 93,- Euro) is higher than the EACF of the overhaul with just some new stu (150:531; 48,- Euro) so the replacement generates more annualized cash

Mr. Handy should choose the replacement and use the Vital Spark the rest of the year until the new one arrives. After the arrival he should sell/scrap the Vital Spark for book value of 100:000,- Euro (assumed that they used the spare parts to keep it going for the rest of the year).

3 NET (B) - Question 2
If the replacement's equivalent annual costs are higher than the Vital Spark's, Mr. Handy should seek additional information about the EAC of a replacement after the useful life of the Vital Spark. Maybe it is much more expensive to replace the old...
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