Boat Finance
Finance 1
NETCO case
Capital budgeting report
Capital Budgeting Report
Introduction
At present the boat Cynthia II no longer has economic value for NETCO meaning that either an overhaul of said boat has to be financed or a new boat should be purchased. Therefore, an NPV budget decision has to be computed in order to determine which alternative, an overhaul of the current boat or the purchase of a new one, is most profitable.
To compare the profitability of these two options we used the difference between the present values of both options and computed only one Net Present Value. Evidently, the incremental costs and revenues of the purchase of the new boat minus the incremental costs and revenues of the overhaul of the Cynthia II should be taken into consideration.
Assumptions
Several aspects of both buying decisions were unclear. Therefore, we had to make the following assumptions in order to be able to complete our calculations:
All cash flows are in nominal terms, meaning that 3% inflation is included.
Year 0 corresponds with 2009, year 1 with 2010 etc.
We compared the depreciation of the new boat with the depreciation of the overhauled Cynthia II, therefore the depreciation is the difference between the depreciation of both options. We calculated depreciation according to the MACRS method, including a 10 year economic life time for both boats.
We assumed that the training costs are €75000.
We did not include the interest expense in the cash flows, because we wish to evaluate the earning contributions from the projects on their own, separate from the financing decision.
We assumed a discount rate of 13.5%, which is the sum of a yield to maturity on Treasury Bonds of 3,5% and a risk premium of 10% (since the yield to maturity is estimated at 3-4%, we assumed an average of 3.5%).
The amount at "Purchase of equipment" is the difference between the purchase of the new boat (€2000000) and the overhauling of the Cynthia II (€600000), which
NETCO case
Capital budgeting report
Capital Budgeting Report
Introduction
At present the boat Cynthia II no longer has economic value for NETCO meaning that either an overhaul of said boat has to be financed or a new boat should be purchased. Therefore, an NPV budget decision has to be computed in order to determine which alternative, an overhaul of the current boat or the purchase of a new one, is most profitable.
To compare the profitability of these two options we used the difference between the present values of both options and computed only one Net Present Value. Evidently, the incremental costs and revenues of the purchase of the new boat minus the incremental costs and revenues of the overhaul of the Cynthia II should be taken into consideration.
Assumptions
Several aspects of both buying decisions were unclear. Therefore, we had to make the following assumptions in order to be able to complete our calculations:
All cash flows are in nominal terms, meaning that 3% inflation is included.
Year 0 corresponds with 2009, year 1 with 2010 etc.
We compared the depreciation of the new boat with the depreciation of the overhauled Cynthia II, therefore the depreciation is the difference between the depreciation of both options. We calculated depreciation according to the MACRS method, including a 10 year economic life time for both boats.
We assumed that the training costs are €75000.
We did not include the interest expense in the cash flows, because we wish to evaluate the earning contributions from the projects on their own, separate from the financing decision.
We assumed a discount rate of 13.5%, which is the sum of a yield to maturity on Treasury Bonds of 3,5% and a risk premium of 10% (since the yield to maturity is estimated at 3-4%, we assumed an average of 3.5%).
The amount at "Purchase of equipment" is the difference between the purchase of the new boat (€2000000) and the overhauling of the Cynthia II (€600000), which