New Economy Transport Company

New Economy Transport Company

Financial Analysis Report

Prepared by:

Gibson

September 21, 2011

Introduction

I understand your company is in need of possibly updating your valuable fleet of ships. The first proposal made was to completely overhaul the older Vital Spark vessel. Your chief engineer also suggested that it might be a good idea to install a new engine and control system as well. The deciding factor will be whether it is more cost-effective after-taxes for the remaining life of the vessel.

The second proposal was to research what purchasing a completely new vessel. We will compare the equivalent annual costs of overhauling and operating the Vital Spark for 12 additional years to the equivalent annual costs of buying and operating a proposed replacement vessel. Again we will decide which proposed idea is more beneficial for the future of your company.

Assumptions

In this case study many assumptions are necessary. We must assume the tax depreciated value of the Vital Spark using the seven-year MACRS class. We must assume an inflation rate of 2.5% a year when figuring future revenues and operating costs. In figuring your profit after tax we must assume your tax rate of 35%. When calculating the internal rate of return (IRR) we must remember your firm is conservatively financed using an 11% cost of capital.

When comparing the Vital Spark operating costs to the new vessel's operating costs, we are assuming that both ships will be operated in the same way. The new vessel would be able to transport larger loads which would increase its revenue by $100,000 a year as well as having a longer operating life of 20 years. The cost of the new vessel, $3000000, is assumed to depreciate the full value of the ship the first year in service even though the full amount is split into two payments, one the first year and one the next.

w costs is to operate for 12 more years we are going to assume that you will invest in a new engine and control centeris that the to save for their child's education it was necessary to make an assumption on what college tuition would be in the future. Our group assumed that college in today's dollars would cost 20,000 per year. We then aged the 20,000 and found the FV 18 years from now. The second assumption our group made was that when saving to purchase a new home that we could earn an interest rate of 1.25% in a savings account that would be compounded monthly. In computing retirement savings need it was necessary to assume that a retirement age. We chose a retirement age of 65, this would allow for 35 years of savings prior to retirement and 15 years of income until death.

Analysis

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