Notes and Assumptions

1
2
3
4

Depreciation under SLM for 20 years or 25 years

Tax rate for both income and capital gain is assumed at 48%
Opportunity cost of Capital 10%
Conversion option extends the life of the boat to further 20 years from the date of conversion
(I.e.: life is 20 years if converted immediately and 22 years if converted in time t=2)
5 No general overhaul of the engines in case of conversion. You can assume alternatively one time
overhaul at the end of 10 years

e date of conversion

me alternatively one time

Annuity Value @10% since life differs

Life With 2 Shifts With 3 Shifts

With 2 Shifts

With 3 Shifts

1 Reparing the Cynthia

-1014.75

Not Applicable

20

$119.19

NA

2 Purchasing Diesel-Powered Boat

-1020.07

-1196.96

25

$112.38

$131.87

3 Converting the Cynthia in period 0

-1008.06

-1229.68

20

$118.41

$144.44

4 Converting the Cynthia in period 2

-1065.53

-1248.68

22

$121.48

$142.36

5 Hire Purchase

-879.61

-904.69

25

$96.90

$99.67

All first four options cost are close to each other. Hence even if the purchase option is greater
than others with marginal value (actually it is not the case here), we may opt for purchase
in the real world since it may be worth to incur such additional cost.

since life differs

With 3 Shifts

Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

-31.96
-43.5
-71.5
-146.96

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings Forgone

-6.96

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-146.96

-101.93

-101.93

-101.93

-101.93

-101.93

-146.96
-1014.75

-92.6636

-84.2397

-76.5815

-69.6196

-63.2905

Notes:
1 Since the decision to repairing forgoes the sale value of the ship, sale value is an opportunity cost for the optio
Since the sale of ship leads to a capital loss, the decision to repair also forgoes certain tax advantage on capita
The loss is also added back to compute the net opportunity cost of not selling the ship but using the same for

2 The decision to use spare parts forgoes an opportunity income of $30000 but ESC has to use $41500 spare par
in any case. The decision to sell the spare part or use internally is an independent decision.
This project of repairing should not be given unnecessary benefit of lower opportunity sale value.
Actually, we have three values: Sunk Cost (41500), sale value (30000) and opportunity cost (41500). Which one
consider? In this case opportunity cost is more relevant.
3 Depreciation is computed on SLM on a notional book value of (39.5+115) since the decision to use
internal spare parts should neither cost nor benefit the repairing decision.

10

11

12

13

14

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-57.5368

-52.3062

-47.5511

-43.2283

-39.2984

-35.7258

-32.478

-29.5255

-26.8414

pportunity cost for the option

tain tax advantage on capital loss.
ship but using the same for repair.

has to use $41500 spare parts

nity sale value.

ity cost (41500). Which one to

decision to use

15

16

17

18

19

20

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-105.638
3.708
-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-101.93

-24.4012

-22.1829

-20.1663

-18.333

-16.6664

-15.1512

Two Shifts of 12 hours each

Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

31.96
30.00
-400
-338.04

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings
6.96
(assumed that the purchase will make the spares unwante
(since there is no immediate plan for adding more diesel u

-45.4528
6.24
-39.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-338.04

-39.2128

-75.2128

-75.2128

-75.2128

-75.2128

-338.04
-1020.07

-35.648

-62.1593

-56.5085

-51.3714

-46.7012

Assumption: Parts inventory is written off in year 1

Parts inventory is taken in full as COF since there is no immediate plan to expand the fleet.

Three Shifts of 8 hours each

Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

31.96
30.00
-400
-338.04

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings
6.96
(assumed that the purchase will make the spares unwante
(since there is no immediate plan for adding more diesel u

-66.635
6.24
-60.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-338.04

-60.395

-96.395

-96.395

-96.395

-96.395

-338.04
-1196.96

-54.9045

-79.6653

-72.423

-65.8391

-59.8537

10

11

12

13

14

ill make the spares unwanted)

an for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)
-60
-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-75.2128

-75.2128

-75.2128

-75.2128

-135.213

-75.2128

-75.2128

-75.2128

-75.2128

-42.4557

-38.5961

-35.0873

-31.8976

-52.1304

-26.3616

-23.9651

-21.7865

-19.8059

10

11

12

13

14

ill make the spares unwanted)

an for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)
-31.2
-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-96.395

-96.395

-96.395

-96.395

-127.595

-96.395

-96.395

-96.395

-96.395

-54.4125

-49.4659

-44.969

-40.8809

-49.1934

-33.7859

-30.7144

-27.9222

-25.3838

15

16

17

18

19

20

21

22

23

-60
-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-75.2128

-75.2128

-75.2128

-75.2128

-75.2128

-135.213

-75.2128

-75.2128

-75.2128

-18.0053

-16.3685

-14.8805

-13.5277

-12.2979

-20.0985

-10.1635

-9.23959

-8.39963

15

16

17

18

19

20

21

22

23

-31.2
-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-96.395

-96.395

-96.395

-96.395

-96.395

-127.595

-96.395

-96.395

-96.395

-23.0762

-20.9784

-19.0712

-17.3375

-15.7614

-18.9662

-13.0259

-11.8417

-10.7652

24

25

-81.4528
6.24
-75.2128

-81.4528
6.24
-75.2128

-75.2128

-75.2128

-7.63602

-6.94184

24

25

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-96.395

-96.395

-9.78656

-8.89687

Converting Cynthia immediately

Two shifts of 12 hours
Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

-31.96
-43.5
-111.5
-186.96

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings Forgone

-6.96

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-186.96

-96.446

-96.446

-96.446

-96.446

-96.446

-186.96
-1008.06

-87.6782

-79.7074

-72.4613

-65.8739

-59.8854

Notes: All notes of Repairing Chynthia

No parts inventory is considered for this option
Three Shifts of 8 hours
Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

-31.96
-43.5
-111.5
-186.96

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings Forgone

-6.96

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-186.96

-122.477

-122.477

-122.477

-122.477

-122.477

-186.96
-1229.68

-111.343

-101.221

-92.0189

-83.6536

-76.0487

10

11

12

13

14

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-54.4413

-49.492

-44.9928

-40.9025

-37.1841

-33.8037

-30.7307

-27.937

-25.3972

10

11

12

13

14

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-69.1352

-62.8502

-57.1365

-51.9423

-47.2203

-42.9275

-39.025

-35.4773

-32.2521

15

16

17

18

19

20

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-101.114
4.668
-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-96.446

-23.0884

-20.9895

-19.0813

-17.3467

-15.7697

-14.3361

15

16

17

18

19

20

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-127.145
4.668
-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-122.477

-29.3201

-26.6546

-24.2315

-22.0286

-20.026

-18.2055

Converting Cynthia immediately

Two shifts of 12 hours
Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

-31.96
-43.5
-71.5
-146.96

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings Forgone

-6.96

-70
-105.638
3.708
-101.93

-105.638
3.708
-101.93

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-146.96

-101.93

-171.93

-97.1876

-97.1876

-97.1876

-146.96
-1065.53

-92.6636

-142.091

-73.0185

-66.3804

-60.3459

Notes: All notes of Repairing Chynthia

No parts inventory is considered for this option
Three Shifts of 8 hours
Year
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

-31.96
-43.5
-71.5
-146.96

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings Forgone

-6.96

-70
-105.638
3.708
-101.93

-105.638
3.708
-101.93

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-146.96

-101.93

-171.93

-123.219

-123.219

-123.219

-146.96
-1248.68

-92.6636

-142.091

-92.5761

-84.1601

-76.5092

10

11

12

13

14

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-54.8599

-49.8726

-45.3387

-41.217

-37.47

-34.0637

-30.967

-28.1518

-25.5925

10

11

12

13

14

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-69.5538

-63.2307

-57.4825

-52.2568

-47.5062

-43.1874

-39.2613

-35.6921

-32.4474

15

16

17

18

19

20

21

22

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-101.114
3.9264
-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-97.1876

-23.2659

-21.1509

-19.228

-17.48

-15.8909

-14.4463

-13.133

-11.9391

15

16

17

18

19

20

21

22

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-127.145
3.9264
-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-123.219

-29.4976

-26.816

-24.3782

-22.162

-20.1473

-18.3157

-16.6506

-15.1369

Note: Quapelle company charges 325000/15 = 21700 an HP value without taking into account the TVM
It separately charges an interest of $ 5700 per year for 15 years.
The pre-tax IRR of this works out to 3.10% per year, which means Quapelle offers loan at 3.10%
The deal will be naturally attractive than alternative schemes where the investment is required.
Two Shifts of 12 hours each
Year
0
1
2
3
4
5
COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

31.96
30.00
-75
-13.04

Operating Cost (net of tax gain)

HP Rent net of Tax
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-13.04

-95.7008

-95.7008

-95.7008

-95.7008

-95.7008

-13.04
-879.608

-87.0007

-79.0916

-71.9014

-65.3649

-59.4227

Three Shifts of 8 hours each

Year

COF
Opportunity Cost
Sale Value net of tax
Spare Part
Actual Cash Spent
COF

31.96
30.00
-75
-13.04

Operating Cost (net of tax gain)

Tax Shield on Depreciation
Operating Cost net of Tax
CF
PV of CF
Total PV of CF

Tax Savings
6.96
(assumed that the purchase will make the spares unwante
(since there is no immediate plan for adding more diesel u

Tax Savings
6.96
(assumed that the purchase will make the spares unwante
(since there is no immediate plan for adding more diesel u

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-13.04

-96.395

-96.395

-96.395

-96.395

-96.395

-13.04
-904.688

-87.6318

-79.6653

-72.423

-65.8391

-59.8537

0
1
2
3
4
5

-325000
27400
27400
27400
27400
27400

6
7
8
9
10
11
12
13
14
15

27400
27400
27400
27400
27400
27400
27400
27400
27400
27400
3.1%

unt the TVM

oan at 3.10%

10

11

12

13

14

ill make the spares unwanted)

an for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)
-31.2
-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-81.4528
-14.248
-95.7008

-95.7008

-95.7008

-95.7008

-95.7008

-126.901

-95.7008

-95.7008

-95.7008

-95.7008

-54.0206

-49.1096

-44.6451

-40.5865

-48.9258

-33.5425

-30.4932

-27.7211

-25.201

10

11

12

13

14

ill make the spares unwanted)

an for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)
-31.2
-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-96.395

-96.395

-96.395

-96.395

-127.595

-96.395

-96.395

-96.395

-96.395

-54.4125

-49.4659

-44.969

-40.8809

-49.1934

-33.7859

-30.7144

-27.9222

-25.3838

15

16

17

18

19

20

21

22

23

-31.2
-81.4528
-14.248
-95.7008

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-95.7008

-82.9348

-82.9348

-82.9348

-82.9348

-114.135

-82.9348

-82.9348

-82.9348

-22.91

-18.049

-16.4082

-14.9166

-13.5605

-16.9654

-11.207

-10.1882

-9.26201

15

16

17

18

19

20

21

22

23

-31.2
-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-96.395

-96.395

-96.395

-96.395

-96.395

-127.595

-96.395

-96.395

-96.395

-23.0762

-20.9784

-19.0712

-17.3375

-15.7614

-18.9662

-13.0259

-11.8417

-10.7652

24

25

-81.4528
-1.482
-82.9348

-81.4528
-1.482
-82.9348

-82.9348

-82.9348

-8.42001

-7.65455

24

25

-102.635
6.24
-96.395

-102.635
6.24
-96.395

-96.395

-96.395

-9.78656

-8.89687