A major refit costing $2 million will be required after both the fifth and tenth years.

QUESTION

Halcyon Lines is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating costs are $4 million. A major refit costing $2 million will be required after both the fifth and tenth years. After 15 years, the ship is expected to be sold for scrap at $1.5 million. If the discount rate is 8%, what is the ship”s NPV?
Calculation of NPV ( Amount in million) Particulars Years Cash Flow PVF@8% Present Value Purchase Cost 0 ($8) 1 ($8.000) Revenue Operating cost($5-$4) 1 $1 0.926 $0.926 Revenue Operating cost($5-$4) 2 $1 0.857 $0.857 Revenue Operating cost($5-$4) 3 $1 0.794 $0.794 Revenue Operating cost($5-$4) 4 $1 0.735 $0.735 Revenue Operating cost($5-$4) 5 $1 0.681 $0.681 major refit costing 5 ($2) 0.681 ($1.361) Revenue Operating cost($5-$4) 6 $1 0.630 $0.630 Revenue Operating cost($5-$4) 7 $1 0.583 $0.583 Revenue Operating cost($5-$4) 8 $1 0.540 $0.540 Revenue Operating cost($5-$4) 9 $1

0 $0.500 Revenue Operating cost($5-$4) 10 $1 0.463 $0.463 major refit costing 10 ($2) 0.463 ($0.926) Revenue Operating cost($5-$4) 11 $1 0.429 $0.429 Revenue Operating cost($5-$4) 12 $1 0.397 $0.397 Revenue Operating cost($5-$4) 13 $1 0.368 $0.368 Revenue Operating cost($5-$4) 14 $1 0.340 $0.340 Revenue Operating cost($5-$4) 15 $1 0.315 $0.315 Scarp Sale 15 $1.50 0.315 $0.473 NPV ($1.255)

ANSWER:

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