Calculate the present value of the proposed overhaul of the Maracas and then *write just one paragraph!* | Homework Helper

Rio Negro, Inc. (RNI) is in the business of transporting cargo between ports in California and Washington. Its fleet
includes a small dry-cargo vessel, the Maracas. The Maracas is 25 years old and badly in need of an overhaul.
It is March 2016, and Michael John, the finance director, has just been presented with a proposal that would require
the one-time expenditures shown below in Table 1. If the proposal is accepted, these expenditures will be made in
the next few days. Mr. John believes that all these outlays could be depreciated for tax purposes in the seven-year
MACRS class (see Table 2 below for rates). Overhaul of the Maracas will begin as soon as the expenditures in
Table1 are made, but the vessel will be out of service for several months. The overhauled vessel would resume
commercial service in one year. RNI’s chief engineer’s estimates of the post-overhaul operating costs are in Table 3.
In addition to the overhaul described above, the chief engineer suggests installation of a brand- new engine and
control system. Installation of this new engine would cost an extra $600,000 (This additional outlay would also
qualify for tax depreciation in the seven-year MACRS class.). However, if the additional equipment is installed, it
would result in reduced fuel, labor, and maintenance costs as shown in Table 4.
The operating cost estimates in Tables 3 and 4 are current for March 2016. However, these costs will increase with
inflation, which is forecasted at 1.25% a year. Depreciation and operating costs attributable to the overhaul of
the Maracas will begin one year after the vessel is put back into commercial service. The revenues from operating
the vessel will be the same for both types of overhaul.
Even with the proposed overhaul, the Maracas cannot continue forever. After the overhaul, its remaining useful life
is estimated to be only 12 years. Its salvage value when finally taken out of service will be trivial. Thus, Mr. John
feels it is unwise to proceed without also considering the purchase of a new vessel. Racette