NEW ECONOMY TRANSPORT (B) Minicase solution, Chapter 6 Principles of Corporate Finance, 12th Edition R. A. Brealey, S. C. Myers and F. Allen We start with the assumptions and PV calculations in New Economy Transport (A). We could calculate the NPV of the new vessel in the same format. But the new vessel lasts for 20 years, 8 years longer than the rehabilitated Vital Spark. Thus we calculate equivalent annual cash flows. That is, we calculate the equivalent annual costs of the net investments required for the Vital Spark (with and without the new engine and control system) and for the new vessel. The equivalent annual costs are subtracted from net operating revenue. The spreadsheet for New Economy Transport (B) summarizes the calculations. The net investments are: 1. Overhaul of the Vital Spark (REHAB): The investment of $820,000 is offset by the proceeds from sale as is (an opportunity cost of $179,000) and the present value of depreciation tax shields ($201,108). The PV of net investment is $439,892. 2. Overhaul with new engine (REHAB PLUS): Investment increases to $1,420,000, but the PV of depreciation tax shields also increases. The PV of net investment is $892,739. 3. New vessel: The PV of the $3,000,000 investment is only $2,851,351, because half of the payment is deferred to t = 1. The PV of training costs is also treated as an investment. In addition, NETCO can run the Vital Spark for one more year, generating after-tax revenues of $910,000 and a salvage value of $140,000 at t = 1. Thus the net investment in the new vessel (PV) is $1,158,017. The net investments are converted into equivalent annual costs, that is, real annuities starting at t = 1.5 and continuing to t = 12.5 for the Vital Spark and to t = 20.5 for the new vessel. The equivalent annual costs per dollar of net investment are shown at the bottom of the spreadsheet. The total equivalent annual cash flow for each option equals revenues – operating costs – equivalent annual cost of net investment. Overhaul of the Vital Spark generates a positive annual flow, as expected, since overhaul is positive-NPV. But the new vessel generates a larger equivalent annual cash flow of about +$274,000. Thus the Vital Spark is headed for retirement at t = 1. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 本文来源：https://www.wddqw.com/doc/0e1d1048fc00bed5b9f3f90f76c66137ef064f49.html