A shipping company provides two kinds of shipments, gas and oil. ship A can make 8 trips annually. the journey can generate revenue 1.6 mil and it costs 1 mil. The fixed cost is 500000 per year. Ship A is currently ten years old and it was bought at 12 mil, which has a 30 yr life with straight line depreciation. this ship is correctly priced at 10 mil, yet 20 years later it could be sold at 1 mil for its salvage value. on the financial statement, the company requires net working capital that is 5% of the total revenue to run ship A. Tax rate:40% and required return:20%.

an analyst is evaluating whether to replace this ship. newer model is more efficient and has less maintenance work, which can still do 8 trips, with the revenue of 1.8mil per trip, and the cost of 0.9 mil. the maintenance cost is 400000 and net working capital requirement is 5% of revenue/yr. newer model has a 20 yr life which is priced at 18 mil with straight line depreciation. it can be sold at salvage value of 2.5 mil in 20 yrs. 

1) what is the incremental cash flow with replacement and with net capital spending now?

2) what is the incremental cash flow twenty years later?

3. what is the operating cash flow / yr?

4. what is the changes in net working capital each year

5. what is the NPV of newer model, if purchased and replaced?

6. what is the change in NPV for every 1 dollar change in new model's gross revenue per travel?

Answer rating: 100% (QA)

1 The incremental cash flow with replacement and with net capital spending now is 18 million 2 T... View the full answer