bre44380_ch06_132-161.indd 161 09/30/15 12:46 PM
Chapter 6 Making Investment Decisions with the Net Present Value Rule 161
Mr. Handy stepped out on the foredeck of the Vital Spark as she chugged down the Cook Inlet.
“A rusty old tub,” he muttered, “but she’s never let us down. I’ll bet we could keep her going until
next year while Cohn and Doyle are building her replacement. We could use up the spare parts to
keep her going. We might even be able to sell or scrap her for book value when her replacement
arrives.
“But how do I compare the NPV of a new ship with the old Vital Spark? Sure, I could run a
20-year NPV spreadsheet, but I don’t have a clue how the replacement will be used in 2030 or
- Maybe I could compare the overall cost of overhauling and operating the Vital Spark to the
cost of buying and operating the proposed replacement.”
QUESTIONS
- Calculate and compare the equivalent annual costs of (a) overhauling and operating the Vital
Spark for 12 more years, and (b) buying and operating the proposed replacement vessel for
20 years. What should Mr. Handy do if the replacement’s annual costs are the same or lower? - Suppose the replacement’s equivalent annual costs are higher than the Vital Spark’s. What
additional information should Mr. Handy seek in this case?