Notes and Assumptions

1 Depreciation under SLM for 20 years or 25 years2 Tax rate for both income and capital gain is assumed at 48%3 Opportunity cost of Capital 10%4 Conversion option extends the life of the boat to further 20 years from the date of conversion

(I.e.: life is 20 years if converted immediately and 22 years if converted in time t=2)5 No general overhaul of the engines in case of conversion. You can assume alternatively one time

overhaul at the end of 10 years

Conversion option extends the life of the boat to further 20 years from the date of conversion

No general overhaul of the engines in case of conversion. You can assume alternatively one time

Annuity Value @10% since life differsWith 2 Shifts With 3 Shifts Life With 2 Shifts

1 Reparing the Cynthia -1014.75 Not Applicable 20 $119.19

2 Purchasing Diesel-Powered Boat -1020.07 -1196.96 25 $112.38

3 Converting the Cynthia in period 0 -1008.06 -1229.68 20 $118.41

4 Converting the Cynthia in period 2 -1065.53 -1248.68 22 $121.48

5 Hire Purchase -879.61 -904.69 25 $96.90

All first four options cost are close to each other. Hence even if the purchase option is greaterthan others with marginal value (actually it is not the case here), we may opt for purchasein the real world since it may be worth to incur such additional cost.

Annuity Value @10% since life differsWith 3 Shifts

NA

$131.87

$144.44

$142.36

$99.67

All first four options cost are close to each other. Hence even if the purchase option is greaterthan others with marginal value (actually it is not the case here), we may opt for purchase

Year 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax -31.96 Tax Savings Forgone -6.96Spare Part -43.5Actual Cash Spent -71.5COF -146.96

Operating Cost (net of tax gain) -105.638 -105.638 -105.638 -105.638 -105.638Tax Shield on Depreciation 3.708 3.708 3.708 3.708 3.708Operating Cost net of Tax -101.93 -101.93 -101.93 -101.93 -101.93

CF -146.96 -101.93 -101.93 -101.93 -101.93 -101.93

PV of CF -146.96 -92.66364 -84.23967 -76.58152 -69.61956 -63.29051Total PV of CF -1014.748

Notes:1 Since the decision to repairing forgoes the sale value of the ship, sale value is an opportunity cost for the option

Since the sale of ship leads to a capital loss, the decision to repair also forgoes certain tax advantage on capital loss.The loss is also added back to compute the net opportunity cost of not selling the ship but using the same for repair.

2 The decision to use spare parts forgoes an opportunity income of $30000 but ESC has to use $41500 spare partsin any case. The decision to sell the spare part or use internally is an independent decision. This project of repairing should not be given unnecessary benefit of lower opportunity sale value. Actually, we have three values: Sunk Cost (41500), sale value (30000) and opportunity cost (41500). Which one to consider? In this case opportunity cost is more relevant.

3 Depreciation is computed on SLM on a notional book value of (39.5+115) since the decision to useinternal spare parts should neither cost nor benefit the repairing decision.

6 7 8 9 10 11 12 13 14

-105.638 -105.638 -105.638 -105.638 -105.638 -105.638 -105.638 -105.638 -105.6383.708 3.708 3.708 3.708 3.708 3.708 3.708 3.708 3.708

-101.93 -101.93 -101.93 -101.93 -101.93 -101.93 -101.93 -101.93 -101.93

-101.93 -101.93 -101.93 -101.93 -101.93 -101.93 -101.93 -101.93 -101.93

-57.53683 -52.30621 -47.5511 -43.22827 -39.29843 -35.72584 -32.47804 -29.52549 -26.84135

Since the decision to repairing forgoes the sale value of the ship, sale value is an opportunity cost for the optionSince the sale of ship leads to a capital loss, the decision to repair also forgoes certain tax advantage on capital loss.The loss is also added back to compute the net opportunity cost of not selling the ship but using the same for repair.

The decision to use spare parts forgoes an opportunity income of $30000 but ESC has to use $41500 spare parts

This project of repairing should not be given unnecessary benefit of lower opportunity sale value. Actually, we have three values: Sunk Cost (41500), sale value (30000) and opportunity cost (41500). Which one to

Depreciation is computed on SLM on a notional book value of (39.5+115) since the decision to use

15 16 17 18 19 20

-105.638 -105.638 -105.638 -105.638 -105.638 -105.6383.708 3.708 3.708 3.708 3.708 3.708

-101.93 -101.93 -101.93 -101.93 -101.93 -101.93

-101.93 -101.93 -101.93 -101.93 -101.93 -101.93

-24.40123 -22.18294 -20.16631 -18.33301 -16.66637 -15.15125

Two Shifts of 12 hours eachYear 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax 31.96 Tax Savings 6.96Spare Part 30.00 (assumed that the purchase will make the spares unwanted)Actual Cash Spent -400 (since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)COF -338.04

Operating Cost (net of tax gain) -45.4528 -81.4528 -81.4528 -81.4528 -81.4528Tax Shield on Depreciation 6.24 6.24 6.24 6.24 6.24Operating Cost net of Tax -39.2128 -75.2128 -75.2128 -75.2128 -75.2128

CF -338.04 -39.2128 -75.2128 -75.2128 -75.2128 -75.2128

PV of CF -338.04 -35.648 -62.15934 -56.50849 -51.37135 -46.70123Total PV of CF -1020.074

Assumption: Parts inventory is written off in year 1Parts inventory is taken in full as COF since there is no immediate plan to expand the fleet.

Three Shifts of 8 hours eachYear 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax 31.96 Tax Savings 6.96Spare Part 30.00 (assumed that the purchase will make the spares unwanted)Actual Cash Spent -400 (since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)COF -338.04

Operating Cost (net of tax gain) -66.635 -102.635 -102.635 -102.635 -102.635Tax Shield on Depreciation 6.24 6.24 6.24 6.24 6.24Operating Cost net of Tax -60.395 -96.395 -96.395 -96.395 -96.395

CF -338.04 -60.395 -96.395 -96.395 -96.395 -96.395

PV of CF -338.04 -54.90455 -79.66529 -72.42299 -65.83908 -59.85371Total PV of CF -1196.961

6 7 8 9 10 11 12 13 14

(assumed that the purchase will make the spares unwanted)(since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)

-60

-81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.45286.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24

-75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128

-75.2128 -75.2128 -75.2128 -75.2128 -135.2128 -75.2128 -75.2128 -75.2128 -75.2128

-42.45566 -38.59606 -35.08733 -31.89757 -52.13039 -26.36163 -23.96512 -21.78647 -19.80588

6 7 8 9 10 11 12 13 14

(assumed that the purchase will make the spares unwanted)(since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)

-31.2

-102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.6356.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24

-96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395

-96.395 -96.395 -96.395 -96.395 -127.595 -96.395 -96.395 -96.395 -96.395

-54.41246 -49.46588 -44.96898 -40.88089 -49.1934 -33.78586 -30.71442 -27.9222 -25.38382

15 16 17 18 19 20 21 22 23

-60

-81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.45286.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24

-75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -75.2128

-75.2128 -75.2128 -75.2128 -75.2128 -75.2128 -135.2128 -75.2128 -75.2128 -75.2128

-18.00535 -16.3685 -14.88045 -13.52768 -12.29789 -20.09852 -10.16355 -9.23959 -8.399627

15 16 17 18 19 20 21 22 23

-31.2

-102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.6356.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24

-96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395

-96.395 -96.395 -96.395 -96.395 -96.395 -127.595 -96.395 -96.395 -96.395

-23.0762 -20.97836 -19.07124 -17.33749 -15.76135 -18.96618 -13.02591 -11.84174 -10.76522

24 25

-81.4528 -81.45286.24 6.24

-75.2128 -75.2128

-75.2128 -75.2128

-7.636024 -6.94184

24 25

-102.635 -102.6356.24 6.24

-96.395 -96.395

-96.395 -96.395

-9.78656 -8.896873

Converting Cynthia immediatelyTwo shifts of 12 hours

Year 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax -31.96 Tax Savings Forgone -6.96Spare Part -43.5Actual Cash Spent -111.5COF -186.96

Operating Cost (net of tax gain) -101.114 -101.114 -101.114 -101.114 -101.114Tax Shield on Depreciation 4.668 4.668 4.668 4.668 4.668Operating Cost net of Tax -96.446 -96.446 -96.446 -96.446 -96.446

CF -186.96 -96.446 -96.446 -96.446 -96.446 -96.446

PV of CF -186.96 -87.67818 -79.70744 -72.46131 -65.87392 -59.88538Total PV of CF -1008.059

Notes: All notes of Repairing ChynthiaNo parts inventory is considered for this option

Three Shifts of 8 hoursYear 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax -31.96 Tax Savings Forgone -6.96Spare Part -43.5Actual Cash Spent -111.5COF -186.96

Operating Cost (net of tax gain) -127.1452 -127.1452 -127.1452 -127.1452 -127.1452Tax Shield on Depreciation 4.668 4.668 4.668 4.668 4.668Operating Cost net of Tax -122.4772 -122.4772 -122.4772 -122.4772 -122.4772

CF -186.96 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772

PV of CF -186.96 -111.3429 -101.2208 -92.01893 -83.65358 -76.04871Total PV of CF -1229.677

6 7 8 9 10 11 12 13 14

-101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.1144.668 4.668 4.668 4.668 4.668 4.668 4.668 4.668 4.668

-96.446 -96.446 -96.446 -96.446 -96.446 -96.446 -96.446 -96.446 -96.446

-96.446 -96.446 -96.446 -96.446 -96.446 -96.446 -96.446 -96.446 -96.446

-54.44125 -49.49205 -44.99277 -40.90252 -37.18411 -33.80373 -30.73067 -27.93697 -25.39725

6 7 8 9 10 11 12 13 14

-127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.14524.668 4.668 4.668 4.668 4.668 4.668 4.668 4.668 4.668

-122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772

-122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772

-69.13519 -62.85017 -57.13652 -51.94229 -47.22026 -42.92751 -39.02501 -35.47728 -32.25207

15 16 17 18 19 20

-101.114 -101.114 -101.114 -101.114 -101.114 -101.1144.668 4.668 4.668 4.668 4.668 4.668

-96.446 -96.446 -96.446 -96.446 -96.446 -96.446

-96.446 -96.446 -96.446 -96.446 -96.446 -96.446

-23.08841 -20.98946 -19.08133 -17.34666 -15.76969 -14.33608

15 16 17 18 19 20

-127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.14524.668 4.668 4.668 4.668 4.668 4.668

-122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772

-122.4772 -122.4772 -122.4772 -122.4772 -122.4772 -122.4772

-29.32007 -26.65461 -24.23146 -22.0286 -20.026 -18.20546

Converting Cynthia immediatelyTwo shifts of 12 hours

Year 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax -31.96 Tax Savings Forgone -6.96Spare Part -43.5Actual Cash Spent -71.5COF -146.96 -70

Operating Cost (net of tax gain) -105.638 -105.638 -101.114 -101.114 -101.114Tax Shield on Depreciation 3.708 3.708 3.9264 3.9264 3.9264Operating Cost net of Tax -101.93 -101.93 -97.1876 -97.1876 -97.1876

CF -146.96 -101.93 -171.93 -97.1876 -97.1876 -97.1876

PV of CF -146.96 -92.66364 -142.0909 -73.01848 -66.38044 -60.34585Total PV of CF -1065.527

Notes: All notes of Repairing ChynthiaNo parts inventory is considered for this option

Three Shifts of 8 hoursYear 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax -31.96 Tax Savings Forgone -6.96Spare Part -43.5Actual Cash Spent -71.5COF -146.96 -70

Operating Cost (net of tax gain) -105.638 -105.638 -127.1452 -127.1452 -127.1452Tax Shield on Depreciation 3.708 3.708 3.9264 3.9264 3.9264Operating Cost net of Tax -101.93 -101.93 -123.2188 -123.2188 -123.2188

CF -146.96 -101.93 -171.93 -123.2188 -123.2188 -123.2188

PV of CF -146.96 -92.66364 -142.0909 -92.57611 -84.1601 -76.50918Total PV of CF -1248.682

6 7 8 9 10 11 12 13 14

-101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.1143.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264

-97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876

-97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876

-54.85987 -49.87261 -45.33873 -41.21703 -37.47003 -34.06366 -30.96696 -28.15179 -25.59253

6 7 8 9 10 11 12 13 14

-127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.14523.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264

-123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188

-123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188

-69.5538 -63.23073 -57.48248 -52.2568 -47.50618 -43.18744 -39.26131 -35.6921 -32.44736

15 16 17 18 19 20 21 22

-101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.114 -101.1143.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264

-97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876

-97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876 -97.1876

-23.26594 -21.15085 -19.22805 -17.48004 -15.89095 -14.44632 -13.13302 -11.93911

15 16 17 18 19 20 21 22

-127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.1452 -127.14523.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264 3.9264

-123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188

-123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188 -123.2188

-29.4976 -26.816 -24.37818 -22.16198 -20.14726 -18.31569 -16.65063 -15.13693

Note: Quapelle company charges 325000/15 = 21700 an HP value without taking into account the TVMIt separately charges an interest of $ 5700 per year for 15 years. The pre-tax IRR of this works out to 3.10% per year, which means Quapelle offers loan at 3.10%The deal will be naturally attractive than alternative schemes where the investment is required.Two Shifts of 12 hours each

Year 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax 31.96 Tax Savings 6.96Spare Part 30.00 (assumed that the purchase will make the spares unwanted)Actual Cash Spent -75 (since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)COF -13.04

Operating Cost (net of tax gain) -81.4528 -81.4528 -81.4528 -81.4528 -81.4528HP Rent net of Tax -14.248 -14.248 -14.248 -14.248 -14.248Operating Cost net of Tax -95.7008 -95.7008 -95.7008 -95.7008 -95.7008

CF -13.04 -95.7008 -95.7008 -95.7008 -95.7008 -95.7008

PV of CF -13.04 -87.00073 -79.09157 -71.90143 -65.36493 -59.42267Total PV of CF -879.6083

Three Shifts of 8 hours eachYear 0 1 2 3 4 5

COFOpportunity CostSale Value net of tax 31.96 Tax Savings 6.96Spare Part 30.00 (assumed that the purchase will make the spares unwanted)Actual Cash Spent -75 (since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)COF -13.04

Operating Cost (net of tax gain) -102.635 -102.635 -102.635 -102.635 -102.635Tax Shield on Depreciation 6.24 6.24 6.24 6.24 6.24Operating Cost net of Tax -96.395 -96.395 -96.395 -96.395 -96.395

CF -13.04 -96.395 -96.395 -96.395 -96.395 -96.395

PV of CF -13.04 -87.63182 -79.66529 -72.42299 -65.83908 -59.85371Total PV of CF -904.6879

0 -3250001 274002 274003 274004 274005 274006 274007 27400

8 274009 27400

10 2740011 2740012 2740013 2740014 2740015 27400

3.1%

Quapelle company charges 325000/15 = 21700 an HP value without taking into account the TVM

The pre-tax IRR of this works out to 3.10% per year, which means Quapelle offers loan at 3.10%The deal will be naturally attractive than alternative schemes where the investment is required.

6 7 8 9 10 11 12 13 14

(assumed that the purchase will make the spares unwanted)(since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)

-31.2

-81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528-14.248 -14.248 -14.248 -14.248 -14.248 -14.248 -14.248 -14.248 -14.248

-95.7008 -95.7008 -95.7008 -95.7008 -95.7008 -95.7008 -95.7008 -95.7008 -95.7008

-95.7008 -95.7008 -95.7008 -95.7008 -126.9008 -95.7008 -95.7008 -95.7008 -95.7008

-54.02061 -49.10964 -44.64513 -40.58648 -48.92575 -33.54255 -30.49322 -27.72111 -25.20101

6 7 8 9 10 11 12 13 14

(assumed that the purchase will make the spares unwanted)(since there is no immediate plan for adding more diesel units, the entire spare parts is considered as relevant Cash Outflow)

-31.2

-102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.6356.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24

-96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395

-96.395 -96.395 -96.395 -96.395 -127.595 -96.395 -96.395 -96.395 -96.395

-54.41246 -49.46588 -44.96898 -40.88089 -49.1934 -33.78586 -30.71442 -27.9222 -25.38382

15 16 17 18 19 20 21 22 23

-31.2

-81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528 -81.4528-14.248 -1.482 -1.482 -1.482 -1.482 -1.482 -1.482 -1.482 -1.482

-95.7008 -82.9348 -82.9348 -82.9348 -82.9348 -82.9348 -82.9348 -82.9348 -82.9348

-95.7008 -82.9348 -82.9348 -82.9348 -82.9348 -114.1348 -82.9348 -82.9348 -82.9348

-22.91001 -18.04903 -16.40821 -14.91655 -13.5605 -16.96541 -11.20703 -10.18821 -9.262006

15 16 17 18 19 20 21 22 23

-31.2

-102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.635 -102.6356.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24 6.24

-96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395 -96.395

-96.395 -96.395 -96.395 -96.395 -96.395 -127.595 -96.395 -96.395 -96.395

-23.0762 -20.97836 -19.07124 -17.33749 -15.76135 -18.96618 -13.02591 -11.84174 -10.76522

24 25

-81.4528 -81.4528-1.482 -1.482

-82.9348 -82.9348

-82.9348 -82.9348

-8.420005 -7.65455

24 25

-102.635 -102.6356.24 6.24

-96.395 -96.395

-96.395 -96.395

-9.78656 -8.896873