Assuming that the cost of purchasing and operating

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Reference no: EM13618533

Copan Shipping just purchased an oil tanker at a cost of $450 million. The tanker has an expected life of 20 years, with an expected salvage value of $20 million. However, the Tax Reform Act of 2006 specifies that oil tankers and transport ships may be depreciated using straight-line depreciation over a 9-year life. The cost of operating the tanker is expected to be $10 million per year. Copan Shipping has a marginal tax rate of 30 percent and a required return of 10 percent.

Determine the yearly after-tax cost of owning and operating the tanker:

a. assuming that the cost of purchasing and operating sea-going vessels (e.g., oil tankers) are expected to remain constant over the next 20 years,

b. assuming that the cost of purchasing and operating sea-going vessels (e.g., oil tankers) are expected to increase by 8 percent per year over the foreseeable future [Hint: If the cost of ships is increasing or decreasing at a constant rate over time, then you may reasonably assume that the yearly cost of leasing the equipment will decrease steadily over time. Thus, you can approximate the impact of expected changes in the cost of ships by treating the after-tax annual equivalent cost of machine as a growing annuity stream.]

Reference no: EM13618533

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