Mini Case #1: Capital Budgeting at Rio Negro, Inc.

The specific case study, directions & guidelines for completing are in the attached document. The essential elements of the paper are as follows:
1. Introduction
2. Analysis consisting of the following:
a) Calculate the present value of the proposed overhaul of the Maracas, with and without the new engine and control system. Should RNI do the basic overhaul or the expanded overhaul with the new engine and control system? For the moment, ignore the option to purchase a new vessel (you will evaluate that option in question 2 below). Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 1.
b) Calculate the present value of buying and operating the new vessel. What, if any, additional information would be useful to you in your analysis? Write a few paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 2.
c) Calculate the equivalent annual costs of (a) overhauling and operating the Maracas for 12 more years (with and without the new engine and control system) and (b) buying and operating the proposed replacement vessel for 20 years. You should use the real discount rate for this analysis. Based on your answer, what should RNI do? Write one to two paragraphs giving your answer and clearly explaining your reasoning and computations; show detailed computations in your Excel spreadsheet labeled Exhibit 3.
d) Why is the equivalent annual cost method potentially useful in decision making in this case? Why would you use the real discount rate to compute the EAC? What problem(s) do you see with using the equivalent annual cost method to evaluate RNI’s options?
3) Conclusion including a recommendation to Rio Negro senior management regarding which option they should pursue.