Economy Shipping Essay

841 words - 4 pages

Economy Shipping Company

It is recommended that Economy Shipping Company (ESC) replace the
steamboat, Cynthia, with a new diesel powered boat.

The analysis assumed no operating cost in 1950. Although ESC was
presumably still in service during this analysis, the costs associated
with the project evaluation were not accounted for until 1951. It was
also implicit in the NPV calculations that any upgrade required
subsequent to 1950 could be performed without any interruption to the
daily operations and were performed at the beginning of the year.
Therefore, the stoker upgrade and the engine replacements were
considered on Jan 1st of the intended year and did not require ...view middle of the document...

If
the new regulation had fines associated for any vessel not in
compliance with the new guidelines, the results for the steamboat
scenarios would only get worse. In this case, the diesel-powered
boats could accommodate the anticipated ruling and therefore continue
to operate without fear of being unlawful.

Another disadvantage against rehabilitating Cynthia was its age. At
the time of the decision the steamboat had already been in operation
for 23 years. Although, the realizable cost to renovate the steamboat
was already known, the intangible aspect of this alternative was the
status of the boat once refurbished. It should be noted that with
any overhaul, there are still aspects to the boat that will remain
?old? and will eventually fail. The maintenance and repairs listed in
the case appear to indicate general maintenance and not a catastrophic
event as is suggested. The cost of another large repair that is
associated with age has not been calculated for but must be understood
as a variable to the rehabilitation options.

The tax savings associated with purchasing the new diesel-powered boat
is yet another advantage over the steamboat. With a lower operating
cost and higher depreciation (see appendix) the purchasing option
saves approximately $11,500 less in taxes (option 4 vs. option 1).
During the 25-year useful life of the boat, Economy will save
$287,500.

The equivalent annual cost (EAC) analysis was used to evaluate each
option. The rehabilitation options had a useful life of 20 years,
whereas the purchasing options had a useful life of 25 years. The
...

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