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Economy Shipping Company

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Introduction

Economy Shipping Company Advanced Financial Management Professor Clayton July 21, 2005 Tim Boyd Dave Chen Ian Hoffman Chirayu Patel 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 any downtime for the installation. The evaluation considered four different scenarios: 1. Rehabilitation of Cynthia with the stoker conversion occurring in 1950 (App A) ...read more.

Middle

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. ...read more.

Conclusion

The immediate stoker conversion resulted in an equivalent annual cost of $114,040. Compared to the two purchasing options ($110,833, $111,402) the cost of the rehabilitation option was slightly higher. Although both of the purchasing options were optimal compared to the alternative of rehabilitating Cynthia, the effect that the union's proposition would have on the shipping industry would obviously increase the cost of doing business. If the controller's instincts are correct, the NPV calculation for the purchasing option would increase by $4,850 and the EAC would increase by $570. Although these dollars would eat into the profit, the alternative may be far more costly if fines are administered for those vessels not in compliance. While the analysis may suggest that the two main options (overhaul vs. purchase) are close in cost, it is obvious that with all the intangibles associated with this case that the purchase of the new diesel powered boats guarantees a successful future, whereas the steamboat option is dependent on unlikely events. 3 Economy Shipping Company 7/21/05 ...read more.

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