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 any downtime for the installation.
The evaluation considered four different scenarios:
1. Rehabilitation of Cynthia with the stoker conversion occurring in 1950
2. Rehabilitation of Cynthia with the stoker conversion occurring in 1952
3. Purchase of a new diesel-powered boat with 2 shifts, 12-hour working day
4. Purchase of a new diesel-powered boat with 3 shifts, 8-hour working day
Since ESC was considering other projects with a rate of return of 10%, each of the above options were considered using the same rate of return. The company?s balance sheet suggests that management was very conservative. The debt-to-equity ratio in 1950 was 0.075, indicating that the company could easily borrow at the going rate of 3% without fear of bankruptcy. Moreover, the company had sufficient funds to purchase four new diesel-powered boats. Overall, ECS was in a very strong position to quickly upgrade their fleet and gain any advantage that may come with the new diesel-powered boats.
The influence of the union to change the working hours for the crew members is noteworthy in this analysis. If the union succeeded, the steamboats would not be capable of accommodating the 3-shift requirement and therefore be noncompliant with the new regulation. If the new regulation had fines associated for...
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