Economy Shipping Company (Abridged) – Case #5
Spring of 1950, Economy Shipping Company in Pittsburgh was deciding to repair, the Conway, one of their steam riverboats or to just replace it with a new diesel-powered boat. Currently all the boats owned by Economy were steam-powered and were at least 10 years old, majority being 15-30 years old. The Conway was 23 years old and was in dire need of renovation or replacement. The best recommendation I have to offer Economy would be to replace the Conway with a new diesel powered boat.
I assumed no operating costs in 1950 and that Economy was still up and running during this time, the cost pertaining to the project didn’t come into effect until 1951. Also the NPV calculations at the beginning of the year showed that any upgrade would not cause any issues with the daily operations. A standard 10% rate of return was assumed for each option, the debt-to-equity ratio in 1950 was 0.075, proving that Economy could indeed borrow at a rate of 3% with no problems. Another option for Economy would be to purchase new boats and upgrade their fleet, allowing for numerous advantages to their company since they had enough funds to do so.
A disadvantage against the renovation was the Conway’s age, since it was already 23 years old. Even though there would be a significant price difference to just refurbish it, depreciation would take effect to other aspects of the boat that did not get upgraded. With any sort of overhaul those parts of the Conway will still remain old and have a bigger chance of failure. Since age is such an issue we must take into account another large repair that would soon come about due to depreciation of those parts.
Tax savings is a huge advantage for Economy to purchase a new diesel-powered boat over the steamboat. With a smaller operating cost and a higher depreciation the purchasing option will save Economy roughly $11,500 less in taxes alone. During the...