Economy Shipping

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...