Economy Shipping

Problem Definition

The management of Economy Shipping Company is considering the feasibility to overhaul one of its steam-powered boats, Conway, through repair or direct replacement by acquisition of a diesel-powered boat. In repairing Conway, the management has the option to either restore the steam boat on its own or to rehabilitate it using new spare parts of a retired boat in 1993. With this in mind, the group was tasked to analyze each of the alternatives, to identify the relevant cash flows associated with each option and to identify which among these will entail the least cost to the company.

Assumptions

To facilitate with the analysis, the group has made separate assumptions on each alternative. In Option 1, where Conway will be rehabilitated and repaired on its own, the new spare parts from the retired boat were sold for $30,000, as these could not be used with other boats. The company recognized a loss in the sale amounting to $13,500. In Option 2, where Conway will be rehabilitated and repaired using new spare parts from a retired boat, there will be no sale of unused parts that will occur nor gains or losses to be recognized. Under the alternatives in which Conway will be repaired, it was assumed that the steam boat will be retired by the end of its useful life. In Option 3, where Conway will be replaced by acquiring a diesel-powered boat, it was assumed that both Conway and the new spare parts from the retired boat were sold for $25,000 and $30,000 respectively. As these were disposed of less than their book value, the company recognized a loss in the sale valued at $14,500 and $13,500, respectively.