CLIMAX SHIPPING COMPANY
Climax shipping company is engaged mainly in the transportation of coal from nearby mines and to steel mills, public utilities, and other industries in Pittsburgh area. Occasionally, the companyâ€™s steamboats which were all powered by steam power, carries cargoes to places as far as New Orleans. Climax shipping was thinking of whether repairing Cynthia the companyâ€™s steam riverboats or replacing the steamboat with a new diesel-powered boat would be more beneficial to the company.
The facts provide that immediate rehabilitation of steamboat will bring additional useful life of 20 years at an amount of $483,000, and additional spare parts could ...view middle of the document...
Occasionally, the companyâ€™s steamboats which were all powered by steam power, carries cargoes to places as far as New Orleans.
1. Availability of Funds â€“ the company is experiencing a limited resources, so it is only imperative for the company to use the resources wisely. Climax shipping should consider the availability of funds as the best way of using such fund despite of its capacity to buy diesel-powered boats.
2. City Smoke Ordinance â€“ in two-year time the law mandates stroker firing. While Cynthia is still hand-fired. Should stroker conversion be incorporated during the rehabilitation an additional amount of $168,000.00 will be incurred by the company.
3. Growth policies and risk evaluation â€“ Though the company has the sufficient funds to buy four diesel-powered engine, but there are alternative uses of funds. The management was considering to have an estimated return of at least 10 percent after tax.
Alternative Courses of Actions:
1. Rehabilitate Cynthia with stroker conversion immediately
- Additional usefule life of 20 years for Cynthia
- Cash inflow of $436,887(exhibit 1)
- The spare parts from retired boats can still be utilized as a higher value. These parts will be considered as savings since the same can no longer be used on any of the other Climax steamboats.
- The companyâ€™s annual operating costs are reduced from $853,260 to $804,100.00 after rehabilitation with the stroker conversion done at the same time.
- The company will incur negative cash inflows from this investment project. The cost of investment in the amount of $348,280 will not yield the desired rate of 10%.
2. Delay the rehabilitation of Cynthia with stroker conversion for two years
- the company annual operating cost will be reduced from &853,260 to $804,100.00 upon rehabilitation with the stroker conversion done at the same time.
- Additional useful life of 20 years for Cynthia
- Cash inflow of $436,887.00
- Additional cost te be incurred associated with the delay in conversion of Cynthia to being stroker fired.
- The company will be...