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 company’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 company’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 still be salvaged from another boat which retired just recently. However, the immediate rehabilitation project is affected by the city smoke ordinance, which will come in two-year time.
An alternative to rehabilitating Cynthis is the purchase of a diesel-powered boat from a local boat manufacturer. This will incur additional $315,000.00 for the additional parts to be bought for the boat, But this boat is estimated to have a useful life of 25 years with a net realizable value of $250,000.00 on the 20th year. And another alternative is to have a lease contract with the local manufacturer of the boat which will incur them $222,235 for 15 years, but the manufacturer will stil remain the ownership over the boat. And climax will incur all costs of operating and maintaining the boat.
Statement of the Problem:
Should climax rehabilitate or replace Cynthia, the 23 yr old steamboat?
1. To determine the best alternative that would be beneficial for Climax Shipping Company.
2. To increase future cash Savings and profit for the company to achieved at least 10 percent return on investment.
Areas of Consideration:
Climax shipping company is engaged mainly in the transportation of coal from nearby mines and to steel mills, public utilities,...