Overview

In the spring of 1950 the controller for Economy Shipping Company was asked to report on whether or not the company should refurbish an old steamboat, the Conway, or if they should replace the steamboat with a diesel boat. Economy’s business was to transport coal from the nearby mines to steel mills, public utilities, and other industries in the Pittsburgh area. All of the steamboats that Economy owned were at least 10 years old, with the majority being 15 to 30 years old.

The Conway was 23 years old, and needed immediate rehabilitation or replacement. If the Conway were rehabilitated it would have a useful life of another 20 years. The book value of the Conway was $39,500, but if it were sold it would only bring in about $25,000. Also, if the steamboat were to be rehabilitated it would cost $115,000. However, spare parts from another boat that Economy owned could be used in the rehabilitation of the Conway. These parts had a fair value of $43,500, and if used would decrease the rehabilitation cost from $115,000 to $71,000. If the parts were sold they would only bring in $30,000. The other costs for rehabilitating the Conway would be the operating costs of $203,150. If rehabilitation were chosen, the book value of the Conway including rehabilitation costs would be depreciated over a 20-year period (using straight line depreciation).

The diesel boat could be purchased for $400,000 ($325,000 for the boat, and $75,000 for parts inventory). The useful life of the diesel boat would be 25 years, but if it were purchased it would be sold after the 20th year. The engines would have to be overhauled every 10 years at a cost of $60,000. Other costs involved with the diesel boat would be operating costs of $156,640. At the end of the 20th year the salvage value of the boat and inventory would be $32,500 and $37,500 respectively.