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…show more content… Also, the there will be no overhaul of the boats engine in year 20.
The analysis for this project was done two separate ways. First, the net present value of the project as a whole was found, and second, the net present value for both projects individually was calculated. For the project taken as a whole, the net present value was $–23,353.81. This means there would be a negative return if the diesel boat were chosen. Also, for the projects taken individually, choosing to rehabilitate the Conway had a net present value of $17,210.35, while the choosing the diesel had a net present value of $-269,677.98, which also shows that rehabilitating the Conway is the better choice because it brings in a positive return while the diesel boat would not.
Another point that is important is the IRR and MIRR percentages for each project compared to the cost of capital. For the Conway project, the IRR and MIRR were 11.6 and 10.58 respectively. When the IRR and MIRR are larger than the cost of capital it means the project will generate more revenue than the cost of financing the project. To rehabilitate the Conway would do just that. However, the diesel boat, with IRR and MIRR percentages of –1.05 and 4 would not bring in enough returns to cover the cost of the project. Finally, with both projects taken together, the IRR and MIRR percentages were 8.67 and 9.51 respectively, which also shows that choosing to