Economy Shipping Company

In: Business and Management

Submitted By huruzia
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Estimating Funds Requirements—Short-Term Sources of Finance

Economy Shipping Company (Abridged)
Copyright © 1973 by the President and Fellows of Harvard College. Harvard Business School case 274—092.

In the spring of 1950 the controller of Economy Shipping Company, located near Pittsburgh, was preparing a report for the executive committee regarding the feasibility of repairing one of the company’s steam riverboats or of replacing the steamboat with a new dieselpowered boat. The Economy Shipping Company was engaged mainly in the transportation of coal from the nearby mines to the steel mills, public utilities, and other industries in the Pittsburgh area. Occasionally, the company’s several steamboats also carried cargoes to places as far away as New Orleans. The boats owned by Economy Shipping were all steam powered. All were at least 10 years old, and the majority of them were between 15 and 30 years old. The steamboat the controller was concerned about, the Conway, was 23 years old and required immedia te rehabilitation or replacement. It was estimated that the Conway had a useful life of another 20 years provided that adequate repairs and maintenance were made. The book value of the Conway was $39,500, but the controller believed that if the company sold the boat in 1950, it would bring only around $25,000. The immediate rehabilitation costs for the Conway were estimated to be $115,000. The controller estimated that these general rehabilitation expenditures would extend the useful life of the Conway for about 20 years. New spare parts from another boat, which had been retired in 1948, were available for use in the rehabilitation of the Conway. If these parts were used on the Conway, an estimate of their fair value was $43,500, which was their book value. Use of these parts would, in effect, decrease the immediate rehabilitation costs from $115,000 to…...

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