WetEx is a profitable, over-the-water parcel delivery service operating in a lar
ID: 1126230 • Letter: W
Question
WetEx is a profitable, over-the-water parcel delivery service operating in a large port. The firm will soon The WetEx management team has identified the size and configuration of the type of boat that best meets its general needs but has been unable to agree on the type of engine that would be used to power the boats. A poll of the 8-person management team finds three team members prefer a gasoline engine because of its higher speed while three others prefer a diesel engine because of its relative fuel efficiency also claim that are safer because they are less flammable, as evidenced by the fact that the diesel-powered boats cost approximately $600 less per year to insure than the gasoline-powered boats. You have been tasked to help the management team to conduct a financial analysis of the options and recommend the type of engine to be used.i To support you in this task, the management team has constructed the following table based on information available from the boat manufacturer The estimate of fuel consumption in this table is based on the estimated average speed. Since the boats are used in harbors and for fairly short runs, the higher speed of the gasoline engine is only expected to produce an extra $100 per boat per day in additional revenue. When not in use, the gasoline engines will per hour. Both types of boat are adequate to meet the delivery schedules and requirements of WetEx. The management team also has determined that the diesel engines would each require $9,000 in annual maintenance cost of $6,000. Oil changes are performed twice each month and cost $25 for the gasoline costs about 8% less. The boats will be docked at a wetEx maintenance facility overnight and the fuel tanks fuel to do so. Oil changes and other maintenance activities take place when the boats are docked The diesel-powered boats typically travel 200 nautical miles in the course of the day while the faster gasoline-powered boats are expected to travel 10% farther in order to generate the additional revenue 8 offered by their higher speed. Crews are changed every six hours and the delivery service operates 18 hours per day, 7 days a week.Explanation / Answer
B)
Annual Savings
Calculation
Gasoline
Diesel
additional Revenue
$100 * 30 Days * 12 months
36000
-
Savings in Insurance
Given
-
600
AMC
Given
-6000
-9000
Oil Change
(Cost for a month * 12 month)
-300
-684
Not in use cost
Note 1
0
-11527.1964
Fuel cost
Note 1
-288272.99
-230284.8576
Annual average cost
-258572.99
-250896.054
Note 1:
Gasoline
Diesel
Travelled in a day
220
200
nautical miles
Travel per hour
21.1
17.4
knots
Hours per day
9.0666
9.9950
Gallon used per hour
24
16
cost of fuel per gallon
3.68
4
cost of fuel per day
800.7582938
639.68016
cost of fuel annually
288272.9858
230284.86
Service in a day
18
18
hours
not in use time
8.933443231
8.0049975
Galoon use per hour
0
1
cost of fuel per gallon
3.68
4
not in use cost per day
0
32.01999
not in use cost annually
0
11527.196
NPV for Gasoline Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-96599
1.0000
-96599
Annual Average cost
1-5
-258572.99
3.1272
-808609
Salvage value
5TH
48000
0.4371
20981
-884227
NPV for Diesel Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-124995
1.0000
-124995
Annual Average cost
1-5
-250896.05
3.1272
-784602
Salvage value
6TH
60000
0.3704
22224
-887373
Here though there is a minor difference in cost of both engines, engine with less cost
is still preferable. Hence here also my choice will go with Gasoline Engine.
(C )
Annual Savings
Calculation
Gasoline
Diesel
additional Revenue
$100 * 30 Days * 12 months
36000
-
Savings in Insurance
Given
-
600
AMC
Given
-6000
-9000
Oil Change
(Cost for a month * 12 month)
-300
-684
Not in use cost
Note 1
0
-11757.74033
Fuel cost
Note 1
-294038.45
-234890.5547
Annual average cost
-264338.45
-255732.2951
Note 1:
Gasoline
Diesel
Travelled in a day
220
200
nautical miles
Travel per hour
21.1
17.4
knots
Hours per day
9.0666
9.9950
Gallon used per hour
24
16
cost of fuel per gallon
3.7536
4.08
cost of fuel per day
816.7734597
652.47376
cost of fuel annually
294038.4455
234890.55
Service in a day
18
18
hours
not in use time
8.933443231
8.0049975
Galoon use per hour
0
1
cost of fuel per gallon
3.7536
4.08
not in use cost per day
0
32.66039
not in use cost annually
0
11757.74
NPV for Gasoline Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-96599
1.0000
-96599
Annual Average cost
1-5
-264338.45
3.1272
-826639
Salvage value
5TH
48000
0.4371
20981
-902257
NPV for Diesel Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-124995
1.0000
-124995
Annual Average cost
1-5
-255732.3
3.1272
-799726
Salvage value
6TH
60000
0.3704
22224
-902497
From the trial and error method, we come to conclusion that if fuel cost of diesel is$ 4.08
management team would be economically indifferent.
(D )
Annual Savings
Calculation
Gasoline
Diesel
additional Revenue
$100 * 30 Days * 12 months
36000
-
Savings in Insurance
Given
-
600
AMC
Given
-6000
-9000
Oil Change
(Cost for a month * 12 month)
-300
-684
Not in use cost
Note 1
0
-8357.217391
Fuel cost
Note 1
-208997.91
-166956.5217
Annual average cost
(A)
-179297.91
-184397.7391
Depreciation
(Pur price - sal val)/years
9719.8
10832.5
Total average cost
((B) = A) + DEPRECIATION
-189017.71
-195230.2391
Tax Saved @ 42%
79387.44
81996.70043
Net cost
(B) - TAX
-109630.27
-113233.5387
Annual Cash flow
NET COST + DEPRECIATION
-99910.475
-102401.0387
NPV for Gasoline Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-96599
1.0000
-96599
Annual Average cost
1-5
-99910.475
3.1272
-312440
Salvage value
5TH
48000
0.4371
20981
-388058
NPV for Diesel Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-124995
1.0000
-124995
Annual Average cost
1-5
-102401.04
3.1272
-320229
Salvage value
6TH
60000
0.3704
22224
-423000
Here also my preference would be Gasoline engine as it has less cost.
B)
Annual Savings
Calculation
Gasoline
Diesel
additional Revenue
$100 * 30 Days * 12 months
36000
-
Savings in Insurance
Given
-
600
AMC
Given
-6000
-9000
Oil Change
(Cost for a month * 12 month)
-300
-684
Not in use cost
Note 1
0
-11527.1964
Fuel cost
Note 1
-288272.99
-230284.8576
Annual average cost
-258572.99
-250896.054
Note 1:
Gasoline
Diesel
Travelled in a day
220
200
nautical miles
Travel per hour
21.1
17.4
knots
Hours per day
9.0666
9.9950
Gallon used per hour
24
16
cost of fuel per gallon
3.68
4
cost of fuel per day
800.7582938
639.68016
cost of fuel annually
288272.9858
230284.86
Service in a day
18
18
hours
not in use time
8.933443231
8.0049975
Galoon use per hour
0
1
cost of fuel per gallon
3.68
4
not in use cost per day
0
32.01999
not in use cost annually
0
11527.196
NPV for Gasoline Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-96599
1.0000
-96599
Annual Average cost
1-5
-258572.99
3.1272
-808609
Salvage value
5TH
48000
0.4371
20981
-884227
NPV for Diesel Engine
YEAR
VALUE
DISCOUNT VALUE @ 18%
PRESENT VALUE
Initial cost
0
-124995
1.0000
-124995
Annual Average cost
1-5
-250896.05
3.1272
-784602
Salvage value
6TH
60000
0.3704
22224
-887373
Here though there is a minor difference in cost of both engines, engine with less cost
is still preferable. Hence here also my choice will go with Gasoline Engine.
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