The METCO Company: Case Study

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Introduction

Financial management is often regarded as the key aspect of successful business activity, regardless of the business sphere and marketing strategy applied. Considering the fact that transport companies are hardly dependent on the matters of machinery amortization, financial management should consider all the aspects of technical services, maintenance, and operational costs associated with amortization, maintenance, and re-equipment of the vehicles.

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The aim of this paper is to analyze the case of METCO Company linked with maintenance, operation, overhaul, and benefits of the Nile SS. Variants that are available for the analysis are the overhaul of the Nile SS with and without the new engine and control system. The analysis will be based on the spreadsheet with the costs and benefits, including taxes, depreciation, and inflation rates.

Problem and Case Description

The case details involve the dilemma of the METCO management, associated with including the Nile SS into the business operation. In fact, this is a 25 years old vessel, and it is not in the perfect condition. There are several alternatives: sell it, overhaul it, or continue its operation by including all the necessary service and repair expenses into the yearly budget. In general, every alternative is featured with a particular advantages and disadvantages, as well as financial consequences. The least beneficial variant is to sell the Nile SS. However, the book value of the vessel, as well as the spare parts for it involve EGP 100 000 for the vessel, and EGP 40 000 for the spare parts in accordance with the inventory book. It is stated that the total sales sum may be EGP 200 000, however, this will immediately originate a tax liability because of the difference in the sale price and book value.

Therefore, the most reliable and credible alternative is maintenance of the m/v. However, it should be defines which alternative will be more beneficial. The factors that should be considered involve numerous aspects of sea transportation business, as well the costs imposed by various regulations. Additionally, the case does not include possible changes in oil price, changes in operating expenses of the company, world economic processes, as well as the situation in the sphere of transportation. Hence, the report can not be full without considering these aspects. In accordance with the research by Cheng (247), these factors may be summarized in depreciation rate that generally varies from 8% to 20% yearly.

Financial Analysis

The analysis will be based on the two defined alternatives that will be applied. The general case data, that is common for both alternatives involve the tax rate, depreciation rate, inflation, as well as the revenues derived from the Nile SS. The first alternative is the operation without installing a brand-new engine and control system. The operation time will be taken in two variants: 10 years, and 12 years.

Overhaul Expenses
Overhaul Engine and generators 340 000
Replace radar and other electronic equipment 75 000
Hull and superstructure repair 310 000
Painting 95 000
Total 820 000
Year 1 2 3 4 5
Fuel 450 000 461 250 472 781.3 484 600.8 496 715.8
Labour and Benefits 480 000 492 000 504 300 516 907.5 529 830.2
Maintenance 141 000 144 525 148 138.1 151 841.6 155 637.6
Other 110 000 112 750 115 568.8 118 458 121 419.4
Total yearly 1 181 000 1 210 525 1 240 788 1 271 808 1 303 603
Total Period
Revenues 1 400 000 1 435 000 1 470 875 1 507 647 1 545 338
Pre tax Profit 219 000 224 475 230 086.9 235 839 241 735
Including Tax 142 350 145 908.8 149 556.5 153 295.4 157 127.8
Depreciation (8%) 130 962 134 236.1 137 592 141 031.8 144 557.5
Total Period
Depreciation (20%) 113 880 116 727 119 645.2 122 636.3 125 702.2
Year 6 7 8 9 10 11 12
Fuel 509 133.7 521 862 534 908.6 548 281.3 561 988.3 576 038 590 439
Labour and Benefits 543 075.9 556 652.8 570 569.2 584 833.4 599 454.2 614 440.6 629 801.6
Maintenance 159 528.6 163 516.8 167 604.7 171 794.8 176 089.7 180 491.9 185 004.2
Other 124 454.9 127 566.3 130 755.4 134 024.3 137 374.9 140 809.3 144 329.5
Total yearly 1 336 193 1 369 598 1 403 838 1 438 934 1 474 907 1 511 780 1 549 574
Total Period 13 231 194 16 292 548
Revenues 1 583 971 1 623 571 1 664 160 1 705 764 1 748 408 1 792 118 1 836 921
Pre tax Profit 247 778.4 253 972.9 260 322.2 266 830.2 273 501 280 338.5 287 347
Including Tax 161 056 165 082.4 169 209.4 173 439.7 177 775.6 182 220 186 775.5
1594801 1963797
Depreciation (8%) 148 171.5 151 875.8 155 672.7 159 564.5 163 553.6 167 642.4 171 833.5
Total Period 1 467 217 1 806 693
Depreciation (20%) 128 844.8 132 065.9 135 367.5 138 751.7 142 220.5 145 776 149 420.4
Total Period 1 275 841 1 571 038
Depreciation 8% 20%
10 year income 647 217.3 455 841.1
12 year income 986 693.2 751 037.6

The results of the calculation are given in the last table. Anyway, the revenue will be higher if the ship will be operating for 12 yeas, however, there is a high probability that maintenance costs will be essentially higher by the end of this period, and the total incomes will lower. As for another alternative, the early expenses will be lower, the overhaul costs will be featured with additional EGP 600 000. (Solbakken and Hjertaker, 17)

Overhaul Expenses With new-brand engine and system installation
Overhaul Engine and generators 340 000 + 600 000
Replace radar and other electronic equipment 75000
Hull and superstructure repair 310000
Painting 95000
Total 1420000
Year 1 2 3 4 5
Fuel 400 000 410 000 420 250 430 756.3 441 525.2
Labour and Benefits 405 000 415 125 425 503.1 436 140.7 447 044.2
Maintenance 105 000 107 625 110 315.6 113 073.5 115 900.4
Other 110 000 112 750 115 568.8 118 458 121 419.4
Total yearly 1 020 000 1 045 500 1 071 638 1 098 428 1 125 889
Total Period
Revenues 1 400 000 1 435 000 1 470 875 1 507 647 1 545 338
Pre tax Profit 380 000 389 500 399 237.5 409 218.4 419 448.9
Including Tax 247 000 253 175 259 504.4 265 992 272 641.8
Depreciation (8%) 227 240 232 921 238 744 244 712.6 250 830.4
Total Period
Depreciation (20%) 197 600 202 540 207 603.5 212 793.6 218 113.4
Year 6 7 8 9 10 11 12
Fuel 452 563.3 463 877.4 475 474.3 487 361.2 499 545.2 512 033.8 524 834.7
Labour and Benefits 458 220.3 469 675.8 481 417.7 493 453.2 505 789.5 518 434.2 531 395.1
Maintenance 118 797.9 121 767.8 124 812 127 932.3 131 130.6 134 408.9 137 769.1
Other 124 454.9 127 566.3 130 755.4 134 024.3 137 374.9 140 809.3 144 329.5
Total yearly 1 154 036 1 182 887 1 212 459 1 242 771 1 273 840 1 305 686 1 338 328
Total Period 11 427 449 14 071 464
Revenues 1 583 971 1 623 571 1 664 160 1 705 764 1 748 408 1 792 118 1 836 921
Pre tax Profit 429 935.1 440 683.5 451 700.6 462 993.1 474 567.9 486 432.1 498 592.9
Including Tax 279 457.8 286 444.3 293 605.4 300 945.5 308 469.2 316 180.9 324 085.4
2 767 235 3 407 502
Depreciation (8%) 257 101.2 263 528.7 270 117 276 869.9 283 791.6 290 886.4 298 158.6
Total Period 2 545 856 3 134 901
Depreciation (20%) 223 566.3 229 155.4 234 884.3 240 756.4 246 775.3 252 944.7 259 268.3
2 213 788 2 726 001
Depreciation 8% 20%
10 year income 1 125 856 793 788.2
12 year income 1 714 901 1 306 001

Therefore, considering all the depreciation rates, inflation, taxes, and costs, the possible income will be as stated in the table. Nevertheless, like in the previous case, the maintenance and service costs may increase essentially by the end of the period. Comparing the results of both alternatives, regardless of the initial costs that are essentially larger, the decreased operating costs are lower for the entire period, and, even considering the worst depreciation scenario, the total benefits will be approx 73% higher.

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With Engine Upgrade
Depreciation 8% 20%
10 year income 1 125 856 793 788.2
12 year income 1 714 901 1 306 001
Without Engine Upgrade
Depreciation 8% 20%
10 year income 647 217.3 455 841.1
12 year income 986 693.2 751 037.6

As for the matters of depreciation and inflation, it should be stated that these values play their particular role in the calculation. Inflation and depreciation rates have been included into the spreadsheets, nevertheless, further calculations reveal that yearly income will be higher if the operation period is 12 yeas. (Brigham and Ehrhardt, 827) Hence, there are results as given below for both alternatives:

First alternative
8% 12%
10 years 64721.73 45584.11
12 years 82224.43 62586.47
Second Alternative
8% 12%
10 years 112 585.6 79 378.82
12 years 142 908.5 108 833.4

Conclusion

Considering the fact that METCO company has at least three alternatives that are featured with profit, one of these alternatives had been rejected due to its inconsistency, and the opportunity of low income. The other two alternatives are analyzed properly with considering the depreciation rates, as well as the yearly inflation rate. Considering the results achieved, the lower maintenance costs of the second alternative will be able to compensate the expenses associated with engine and control system upgrade, so, the final income, regardless of the depreciation rate, and operating period will be approximately 73% higher. However, the analysis does not involve the opportunity of the increased technical maintenance costs by the end of the operating period, as this data is not given in the case description.

Works Cited

Brigham, Eugene., Ehrhardt, Michael. Financial Management: Theory and Practice. South-Western College Pub. Oxford 2004.

Cheng, Philip. Financial Management in the Shipping Industry. Cornell Maritime Pr/Tidewater Pub. London 2004.

Solbakken, Lars., Hjertaker, Ole. Ship Finance International Limited – Filing of Annual Report On Form 20-F. Ship Finance International Limited. Hamilton 2007.

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