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.
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.
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)
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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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:
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.
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.