In: Finance
Additional Instructions:
Show all calculations and include clear explanations.
Case Problem:
Over the past several years, decommissioned U.S. warships have been turned into artificial reefs in the ocean by towing them out to sea and sinking them. The thinking was that sinking the ship would conveniently dispose of it while providing an artificial reef environment for aquatic life. In reality, some of the sunken ships have released toxins into the ocean and have been costly to decontaminate. In the late 1990s, at least two international conventions have made it all but impossible to export used warships for salvage without removing all military equipment, conducting a complete cleanup and cutting the ship into such comparatively small pieces as to make the entire exercise relatively expensive.
The new environmental regulations have made disposal of ships an expensive project. The United States has hundreds of mothballed warships, presenting an extremely expensive problem for military authorities and the government. Now the U.S. government is taking bids to instead dismantle and recycle ships that have recently been decommissioned (but have not been sunk yet.)
Assume that a recently decommissioned aircraft carrier, the USS Blaze, is estimated to contain 40 tons of recyclable materials able to be sold for approximately $32.8 million. About 90% of the value in old ships is the metals, including steel, copper, copper alloys, and lead that can be removed, sold for remelting, and reformed into new metal products. There are also some high-value metals; such as, nickel alloys, stainless steel, and titanium that can be found in some parts of all warships but may be present is such small quantities that recovery and resale may not be cost effective. The low bid for dismantling and transporting the ship materials to appropriate facilities is $34.5 million. Recycling and dismantling the ship would create about 500 jobs for about a year on the West Coast area. This geographic area has been experiencing record-high unemployment rates in recent years.
As an alternative, reefing these ships would create new habitats for underwater life and can be done using newer environmentally safe methods. These new artificial reefs would enhance fishery resources and facilitate the access and utilization by recreational and commercial fishermen. Artificial reefs can also increase tourism by attracting sport divers for recreational purposes. Academic organizations may be interested in using the site to study fish and other marine life which may open the door for more funding from these research activities. Research has shown that a new reef will attract 60,000 – 70,000 divers and add more than 10 million to the local tourism industry. Research has also shown that artificial reefs can substantially increase the population of reef-associated species. Within months the G. B. Churchartificial reef in British Columbia had hundreds of encrusted individuals on its hull and within 2.5 years had seen an increase of nearly 100 species.
Reefing the ship would cost an estimated 800K (or $0.8 million) which includes cleaning of the vessel of toxics, oils and greases, PCB containing electrical and electronic equipment and other readily removable PCB containing equipment, local towing and docking, preparation (unspecified) and other incidental overhead items, insurance, and making the vessels safe for divers (diverizing). There will also be yearly maintenance costs in perpetuity.
1. Is it more financially advantageous to sink the ship or to dismantle and recycle it? Show your calculations. (Worth 4 pts.)
2.From a sustainability standpoint, what should be done with the decommissioned aircraft carrier? (Worth 4 pts.)
3.List some of the other quantitative and qualitative factors that should enter into this analysis. (Worth 10 pts.)
4.As a taxpayer(s), which action would you prefer (sink or recycle)? Defend your answer. (Worth 4 pts.)
1.
It is more financially advantageous to sink the ship or to dismantle and recycle it, can be identified by comparing the net cost of sinking the ship and cost of recycling it.
Net cost of recycling the ship = Bid price – Scrap value
= $34,500,000 - $32,800,000
= $1,700,000
If the cost of sinking the ship is less than the net cost of recycling, it would be financially advantageous to sink the ship. If the cost of sinking the ship is more than the net cost of recycling it, it would be financially advantageous to recycle the ship.
2.
When an aircraft carrier has been withdrawn from its service, organisations in-charge of it has lot of responsibility in deciding with what can be done with it. The companies that embrace sustainability, has to make every decision keeping in mind its impact on people and planet. From a sustainability point of view, below are some options which can be done with the decommissioned aircraft carrier:
3.
Some of quantitative factors that must be considered when deciding what has to be done with decommissioned aircraft carrier are:
Some of qualitative factors that must be considered when deciding what has to be done with decommissioned aircraft carrier are:
4.
A taxpayer would prefer to dismantle and recycle the aircraft carrier. This is because dismantling and recycling the ship will create jobs for the people in the nearby geographic area. People will have sense of economic security and their quality of life will improve which will in turn impact growth of the economy. Also, dismantling and recycling the ship will not release toxins in the ocean. This will be preferred by the sustainable tax payer who wants to live in a healthy pollution-free environment. When the ship is dismantled, the materials such as steel, copper, lead will be sold. People who are engaged in metal business can purchase these materials and transform them into new products and sale them further to earn profits. However, if the ship sinks, it will release harmful toxins which will impact sea life and its environment.