Question

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.)

Answer 1

(1)            Financial decision

               Cost to dismantle and recycle

                    Bid price                                       =           $34.5 mn

          Less: Scrap Value                                  =            $32.8 mn

                   profit                                             =             $1.7 mn

                     cost to sink                                   =           $ 0.8 mn

                      net profit                                      =        $ 0 .9 mn

(2)              For sustainability a company would prefer dismantle and recycling a ship as it would -

a. About 90% of the value in old ships is the metals, including steel, copper, copper alloys, and lead that can be removed, sold for remitting, and reformed into new metal products , thereby objective of using the planet resources judicially would be achieved.

b. help creating jobs thereby decrease unemployment

    c. also the perpetual cleanup cost of sinking the ship would be saved by the                        

          company.

(3) Qualitative factors-

• Recreational purpose - the divers for recreational activities
• Improving underwater life thus helping maintaining a good aquatic environment
• job creation -thereby reducing unemployment

     Quantitative factors-

• maintenance cost of sinking the ship as these would be incurred for perpetuity
• clean up cost- cleanup cost associated with sinking.
• employment costs.

                       (4)   Provided clean up costs are required , a taxpayer concerned about                                                   sustainability would prefer to dismantle and recycle the aircraft carrier.