Economic Shipping Company

In: Business and Management

Submitted By SumitPanjwani
Words 354
Pages 2
Additive property of NPV rule

One of the important attractions of NPV rule is its additive property. It can be stated as

NPV(X+Y)=NPV(X)+NPV(Y)

Let us look at a one period case of cash flow stream X. A person invests X0 now and expects to receive X1 one period later. The NPV of this investment would be: NPV=-X0+PVX1

Under equilibrium, the market forces would ensure that the NPV is zero. Hence, PVX1=X0. We know that, r=(X1-X0)/X0

The Capital Asset Pricing Model states that: r=rf+β.(rm-rf)

As X0 is known with certainty, we can rewrite β as {covariance(X1,rm)/Variance(rm)}/X0. Defining {covariance(X1,rm)/Variance(rm)} as λ(X1),

r=rf+ λ(X1).(rm-rf)/X0

PVX1=X1/(1+r)

PVX1=X1/(1+rf+ λ(X1)/X0)
That is,

PVX1. (1+rf+ λ(X1)/X0)=X1

Noting that PV=X0, we can simplify this expression as,

PVX1={X1- λ(X1)}/(1+rf) ……….. (1)

NPVX1=PVX1-X0={X1- λ(X1)}/(1+rf)-X0

Let us now look at two different cash flow streams, X and Y.

NPV(X)= ={X1- λ(X1)}/(1+rf)-X0

NPV(Y)= ={Y1- λ(Y1)}/(1+rf)-Y0

It is evident that NPV(X+Y)=NPV(X)+NPV(Y)

If you recall, we tried to capture the risk premium using σ as the measure of risk in one of our earlier sessions. Once you learn the Capital Asset Pricing Model, you would know that the measure of risk is not σ but β. Now look at expression (1).

PVX1={X1- λ(X1)}/(1+rf)

There are two components on the RHS:
{X1}/(1+rf)

{ λ(X1)}/(1+rf)

The second term is the adjustment for risk. The expected cash flow is reduced to account for risk.

--------------------------------------------
[ 1 ]. You will learn this later in the course. We have dropped the expectation operator for convenience of writing. r=return from the investment; rm=return from the market; rf=risk-free rate; β=covariance(r,rm)/variance(rm).
[ 2 ]. If you recall, we derived it as…...

Similar Documents

Stateline Shipping and Transport Company

...Stateline Shipping and Transport Company The transportation model will be set up by assigning a variable to each site. The plants Danville, Selma, and Columbus are 1, 2 and 3 respectively. This makes the waste disposal sites at White Water, Los Canos, Duras variables A, B and C, respectively. Decision variables: 1. Ship from 1: x1A, x1B, x1C 2. Ship from 2; x2A, x2B, x2C, 3. Ship from 3: x3A, x3B, x3C, The objective function is: Min. cost Z= 14x1A+9x1B+10x1C+17x2A+16x2B+19x2C+7x3A+14x3B+12x3C There will be one constraint for each location regardless of how many variables. Plant constraints: Output from plant 1: x1A + x1B + x1C =26 Output from plant 2: x2A + x2B + x2C = 53 Output from plant 3: x3A + x3B + x3C = 29 Waste disposal site constraints: Intake at site A: x1A + x2A + x3A ≤65 Intake at site B: x1B + x2B + x3B ≤80 Intake at site C: x1C + x2C + x3C ≤105 Once the data solver is set up the model comes up with this solution: Ship all Danville and Selma waste to Los Canos and all Columbus Waste to White Water to get a shipping cost of $1285.00 3. The transshipment model will follow the same logic as the transportation when setting up the variables. There will be a variable for each shipment from plant to plant, plant to waste disposal site and waste disposal site to waste disposal site. I started out Decision......

Words: 587 - Pages: 3

Stateline Shipping & Transport Company

...Week 10 – Assignment # 4 06/16/13 Coretta M. Monts Stateline Shipping & Transport Company Question #1 – Transportation Model Plant Waste Disposal | A. White Water | B. Los Canos | C. Duras | Supply | 1. Kingsport | 12 | 15 | 17 | 35 | 2. Danville | 14 | 9 | 10 | 26 | 3. Macon | 13 | 20 | 11 | 42 | 4. Selma | 17 | 16 | 19 | 53 | 5. Columbus | 7 | 14 | 12 | 29 | 6. Allentown | 22 | 16 | 18 | 38 | Demand | 65 | 80 | 105 | | Xij = Shipping from plant to disposal site. i = PLANT = 1,2,3,4,5,6 j = disposal sites = A, B, C The objective function of the manager is to minimize the total transportation cost for all shipments. Therefore, the objective function is the sum of the individual shipping costs from each plant to each waste disposal site: Minimize Z = 121A + 151B + 171C+142A+92B+102C+133A+203B+113C +174A+164B+194C+75A+145B+125C+226A+166B+186C The constraints in the model are the number of barrels of wastes available per week at each plant and the number of barrels of wastes accommodated at each waste disposal site. There are 9 constraints- one for each plant supply and one for each waste disposal site’s demand. Subject to: X1A + x1B + X1C = 35 X 2A + X 2B + X 3C= 26 X3A + X3B + X 3C = 42 X4A + X 4b + X4C = 53 X5A + X5b + x5C = 29 X6a + x 6B + x 76b = 38 X1A + X 2A + X 3A + X 4A+ X5A + X 6A = 65 X1B + X 2B + X 3B = X 4B + X5B + X 6B = 80 X1C + X 2C + X 3C = X 4C + X5C + X 6C = 105 XIJ ≥ ......

Words: 1453 - Pages: 6

Stateline Shipping and Transport Company

...Stateline Shipping and Transport Company School of Business MAT 540 This paper was presented in submission for MAT 540 assignment four (Part 1 Only). Abstract This paper serves as a written response to the instructions and questions asked in assignment four. Assignment four instructed the writer to read the case problem Stateline Shipping and Transport Company from pages 273-274 in the text, Introduction to Management Science by Bernard W. Taylor. The assignment then directed the writer to Formulate and Solve and linear transportation programming model, this step was done in QM. The linear programming model is attached herein. Keywords: Linear Programming, Transportation, Shipping, Model Introduction This Case Problem, Stateline Shipping and Transport Company, is based on a girl named Rachel Sundusky who is a manager of the South-Atlantic office for Stateline Shipping and Transport (Taylor, 2010). Rachel is negotiating a contract with Polychem an industrial use chemical company (Taylor, 2010). Polychem has six sites that it would like for Stateline to pick up waste from (Taylor, 2010). Polychem would then like for Stateline to transport the waste for disposal to one of three sites (Taylor, 2010). Polychem has agreed to handle all of the waste at all sites therefore Stateline needs only transport the materials and incur costs for the same (Taylor, 2010). Rachel would like to see what the less costly shipping routes are (Taylor, 2010). Rachel will need all of......

Words: 1105 - Pages: 5

Case Problem: Stateline Shipping and Transport Company

...Case Problem: Stateline Shipping and Transport Company Assignment #4 Case Problem: Stateline Shipping and Transport Company MAT540: Quantitative Methods Vargha Azad 09/08/13 In Excel, or other suitable program, develop a model for shipping the waste directly from the 6 plants to the 3 waste disposal sites. Solve the model you developed in #1 (above) and clearly describe the results. In Excel, or other suitable program. Develop a transshipment model in which each of the plants and disposal sites can be used as intermediate points. 6 Plants labeled 1 through 6, 3 waste facilities labeled A through C Objective function: Minimize Z = 1A(12) + 1B(15) + 1C(17) + 2A(14) + 2B(9) + 2C(10) + 3A(13) + 3B(20) + 3C(11) + 4A(17) + 4B(16) + 4C(19) + 5A(7) + 5B(14) + 5C(12) + 6A(22) + 6B(16) + 6C(18); Subject to: 1A + 1B + 1C = 35 2A + 2B + 2C = 26 3A + 3B + 3C = 42 4A + 4B + 4C = 53 5A + 5B + 5C = 29 6A + 6B + 6C = 38 1A + 2A + 3A + 4A + 5A + 6A ≤ 65 1B + 2B + 3B + 4B + 5B + 6B ≤ 80 1C + 2C + 3C + 4C + 5C + 6C ≤ 105 All Combinations ≥ 0 Solver add-on solution in MS Excel yielded the following results: 35 bbl of wastes shipped from Kingsport to Whitewater, 26 bbl of waste shipped from Danville to Duras, 42 bbl of wastes shipped from Macon to Duras, 1 bbl of wastes shipped from Selma to Whitewater, 52 bbl of wastes shipped from Selma to Los Canos, 29 bbl of wastes shipped......

Words: 1072 - Pages: 5

Economy Shipping Company

...Estimating Funds Requirements—Short-Term Sources of Finance Economy Shipping Company (Abridged) Copyright © 1973 by the President and Fellows of Harvard College. Harvard Business School case 274—092. In the spring of 1950 the controller of Economy Shipping Company, located near Pittsburgh, was preparing a report for the executive committee regarding the feasibility of repairing one of the company’s steam riverboats or of replacing the steamboat with a new dieselpowered boat. The Economy Shipping Company was engaged mainly in the transportation of coal from the nearby mines to the steel mills, public utilities, and other industries in the Pittsburgh area. Occasionally, the company’s several steamboats also carried cargoes to places as far away as New Orleans. The boats owned by Economy Shipping were all steam powered. All were at least 10 years old, and the majority of them were between 15 and 30 years old. The steamboat the controller was concerned about, the Conway, was 23 years old and required immedia te rehabilitation or replacement. It was estimated that the Conway had a useful life of another 20 years provided that adequate repairs and maintenance were made. The book value of the Conway was $39,500, but the controller believed that if the company sold the boat in 1950, it would bring only around $25,000. The immediate rehabilitation costs for the Conway were estimated to be $115,000. The controller estimated that these general rehabilitation expenditures would......

Words: 959 - Pages: 4

Economic Shipping

...In the spring of 1950 the controller of Economy Shipping Company, located near Pittsburgh, was preparing a report for the executive committee regarding the feasibility of repairing one of the company’s steam riverboats or of replacing the steamboat with a new diesel-powered boat. Economy Shipping was engaged mainly in the transportation of coal from the nearby mines to the steel mills, public utilities, and other industries in the Pittsburgh area. The company’s several steamboats also on occasion carried cargoes to places as far away as New Orleans. All the boats owned by Economy Shipping were steam-powered. All were at least 10 years old, and the majority were between 15 and 30 years old. The steamboat the controller was concerned about, the Conway, was 23 years old and required immediate rehabilitation or replacement. It was estimated that the Conway had a useful life of another 20 years provided that adequate repairs and maintenance were made. The book value of the Conway was $39,500, but the controller believed that if the company sold the boat in 1950, it would bring only around $25,000. The immediate rehabilitation costs for the Conway were estimated to be $115,000. The controller estimated that these general rehabilitation expenditures would extend the useful life of the Conway for about 20 years. New spare parts from another boat, which had been retired in 1948, were available for use in the rehabilitation of the Conway. If these parts were used on the Conway...

Words: 273 - Pages: 2

Economy Shipping Company

...Estimating Funds Requirements—Short-Term Sources of Finance Economy Shipping Company (Abridged) Copyright © 1973 by the President and Fellows of Harvard College. Harvard Business School case 274—092. In the spring of 1950 the controller of Economy Shipping Company, located near Pittsburgh, was preparing a report for the executive committee regarding the feasibility of repairing one of the company’s steam riverboats or of replacing the steamboat with a new dieselpowered boat. The Economy Shipping Company was engaged mainly in the transportation of coal from the nearby mines to the steel mills, public utilities, and other industries in the Pittsburgh area. Occasionally, the company’s several steamboats also carried cargoes to places as far away as New Orleans. The boats owned by Economy Shipping were all steam powered. All were at least 10 years old, and the majority of them were between 15 and 30 years old. The steamboat the controller was concerned about, the Conway, was 23 years old and required immedia te rehabilitation or replacement. It was estimated that the Conway had a useful life of another 20 years provided that adequate repairs and maintenance were made. The book value of the Conway was $39,500, but the controller believed that if the company sold the boat in 1950, it would bring only around $25,000. The immediate rehabilitation costs for the Conway were estimated to be $115,000. The controller estimated that these general......

Words: 961 - Pages: 4

Economy Shipping Company

...CASE STUDY: ECONOMY SHIPPING COMPANY (ABRIDGED) Submitted to: Prof. Roy C. Ybanez MSFIN 222 Submitted by: BASCON, Roland Billy CAJEGAS, Lester ORTIZ, Karmi Ann SALVADORA, Jerick Cezar 02 October 2014 Problem Statement Steamboats are essential parts of Economy Shipping Company (ESC)’s business for it is the main mode of transporting coals from nearby mines to various delivery points. And with the ageing group of steamboats that the company owns, the company is concerned about the status of one of its steamboat – Conway, which is 23 years old and requiring immediate rehabilitation or replacement. Analysis of Alternatives ESC is in consideration of two alternatives as follows: Alternative 1: Replace Conway with a new diesel-powered boat today; sell the Conway and its parts; overhaul the diesel engines in year 10; sell the diesel engine and its parts inventory in year 20 Alternative 2: Rehabilitate the Conway today; operate the Conway for another 30 years; scrap the Conway at the end of year 20. Presented below are the relevant cash flows associated with both alternatives. Since ESC was considering other projects with the rate of 10%, each of the above-mentioned options was considered using the same rate of return. (See attached annex for detailed computation) Alternative 1 Year | Specific Item | After-Tax Cash Flows (48%) | Present Value (10%) | 0 | Selling price of Conway (net of tax) | 31,960 | 31,960 | 0 | Selling price of......

Words: 512 - Pages: 3

Economy Shipping Company

...Economía Shipping Company (abreviado) En la primavera de 1950, el controlador de Economía Shipping Company, ubicada cerca de Pittsburgh, estaba preparando un informe para el comité ejecutivo con respecto a la viabilidad de la reparación de una de las de empresa barcas de vapor o de reemplazar el barco de vapor con un nuevo barco con motor diesel. El envío de la economía de la empresa se dedica principalmente en el transporte de carbón desde el minas cercanas a las fábricas de acero, servicios públicos y otras industrias en el área de Pittsburgh. La de la compañía de varios barcos de vapor también en ocasiones llevan cargas a lugares tan lejanos como Nueva Orleans. Todos los barcos de propiedad de Economía eran generador de vapor. Todos eran por lo menos 10 años de edad, y la mayoría tenían entre 15 y 30 años de edad. El barco de vapor el controlador estaba preocupado sobre el Conway, tenía 23 años y requiere rehabilitación inmediata o sustitución. Se estima que el Conway tenía una vida útil de otros 20 años, siempre que se hagan las reparaciones y el mantenimiento adecuados. El valor en libros de el Conway fue 39.500 dólares, pero el controlador cree que si la compañía vendió el barco en 1950, traería sólo alrededor de $ 25.000. Se estima que los costos de rehabilitación inmediatas para el Conway a ser $ 115.000. El controlador calcula que estos gastos generales de rehabilitación se extenderían la vida útil de la Conway durante unos 20 años. Nuevas piezas de......

Words: 1044 - Pages: 5

Quantitative Method / Stateline Shipping and Transport Company

...Assignment #4: Case Problem “Stateline Shipping and Transport Company” 1) This transportation model problem consists of 18 decision variables, representing the number of barrels of wastes product transported from each of the 6 plants to each of the 3 waste disposal sites: [pic]= Number of Barrels transported per week from plant ‘i’ to the j-th waste disposal site, where i = 1, 2, 3, 4, 5, 6 and j = A, B, C. The objective function is to minimize the total transportation cost for all shipments. So the objective function is the sum of the individual shipping costs from each plant to each waste disposal site: Minimize Z = 12[pic]+ 15[pic]+ 17[pic]+ 14[pic]+ 9[pic]+ 10[pic]+ 13[pic]+ 20[pic] +11[pic] +17[pic] +16[pic] +19[pic] +7[pic] +14[pic] +12[pic] +22[pic] +16[pic] +18[pic] Let’s assume the constraints are the number of barrels of wastes available per week at each plant and the number of barrels of wastes contained at each waste disposal site. Therefore there are 9 constraints- one for each plant supply and one for each waste disposal site’s demand. The six supply constraints are: [pic]+ [pic]+ [pic] = 35 [pic]+ [pic]+ [pic] = 26 [pic]+ [pic] +[pic] = 42 [pic] + [pic] +[pic] = 53 [pic] +[pic] +[pic] = 29 [pic] + [pic] +[pic] = 38 For example, let’s say the supply constraint [pic]+ [pic]+ [pic] = 35 represents the number of barrels transported from the plant Kingsport to all the three waste disposal sites. The amount transported from Kingsport is......

Words: 1325 - Pages: 6

Swot Analysis for a Company -Economic

...SWOT Analysis: Internal Factors * Strengths Al Ain is an attractive destination for many visitors, and has a range of unique and diverse attractions. While the comments here are concentrated on the wildlife park future, it should always be remembered that wildlife park sits in the wider context of tourism and leisure activities and the intangible, emotional attributes of Al Ain such as the unique combination of atmosphere, culture and Al Ain history. Government support: Abu Dhabi economic vision 2030 outline the economic diversification plans of Abu Dhabi Government to be away from overdependence on hydrocarbon industries. The company is being given 2.6 billion US dollars to be transformed into Al Ain wild life park and Resort. Continuous political stability in UAE attracting businesses to invest in UAE. This project is a chance for everyone to invest. Partnership agreements with international and regional organizations are another advantage for AWPR. The agreements further reinforce Al Ain Wildlife Park & Resort's commitment to partnering with conservation organizations both regionally and internationally. The agreement includes an animal and plant exchange program. As part of a major expansion, Al Ain Wildlife Park & Resort is developing a world desert habitat featuring the animals and plants. AWPR has a lot of partnerships and agreements such as: * Exclusive agreement with San Diego Zoo was a huge benefit to the Al Ain wildlife park & resort......

Words: 2093 - Pages: 9

A Look Into the Economics of the Shipping Business

...2010 GUC – MBA 1st Term Cairo - Egypt Business Economics Research Paper A look into the Economics of the shipping business. Mai Hamed 12/27/2010 Table of Contents List of Figures ................................................................................................................................................ 3 List of Tables ................................................................................................................................................. 3 Introduction to NNC Business Activity .......................................................................................................... 4 Backward and Forward Market .................................................................................................................... 8 The freight market .................................................................................................................................... 8 The sale and purchase market .................................................................................................................. 9 The New Building market.......................................................................................................................... 9 The demolition market ............................................................................................................................. 9 Supply and demand Functions in the shipping market .................................................

Words: 1872 - Pages: 8

Stateline Shipping and Transport Company

...Rachel Sundusky is a manager of the South-Atlantic office of the Stateline Shipping and Transport Company. She is in the process of negotiating a new shipping contract with Polychem, a company that manufactures chemicals for industrial use. Polychem wants Stateline to pick up and transport waste products from its six plants to three waste disposal sites. Rachel is very concerned about this proposed arrangement. The chemical wastes that will be hauled can be hazardous to humans and the environment if the leak. In addition, a number of towns and communities in the region where the plants are located prohibit hazardous materials from being shipped through the municipal limits. Thus, not only will the shipments have to be handled carefully and transported at reduced speeds, they will also have to traverse circuitous routes in many cases. Rachel has estimated the cost of shipping a barrel of waste from each of the six plants to each of the three waste disposal sites as shown in the following table. WASTE DISPOSAL SITE Plant | Whitewater | Los Canos | Duras | Kingsport | $ 12 | $ 15 | $ 17 | Danville | 14 | 9 | 10 | Macon | 13 | 20 | 11 | Selma | 17 | 16 | 19 | Columbus | 7 | 14 | 12 | Allentown | 22 | 16 | 18 | The plants generate the following amounts of waste products each week. Plant | Waste per week(bbl) | Kingsport | 35 | Danville | 26 | Macon | 42 | Selma | 53 | Columbus | 29 | Allentown |......

Words: 716 - Pages: 3

Economy Shipping Company

...Economy Shipping Economy Shipping Company (Abridged) Question 1. What are the relevant cash flows under each of the two alternatives? And in what years do they occur? Alternative 1: Rehabilitation of the Conway We decided to divide this alternative in two parts. Part A is Rehabilitation without parts and Part B is Rehabilitation with parts. Facts/Assumptions • Conway’s additional useful life of 20 years. • Book value of Conway: $39,500 • Market value of Conway: $25,000. This is the Opportunity Cost of not selling the Conway at year 0. • Rehabilitation costs: $115,000. If spare parts are used, rehabilitation costs would be $71,500. • Book value of spare parts if used on the Conway: $43,500. • Market value of spare parts: $30,000. This is the Opportunity Cost of not selling the spare parts at year 0. • Annual operating costs of Conway: $203,150 • No dismantling and scrapping costs at the end of useful life (This will be covered by the value of the scrap and used parts). • Return of 10% after taxes. • Tax rate: 48% • Book cost of Conway, including rehabilitation costs, would be depreciated over a 20-year period. • Depreciation according to the straight line method = (Cost - Residual value) / Useful life. For the rehabilitation alternative, residual value is zero at the end of year 20. • ATCF(After-tax cash flow) will be calculated using the formula = Operating Costs after taxes plus Tax shields from......

Words: 287 - Pages: 2

Economy Shipping Company (Abridged)

...------------------------------------------------- ------------------------------------------------- ------------------------------------------------- ECONOMY SHIPPING COMPANY ------------------------------------------------- (Abridged) ------------------------------------------------- In the spring of 1950 the controller of Economy Shipping Company, located near Pittsburgh, was preparing a report for the executive committee regarding the feasibility of repairing one of the company’s steam riverboats or of replacing the steamboat with a new diesel-powered boat. Economy Shipping was engaged mainly in the transportation of coal from the nearby mines to the steel mills, public utilities, and other industries in the Pittsburgh area. The company’s several steamboats also on occasion carried cargoes to places as far away as New Orleans. All the boats owned by Economy Shipping were steam-powered. All were at least 10 years old, and the majority were between 15 and 30 years old. The steamboat the controller was concerned about, the Conway, was 23 years old and required immediate rehabilitation or replacement. It was estimated that the Conway had a useful life of another 20 years provided that adequate repairs and maintenance were made. The book value of the Conway was $39,500, but the controller believed that if the company sold the boat in 1950, it would bring only around $25,000. The immediate rehabilitation costs for the Conway were estimated to be $115,000. The......

Words: 943 - Pages: 4