Question

A large automobile-parts plant was constructed 4 years ago in a Pennsylvania city served by two rail-roads. The PC Railroad purchased 40 specialized 60-foot freight cars as a direct result of the additional traffic generated by the new plant. The investment was based on an estimated useful life of 20 years. Now the competing railroad has offered to service the plant with new 86-foot freight cars that would enable more efficient shipping operations at the plant. The automobile-parts company has threatened to switch carriers unless PC Railroad buys 10 new 86-foot freight cars.
The PC marketing management wants to buy the new cars, but PC operating management says, “The new investment is undesirable. It really consists of the new outlay plus the loss on the old freight cars. The old cars must be written down to a low salvage value if they cannot be used as originally intended.”
Evaluate the comments. What is the correct conceptual approach to the quantitative analysis in this decision?



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  • CreatedNovember 19, 2014
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