Ten years ago, the port of Secoma built a new pier containing a large amount of steel work, at a cost of $300,000, estimating that it would have a life of 50 years. The annual maintenance cost, much of it for painting and repair caused by environmental damage, has turned out to be unexpectedly high, averaging $27,000. The port manager has proposed to the port commission that this pier be replaced immediately with a reinforced concrete pier at a construction cost of $600,000. He assures them that this pier will have a life of at least 50 years, with annual maintenance costs of not over $2,000. He presents the information in Table PI 0-22 as justification for the replacement, having determined that the net market value of the existing pier is $40,000.
He has stated that, because the port earns a net profit of over $3,000,000 per year, the project could be financed out of annual earnings. Thus, there would be no interest cost, and an annual savings of $19,000 would be obtained by making the replacement.
a. Comment on the port manager's analysis.
b. Make your own analysis and recommendation regarding the proposal.