4. (10) Suppose the Navy is considering two minesweeping alternatives to replace an aging fleet of four minesweepers while awaiting a new fleet to be delivered in 2027. Whichever interim alternative is chosen, that alternative will have to be maintained through 2027, then can be scrapped. The alternatives, and the status quo are outlined below:

a. Status quo: Four aging minesweeper vessels. Beginning in FY16, the combined annual O&S cost to maintain the four ships is $75M ($18.75M per ship). It is expected that due to further aging and degradation, this O&S cost will increase by $5M ($1.25M per ship) every two years.

b. Refurbishment: There are three older minesweepers scheduled for retirement in FY17 that, with some improvements, can perform the same functions as the four aging minesweepers, but they will need a substantial refurbishment. This refurbishment can be done on all three ships for a total of $200M. The expected refurbishment cost profile is $63.1M in FY18, $105.5M in FY19, and $31.4M in FY20. When the three older ships are brought back online in 2021, after refurbishment, their expected O&S cost will be a total of $15M per year for all three vessels ($5M per ship). Of course, until that time, the four aging minesweepers will remain active, and the Navy will continue to operate and maintain them.

c. New Acquisition: The other alternative is to acquire two advanced gap filler minesweepers. The concept design phase for these two vessels is complete. If this alternative is chosen, it will require two more years of R&D ($10M in FY16 and $15M in FY17). The two ships can then be procured for $540.0M with the following expected outlay profile:

• FY18: $34.8M
• FY19: $94.8M
• FY20: $128.3M
• FY21: $127.8M
• FY22: $96.7M
• FY23: $48.7M
• FY24: $8.9M

Upon delivery in 2025, the combined annual O&S cost for these two ships is expected to be only $10M per year ($5M per ship). However, until these two ships are delivered, the Navy will continue to operate and maintain the four aging minesweepers.

The Mine Warfare program office has asked for an economic analysis of these three alternatives. Four key attributes have been determined that will affect mine warfare readiness during the 2025 to 2027 time frame. They are (1) number of vessels available between 2025 and 2027 (more is better); (2) search rate (in square nautical miles/vessel/day); (3) cruising range (in nautical miles); and (4) top speed (in knots). Furthermore, the program office has established importance weights for these four attributes for use in the economic analysis. These metrics are displayed in the table below:

Perform an economic analysis of these three alternatives, given the information provided. Be sure to include the major steps provided in the class notes, and remember to make a recommendation. NOTE: since no uncertainty information is provided, a sensitivity analysis is not necessary.

Show the work in Excel.

Use 1.4% as the discount rate

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