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Assume that you are a Controller at Ontario Northland ( ONT ) , one of regional railroads in Canada. ONT is acquiring 2 0 0
Assume that you are a Controller at Ontario Northland ONT one of regional railroads in
Canada. ONT is acquiring railroad tank cars to transport crude oil from northern Canada to the US
You are transporting the oil for Numac Energy, ONTs sole customer for the tank cars. Your current year
transport contract stipulates the following, among other things: if the tank cars are transported halffull at of capacity the rate that Numac pays is $ per day per car; if they are transported
threefourths full, the rate is $ per day per car, and if they are full the rate will be
$ per day. You estimate that the tank cars will operate halffull of the time, threefourths full
of the time, and totally full of the time. Total expenses amount to $ per day all cars
combined when the cars are in use, days per year. When they are not in used, the tank cars will cost
$ per day to run These costs include depreciation, assuming an year life span of a tank car.
After the first years, you will incur retrofit costs of $ per tank car. While the retrofit does not
prolong the life of a tank car, federal regulations require a retrofit to continue to operate the car after the
initial fouryear period. If the retrofit is not completed, you can sell the tank cars for $per tank
car to a South American operator you will use this information in assignment question two below After
the year period assuming you undertake the retrofit and still own the cars the cars are sold for scrap,
which generates $ per car. Assume an percent discount rate and a percent tax rate. Railroad
tank cars are depreciated over their useful life using straight line depreciation with no salvage value. You
estimate depreciation expense based on your previous average acquisition cost, which is $ per
tank car. When calculating the daily cash flows, et cetera, use a day year. Using discounted cash flow
analysis, what is the value of the railroad tank cars? What is the cost of the railroad tank cars?
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