For many years Sydney Harbour Fuel (SHF) has been an icon for professional and recreational boaters alike. Their brightly coloured fuel barges have been delivering and selling petrol and light diesel fuel directly to customers all around Sydney Harbour. Dino Dotson originally started the service when he first migrated to Australia in the 1950s. While no longer working full time, Dino is still seen to occasionally deliver fuel to many of his favourite and long serving loyal customers. Dino does not accept any wages from the business for this help. If he did accept wages his contribution would be worth $15,000 per year. The business is now run by his son Don Dotson and his wife Daisy Dotson. They have three children named Dolly, Debra and Dana. Dana is currently enrolled at University of Wollongong. With this knowledge she is advising her parents and siblings as to ways in which to grow the business.

Five years ago they purchased 4 new barges for $2m each which they are able to depreciate for tax purposes at 10% per annum straight line. At this time 4 barges were sold and four others had extensive renovations. This meant the renovated barges had a useful life of 8 years and a value for taxation depreciation purposes of $400,000. They are able to be depreciated for tax purposes for 8 years straight line. Dana thought it was interesting and helpful that the taxation depreciation was at the same rate as the accounting depreciation. If the expected project goes ahead these new and renovated barges, purchased five years ago, can be sold in period 0 for 20% of their original cost. For taxation purposes the full amounts of the tax base are depreciated with no allowance for residual value. The new barges purchased five years ago are expected to have a salvage value of $100,000 each at the end of their 10 year useful life and the renovated barges a salvage value of $50,000 each at the end of their 8 year useful life. They will only really be able to be scrapped at this time. In recent times there has been a move away from the use of petrol in nautical vessels with most using light diesel. Due to the failure of a competitor there is also the opportunity to now supply heavy diesel to the fleet of cruise liners that regularly visit Sydney harbour. They would not have to tender for this work as they have been offered the contract, as they are the only fuel barge company still in operation on Sydney harbour. To be able to take advantage of this contract the company will have to sell its existing barges and invest in eight new vessels. These new barges will cost $4m each. Their accountant has advised that these can be depreciated straight line at 5% per annum while their tax advisor has advised that they are can be depreciated for 10 years on a straight line basis. They can be sold at the end of their useful lives for 15% of their purchase price. Given Danas outstanding marks while at University she is able to advise the business to use the accounting depreciation rate for capital budgeting purposes. 2 The benefit of the new barges is that they will have the necessary technology to be able to carry and pump both light and heavy diesel. The one downside is that they will no longer be able to sell petrol. As they are no longer distributing petrol, their insurance company has advised that their insurance premiums will fall by $2000 per year from the first year of operation. A feasibility study has been completed by Woodward and Associates to assess the likely demand for fuel for the next ten years. They expect that there will be a demand for 5 million litres of light diesel and 10 million litres of heavy diesel in the first year. The margin on the sale of fuel has traditionally been $2 per litre delivered. Previously they were supplying 2 million litres of petrol and 4 million litres of light diesel per annum. The cost of this report was $25,000. With the move to heavy diesel it is estimated that they will hold $1m worth of heavy diesel inventory and $500,000 worth of light diesel. This is an increase from the previous figure of $350,000 of light diesel inventory held. They will no longer need to hold the $50,000 worth of petrol. This can be sold for this value if they go ahead with the project. The current tax rate is 30%. If the project goes ahead they will not need as many staff as they previously did. The jobs of two captains and two maintenance workers will no longer be required. This will save the company a total of $200,000 per year. In light of the fact that these workers are being retrenched they will receive a redundancy payment at the very start of the project of 50% of their annual wage. Presently Don Dotsons wage is $150,000 and Dots is $50,000. If the new project goes ahead the company will pay Don $100,000 per annum and Dot also $100,000 per annum. To facilitate the purchase of the eight new barges the company will borrow $32 million from Seeto Bank at a rate of 7.5% per annum on an interest only basis. The current rate of inflation is 5.0% p.a. and they pay tax at 30 cents in the dollar and the companys required nominal rate of return is 12.5% p.a. on a project such as this one. All amounts given are in real dollars.

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