ASSIGNMENT 

Water-Jet Ferries is a successful ferry operator providing roll-on/roll-off ferry services to the larger islands off the coast using vessels that are propelled by water-jets powered by diesel engines. Over the last twelve months the company's profitability has been badly affected by rising fuel costs and a fall in patronage. As a consequence management has decided to examine the possibility of modifying 
the existing engines to reduce their fuel consumption. Not only would the modifications result in reduced fuel costs, the modified engines would produce increased power permitting the vessels to travel at higher speeds and so enable more services to be provided. A further benefit would be that the modified engines would be environmentally friendlier which is important to the island communities serviced by the company. 
Their decision was arrived at after receiving advice from the engine manufacturer that Water-Jet would be able to treat the modifications as a repair and by doing so claim a tax deduction for the cost incurred. 

Water-Jet has requested your company to provide them with an opinion as to the correctness of this claim by the engine manufacturer. Your opinion, which should also include an outline of the alternate tax treatment(s)that may be available, must be supported by reference to any applicable tax legislation and/or case law.