Case ID: 202027
Solution ID: 25
Words: 1414
Price $ 75

Ocean Carriers

Case Analysis

Mary Linn, Vice President of Ocean Carriers (a shipping company), is evaluating a proposed lease of a ship for a three year period. The requirements specified by the customer demand the construction of a new vessel, which will take two years to construct. The customer offers an attractive price for the hire, but the contract is only limited to three years. The hire rate after the end of the contract period is hard to determine, as the rate is largely dependent on prevailing supply and demands of shipping vessels. The demand of the capesize is expected to be strong due to strong demand for main cargo – iron ore and coal – in Australia and India. However, the construction of the new vessel requires a significant investment of $39 million, and the resulting cash flows might not guarantee an attractive return. The company also has a policy of selling ships that are older than fifteen years. The policy leads the company to forego the cash flows that could be generated from the new vessel beyond fifteen years of operation.

Excel Calculations

 Investment Appraisal of New Capsize Vessel (cash flows in thousands of dollars)

 Net Cash Flows

PV of Cash Flows

Net Present Value (NPV)

Net Working Capital

Questions Covered

Ocean Carriers uses a 9% discount rate to evaluate its investment projects.

  1. Do you expect daily spot hire rates to increase or decrease next year?
  2. What factors drive average daily hire rates?
  3. How would you characterize the long-term prospects of the capesize dry bulk industry?
  4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong.
  5. What do you think of the company’s policy of not operating ships over 15 years old?