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