Ocean Carriers
FIN 555
CASE 1
Q3
Ms.Linn should not purchase the capsize carrier because the NPV is negative.
a. Incremental earning forecast
1. Operating Revenue
From the following Exhibit,
We can see that from year 2003 to year 2007, from year 2008 to year 2012, and from year 2013 to year 2017, 8 days, 12 days and 16days is separately used to repair.
The annual operating revenue = expected daily hire rate * (365- numbers of days for repair)
2. Operating Cost
The annual operating cost = daily operating cost * 365
Because the inflation rate is 3%, daily cost will increase 1% above inflation. So the daily operating cost of year 2013 is $4000. From year 2014, the daily operating cost is 4000*(1.04^n) annually
3. Depreciation Expense
From year 2003 to year 2006, the annual depreciation = book value of new vessel /25 = 39,000,000/25 = 1,560,000
From year 2007 to year 2011, the annual depreciation = new vessel depreciation + survey depreciation = 1,560,000 +300,000/5= 1,620,000
From year 2012 to year 2016, the annual depreciation = new vessel depreciation + survey depreciation = 1,560,000+350,000/5= 1,630,000
In year 2017, the annual depreciation = 1,560,000
4. Unlevered Net Income
Unlevered net income = (operating revenue – operating cost- depreciation)*(1-35%)
b. Free cash flow forecast:
1. NWC:
Net working capital of year 2003 is 500,000, from year 2004 the NWC =500,000*(1.03^t)
At last the increase in NWC each year = NWCt – NWC(t-1)
However, the NWC should be added back at the very last year.
2. Shut Down
The BV of vessel in year 2007 is 15,600,000, higher than 5,000,000 scrap value. So the firm will receive a tax gain = (book value – scrap value)*35% = 3,710,000
Therefore, the firm will have 8,710,000 increases in cash.
3. Capital Expenditure:
In year 2000 and 2001, firm had 3,900,000 each year for 10% of purchasing price payable
In year 2003, the firm will pay the rest 80% purchasing payable with
CASE 1
Q3
Ms.Linn should not purchase the capsize carrier because the NPV is negative.
a. Incremental earning forecast
1. Operating Revenue
From the following Exhibit,
We can see that from year 2003 to year 2007, from year 2008 to year 2012, and from year 2013 to year 2017, 8 days, 12 days and 16days is separately used to repair.
The annual operating revenue = expected daily hire rate * (365- numbers of days for repair)
2. Operating Cost
The annual operating cost = daily operating cost * 365
Because the inflation rate is 3%, daily cost will increase 1% above inflation. So the daily operating cost of year 2013 is $4000. From year 2014, the daily operating cost is 4000*(1.04^n) annually
3. Depreciation Expense
From year 2003 to year 2006, the annual depreciation = book value of new vessel /25 = 39,000,000/25 = 1,560,000
From year 2007 to year 2011, the annual depreciation = new vessel depreciation + survey depreciation = 1,560,000 +300,000/5= 1,620,000
From year 2012 to year 2016, the annual depreciation = new vessel depreciation + survey depreciation = 1,560,000+350,000/5= 1,630,000
In year 2017, the annual depreciation = 1,560,000
4. Unlevered Net Income
Unlevered net income = (operating revenue – operating cost- depreciation)*(1-35%)
b. Free cash flow forecast:
1. NWC:
Net working capital of year 2003 is 500,000, from year 2004 the NWC =500,000*(1.03^t)
At last the increase in NWC each year = NWCt – NWC(t-1)
However, the NWC should be added back at the very last year.
2. Shut Down
The BV of vessel in year 2007 is 15,600,000, higher than 5,000,000 scrap value. So the firm will receive a tax gain = (book value – scrap value)*35% = 3,710,000
Therefore, the firm will have 8,710,000 increases in cash.
3. Capital Expenditure:
In year 2000 and 2001, firm had 3,900,000 each year for 10% of purchasing price payable
In year 2003, the firm will pay the rest 80% purchasing payable with