Ocean Carriers
Ocean Carrier Case Study
Summary
In order to accept the recently submitted leasing contract proposal, Ocean Carriers would have to purchase a new ship. The purchasing of a new ship is a considerable investment. We have analyzed whether or not Ocean Carriers should make this investment using Free Cash Flow and Net Present Value (NPV) analysis. Given the details of the contract, the forecasted daily time charter rates, and the costs data; we have concluded that Ocean Carriers should not accept the proposal and purchase a new ship if the company’s plan is to scrap the ship in 15 years. The NPV of this option is negative, roughly -$43,705, which means that Ocean Carriers would lose money over the life of this project. However, further analysis has concluded that operating the ship for its entire useful life, 30 years, can produce a positive NPV, roughly $2,107,016. So Ocean Carriers’ should consider taking on this proposal only if they can continue operating the ship for 30 years.
*Please see assumptions and capital budget details.
Answers to Case Questions 1) Spot hire rates will likely decrease in the near term, 2001 and 2002. Imports for ore look to be flat and won’t likely increase for the next two years. With 63 new capsizes scheduled for completion in 2001 there will likely be an overage of supply in the near term. Daily rates are driven by supply and demand as well as the trade patterns. With additional cargo carriers entering the fleet and depressed demand for ore imports, the spot hire rates will decrease. This will lower cash flow projections for the next couple terms and decrease net present value of the project. 2) The cost of ship in PV terms, discounted at 6% (r-g), is $35.5 million. Please see capital budget for details. The book value of the ship is $39 million, which equals the purchase price. 3) If the plan is to scrap the carrier after 15 years of use, Ms. Linn should not take the project. The project has a negative net
Summary
In order to accept the recently submitted leasing contract proposal, Ocean Carriers would have to purchase a new ship. The purchasing of a new ship is a considerable investment. We have analyzed whether or not Ocean Carriers should make this investment using Free Cash Flow and Net Present Value (NPV) analysis. Given the details of the contract, the forecasted daily time charter rates, and the costs data; we have concluded that Ocean Carriers should not accept the proposal and purchase a new ship if the company’s plan is to scrap the ship in 15 years. The NPV of this option is negative, roughly -$43,705, which means that Ocean Carriers would lose money over the life of this project. However, further analysis has concluded that operating the ship for its entire useful life, 30 years, can produce a positive NPV, roughly $2,107,016. So Ocean Carriers’ should consider taking on this proposal only if they can continue operating the ship for 30 years.
*Please see assumptions and capital budget details.
Answers to Case Questions 1) Spot hire rates will likely decrease in the near term, 2001 and 2002. Imports for ore look to be flat and won’t likely increase for the next two years. With 63 new capsizes scheduled for completion in 2001 there will likely be an overage of supply in the near term. Daily rates are driven by supply and demand as well as the trade patterns. With additional cargo carriers entering the fleet and depressed demand for ore imports, the spot hire rates will decrease. This will lower cash flow projections for the next couple terms and decrease net present value of the project. 2) The cost of ship in PV terms, discounted at 6% (r-g), is $35.5 million. Please see capital budget for details. The book value of the ship is $39 million, which equals the purchase price. 3) If the plan is to scrap the carrier after 15 years of use, Ms. Linn should not take the project. The project has a negative net