ocean carriers

Ocean Carriers

Objectives
• Forecast pro-forma cash flows for a project

• Estimate project values using
Net Present Value (NPV)

• Conduct sensitivity analysis for the forecast inputs

Setting
• January 2001
• Customer offering attractive terms on 3-year lease for a capesize carrier
• Would require purchase of new carrier since existing fleet does not fulfill customer needs
• Should it be purchased?

Industry Dynamics
• Revenue Drivers

• Outlook in the:
– Short run

– Next couple of years

– Long run

Project Evaluation
• Net Present Value (NPV) examines the present value of the cash flows net of the present value of the initial investment • Value of the investment

• Estimates of the cash flows

Initial Investment
• $39M vessel
• 10% due immediately
• 10% due in one year
• Remaining due at delivery in two years $3.9M
$31.2M
PV = $3.9M +
+
= $33.74M
2
(1 + 9%) (1 + 9%)

Project Free Cash Flow
Operating Revenue
- Cost of Goods Sold
Gross Profit
- Depreciation
- Other Expenses
Operating Profit Before Interest and Taxes
- Taxes
Net Operating Profit After Taxes
+ Depreciation
- Capital Expenditures
- Increase in Working Capital
- Increase in Other Assets
Free Cash Flow

Revenue
• Contract Revenues
• Estimated Charter Rates
• Adjustment for Vessel Age
• Expected Daily Rate
• Number of Operating Days

Expenses
• Operating Costs
– Increase at inflation plus 1%
• Part of this is expensing the supplies that comprise working capital • Depreciation Assumptions
– Initial Expenditure
• Straight-Line over 25 years

– Special Survey Expenditures
• Straight-Line over the proceeding 5 years Cash Flow Estimates
2008 Forecast
Operating Revenue

$6,170,793.00

- Cost of Goods Sold

$1,776,313.24

Gross Profit

$4,394,479.76

- Depreciation

$1,620,000.00

- Other Expenses
Operating Profit Before Interest and Taxes