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
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Ocean Carriers Inc. A Case Study By ab Introduction • Ocean Carriers Inc. owned and operated cape-size dry bulk carriers worldwide. • Major Cargo type : Iron ore. • Vessel sizes : 80000 DWT to 210000 DWT. • Cape-size carriers travel around Cape Horn rather than the Panama Canal due to size constraints. Operations Maintenance Maintaining Supplies And on board Stores Supply of Lubricants Cargo Operations Repairs Insurance Business Model • Mostly chartered
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Ocean Carriers Case Expectations for Daily Spot Hire Rates Next Year Iron ore and coal imports will most probably decrease the upcoming year With the increasing supply of vessels should result in a market surplus By creating this surplus‚ prices will be driven down‚ since we will have limited demand and suppliers competing Average daily rates‚ based on historical numbers‚ have a direct relationship with the number of shipments. What Factors Drive Average Daily Hire Rates? u
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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: –
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(a) Statement of Problem. Ocean Carriers is evaluating a proposed three year lease of a ship. Currently‚ no ships in Ocean Carrier’s fleet meet the requirements of the customer. Since the new ship requires an investment of $39 million‚ Mary Linn‚ the Vice President of Finance for Ocean Carriers‚ needs to evaluate the proposal’s NPV and determine whether or not to accept the proposal by considering expected cash flows‚ tax implications‚ and future market conditions. (b) Statement
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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
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NPV Analysis. 4 Table 3: Estimation of Resale value of Carrier @15th year 7 1. Introduction 1.1 Executive Summary Ocean Carriers Inc. (OCI) is an International provider of Marine transportation services mainly focussing on Dry Bulk commodities mainly iron ore and coal. OCI has offices located in New York and Hongkong. One of OCI’s customer’s is keen in committing for a 3 year lease starting from 2003 for a large dry bulk Capesize carrier of capacity 180‚000 DWT in order to fulfil its own interests
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Substantive Issue Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year period to a customer‚ beginning in 2003. The proposed leasing contract offers very attractive terms‚ but no ship in Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future expected cash flows warrant the considerable investment in a new ship. Objective of Case Assignment To provide your team an opportunity to make a capital budgeting decision
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“Ocean Carriers” case Assume that Ocean Carriers uses a 9% discount rate. 1) Do you expect daily spot hire rates to increase or decrease next year? (5 points) 2) What factors drive daily hire rates? (5 points) 3) How would you characterize the long-term prospects of the capesize dry bulk industry? (10 points) 4) Should Ms Linn purchase the $39M capsize? Make 2 different assumptions. First‚ assume that Ocean Carriers is a US firm subject to 35% taxation. Second‚ assume that
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OCEAN CARRIERS CASE 1) Should Ls Linn purchase the $39M capsize? Make two different assumptions. First‚ assume that Ocean Carriers is a U.S. firm subject to a 35% statutory (and effective) marginal tax rate. Second‚ assume that Ocean Carriers is domiciled in Hong Kong for tax purposes‚ where ship owners 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‚ i.e.‚ assume a zero tax rate. The
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