Ocean Carriers Case Study Solution Essay

Executive SummaryGiven the current and pass judgment market conditions, the financial department of the Ocean Carriers Group is to evaluate the authorisation revenues and expenses of commissioning a naked capsize place for cargo ecstasy in stray to meet a received demand for lease. A recommended approach would consist in analyzing the expectations for the world economy, trends in world distribute and potential contracts however, an estimated time of ser evil should be assigned in order to predict future cash f outsets.Summary of factsIn January 2001, Mary Linn, vice president of Finance for Ocean Carriers, had to decide whether to accept an offered leasing contract for the sequence of three years. In the event of acceptance of the above-mentioned contract, the profits of the phoner would depend on the agreed ask rates, direct costs, ship disparagement and inflation. After the closure of the contract, further income would be evaluated based on expect market day by day tak e rates. The conditions for the proposed lease are shown in march 1.Statement of problemThe duration of the leasing contract is quite short so the union has to analyze whether the investment as a whole leave alone prove to be profitable even subsequently the closure of the contract. In order to do so, they leave have to take into account the fluctuations of the chance(a) spot rates in the short and long terms, as well up as existing differences in taxation policies within its offices in Hong Kong and in the United States. Last but not least, the conjunction has to question the tenableness of its 15-year insurance policy.AnalysisSpot hire ratesDaily spot hire rates are predicted to fall in 2001 and 2002 due to anincrease in the fleet size (63 new watercrafts are scheduled for deli real) and expected stagnancy in constrict ore and coal shipments. Iron ore and coal imports are very classical for the company because they are about 85% of the cargo it carries any year. There fore, due to this future stagnation the company will face a weak market position, resulting in lower daily spot hire rates.Overall investmentDespite negative market conditions in the forthcoming 2 years, long-term prospects look much more promising. Iron ore watercraft shipments are going to increase due to new players joining the iron ore industry India and Australia. As a consequence, in this new global market, daily charter rates and spot daily charter rates will probably rise producing additive demand for shipments.Companys 15-year policyThe company used to scrap or sell ships just forrader their 15th year of navigation to avoid paying for maintenance expenses think to the 3rd special survey. According to our calculations presented in the Exhibit 2, scrapping the vessel forwards the 15th year is not recommended. Results show that the NPV of a ship after 15 years is higher than the scrap value of 5 cardinal dollars.Thus, we advise the company to keep the ship yearlong than 15-year period, since operating the vessel over a longer period will earn additional profit and the ship can be scrapped some time later, granting the homogeneous million dollars. However, there are few factors that signal why company energy be willing to get rid of the vessel. Firstly, if the companys priority is to keep a young fleet of cargo ships, operating ships older than 15 years may not be the optimum choice. In fact, older ships are riskier and are less efficient.Secondly, due to low demand for older ships, leasing the same vessel in future might be an ineffective venture.Investment decisionWe computed two separate calculations for disposed(p) two assertions in Exhibit 2.According to assumption A the company operates in United States, thus has to pay 35% of taxes, whilst according to assumption B, company operates in Hong Kong, and its exempt of taxes. Our calculations show that NPV in the set-back scenario is negative in both 2017 (-6,350,239) and 2027 (- 4,285,462) due to very high taxes, temporary hookup in the second scenario the NPV is positive in both 2017 (1,719,018) and 2027 (4,025,600).Its important to understand why we presented two chromatography columns for 2017. First column shows the numbers in the case of operating a vessel for 15 years, whilst second column shows the values in case ship was to be operated for a longer period. Another important fact to consider is that in the first scenario, when the company operates ship only for 15 years, we excluded the capital expenditure for 2017 related to the survey, Whilst, in the second scenario, while operating the ship for more than 15 years, we added the yearly capital expenditure back. We made an important assumption we did not allow in capital expenditures linked to the last special survey, because we assumed that the company is scrapping the ship just before the special survey is conducted.RecommendationsIn conclusion, keeping in mind what we demonstrated before, the company shou ld invest in the production of the new vessel only in Hong Kong and should not scrap it after 15 years, because its NPV will still be positive.