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 likely revenues and expenses of commissioning a forward-looking capsize ship for cargo passage in piece to meet a received demand for lease. A recommended approach would consist in analyzing the expectations for the world economy, trends in world deal and potential contracts however, an estimated time of ser guilt should be assigned in order to predict future cash f offsets.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 season of three years. In the event of acceptance of the above-mentioned contract, the profits of the society would depend on the agreed remove rates, operational costs, ship depreciation and inflation. After the closure of the contract, further income would be evaluated based on expect market everyday acquire rates. The conditions for the proposed lease are shown in picture 1.Statement of problemThe duration of the leasing contract is quite short so the companionship has to analyze whether the investment as a whole pass on prove to be profitable even aft(prenominal) the closure of the contract. In order to do so, they allow for have to take into account the fluctuations of the daily spot rates in the short and long terms, as hygienic as existing differences in taxation policies within its offices in Hong Kong and in the United States. Last but not least, the play along has to question the reason of its 15-year insurance policy.AnalysisSpot hire ratesDaily spot hire rates are predicted to fall in 2001 and 2002 due to an increase in the fleet size (63 new vass are scheduled for deli actually) and expected stagnation in smoothing iron ore and coal shipments. Iron ore and coal imports are very consequential for the alliance because they are about 85% of the cargo i t carries each year. Therefore, 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 approaching 2 years, long-term prospects look much more promising. Iron ore vessel 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 surplus demand for shipments.Companys 15-year policyThe company used to scrap or sell ships just to begin with their 15th year of navigation to avoid paying for maintenance expenses link to the 3rd special survey. According to our calculations presented in the Exhibit 2, scrapping the vessel originally 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 k eep the ship long-range 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 same million dollars. However, there are few factors that signal why company business leader 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 best 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 inclined two surmisals 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 archetypal scenario is negative in both 2017 (-6, 350,239) and 2027 (- 4,285,462) due to very high taxes, age 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 periodic capital expenditure back. We made an important assumption we did not imply 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 befor e, the company should 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.