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OCEAN CARRIERS CASE
Ocean Carriers Case Assignment – Team 5
Overview Ocean Carriers Inc. is a global shipping company. In 2001, Mary Linn, Vice President of Finance faced a decision on a proposed contract in which Ocean Carriers would lease one ship to a client for three years and the charterer would start utilizing the ship in 2003. However, Ocean Carriers does not currently have a ship to meet the requirements of the customer. As the VP of Finance, Mary Linn must decide whether to purchase a new capsize carrier to meet the requirements of the customer, and whether this investment would be profitable in the future.
Q1 -Ocean Carriers uses a 9% discount rate. Should Ms. Linn purchase the $39 million capsize? Assume that Ocean Carriers is subject to 35% taxation To decide whether Ms. Linn should make the purchase, we conducted a Net Present Value analysis to determine the worthiness of the project taking into account the time value of future cash flows. We were given the following information: Three-year time charter starting in 2003 at a rate of $20,000 per day with an annual escalation of $200 per day. Expected inflation rate is 3%. Operating cost expected to be $4,000 per day and to increase at a rate 1% above inflation. Maintenance days: Initial 8 days, 12 days after 5 years and 16 days after 10 years annually. Capital Expenditure in 2007: $300,000 and 2012: $350,000. These expenditures will be depreciated on a straight line basis over 5 years. The cost of the ship will be depreciated on a straight line basis over 25 years. Taxation rate is 35%. The ship would cost $39 million, with 10% of the purchase price to be paid in 2001 and 10% due in 2002. The balance would be due on delivery in 2003. Estimated scrap value at end of fifteenth year is $5,000,000. An additional $500,000 investment will be made in net working capital in 2001,

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