633 Words3 Pages

Dilemma of Ocean Carriers:
Oceans Carriers (OC) has been approached by a charter with lucrative proposal to charter their ship. The problem is that OC has not ship that can accommodate the requirements of the client and Mary Linn, vice president of finance has to decide if investing in a new ship would be justified by the future cash flows.
Options, conditions and scenarios:
Ms. Linn would need to investigate the options of investing in a new ship given the following scenarios:
1- Purchase the capesize and to be scrapped after 15 years with a relevant corporate tax rate of 35% 2- The capesize should operate for 30 years and scrapped after. This will mean that the corporate policy of OC has to change. 3- Purchase the capesize and to be sold to the second hand market after 15 years.
The decision will be made based on the NPV should the above scenarios give a positive value. The assumptions are that there will be a corporate tax rate of 35% and discount rate of 9% should operations are US based. The same conditions will need to be investigated if Hong Kong is the base of operations with no corporate tax rates.
Analysis:
1- The average daily spot rate is expected to decrease next year, from $ 15,344 (2000) to $ 14,747 (2001), i.e. a 3.9% decrease. This is due to the 0.90% percent decrease in expected iron ore shipments. Spot rates depend on the demand and supply situation of the market. After the first year’s decrease, there is a 1.5% to 2% increase expected in the iron ore shipments from year 2002 onwards. This implies that the expected cash flows are expected to increase over time
2- Book Value of the ship is $ 39,000,000. Present value of the ship after discounting payments @ 9% is $ 33,738,397 3- Assuming a discount rate of 9% and tax rate of 35%, and the ship is sold for scrap after 15 years for $ 5,000,000, the NPV of

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