In January 2001, Mary Linn, who was the VP of finance for Ocean Carriers, was assessing an offered lease of a ship for a term of three years, which would start in early 2003. Ocean carriers is a shipping firm which has branches in the cities of New York and Hong Kong. The client was in a hurry to seal the deal in order to fulfill his own obligations and offered lucrative terms. No vehicle in the company’s current fleet met the client’s demands. Mary Linn, thus, had to determine if Ocean Carriers should immediately make room for and allow funding for a new capsize carrier, which would be ready in two years’ time and could then be rented to the client.
Investment Appraisal of New Capsize Vessel (cash flows in thousands of dollars)
Net Cash Flows
PV of Cash Flows
Net Present Value (NPV)
Net Working Capital
Ocean Carriers uses a 9% discount rate to evaluate its investment projects.
Do you expect daily spot hire rates to increase or decrease next year?
What factors drive average daily hire rates?
How would you characterize the long-term prospects of the capesize dry bulk industry?
Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships 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.
What do you think of the company’s policy of not operating ships over 15 years old?