Ocean carrier Essay

The purpose of this report is to evaluate whether Ocean Carriers Inc. should immediately commission a in the raw capesize carrier that would cost $39 million, and would be completed two age hence, in order to finalize a lease of the ship for a three-year distributor point with a potential charterer in very good faith. The contrasting tax regulations between the two countries where the company locates its office, and the different cost-benefit circumstances under different aloofness of time in service be considered in the analysis. Taking all available information into consideration, we highly recommend that the company should grease ones palms the new capesize carrier, work it registered under the Hong Kong office, and put it on a scheme for a 25-year service. Industry ProspectsCapesize carriers are mainly used to carry iron ore and coal worldwide. The daily mesh grazes are therefore determined by the total exports of iron ore and coal, the distance between the exporting cou ntries and the destinations, and the fleet size of capesizes in service. According to the foodstuff trends, in the next few years, Australian production in iron ore is expected to be strong and Indian iron ore exports are expected to draw back off. However, imports of iron ore and coal are expected to be stagnant in next two years.Therefore, total exports of iron ore and coal go out be categorical in the coming two years, and will rise remarkably in the following few years. Besides, as East Asia countries absorb the largest portion of the iron ore imports, the connective of India to the iron ore exporting wont significantly increase travel distance because Australia is almost the same distance away by water.Moreover, in 2001 and 2002, 63 and 33 new capesize vessels would be delivered adding up to about 17% of total capesizes currently in service. Consequently, in the first two years, the supply of capesizes would be greater than the demand, the daily hire rates are expected to decrease. But in the mid-to-long run, the daily hire rates are expected to increase continuously. Revenues and Costs Intuitions beforehand going into the numbers, we want to discuss some intuitions of this project that support the decision of purchasing the capesize. First, the increasing mid-to-long run daily hire rates will take into account basis for promising future cash flows. Secondly, although the daily hire rate for the first two years are expected to be low, the charterer had already offered a rate higher than expected to compensate the company. Thirdly, a great portion of the expenditures come from the preparation for special surveys which should be renewed every five years if the ship needs to stay in the business. The high escalation of costs between the second and third surveys, and the fourth and fifth surveys, indicates that maximum net present repute of the project would be achieved when the carrier serves for either 15 years or 25 years. Free Cash FlowsIn this pa rt, we will discuss the detailed numbers. well-nigh assumptions are made based on the economic outlook and company characteristics when calculating free cash flows. We assume that inflation rate is 3% per annual, and that exercise cost would increase 1% above inflation rate per annual. We assume that discount rate is 9%, and will discuss the impact of a rate change later. Provided that the scrape value is estimated to be $5 million at the end of the fifteenth year, we estimate that the value would decrease to $4 million overdue to more wear in the steel. Please refer to Exhibits 1 to 4 for the calculations of estimated free cash flows and NPVs.We can see that if the company chooses to purchase the capesize, have it registered in Hong Kong instead of USA, and runs it for 25 years, the NPV will be the highest compared to other alternatives. Besides, the Hong Kong option (have the vessel registered in Hong Kong) dominates the USA option (have the vessel registered in USA) because no tax is essential in Hong Kong in these operations. Also, the 25-year option dominates the 15-year option because, even if the scrap value is reduced to zero after 25 years, the NPVs for options that keep the capesize for 25 years are still higher than for 15 years. Sensitivity AnalysisIn the above calculations for the NPVs, we assume discount rate to be 9%. If the discount rate is higher, the NPVs for the projects will be reduced because the benefits from recording depreciation and tax deferring willincrease. For example, we found that the USA-25-year option will produce a positive NPV if the discount rate is lower to 6.67%. However, even if the discount rate is as low as 0.1%, the HK option still dominates the US option, and the 25-year option still dominates the 15-year option. ConclusionTo sum up, if Ocean Carriers Inc. purchase a $39 million capesize carrier immediately, register it in Hong Kong, sign the three-year contract with the charterer, and keep the vessel in business for 25 years, based on estimations, it would acquire the largest possible NPV of $3.89 million on the project.