Due date: April 10, 2012
Ocean Carriers uses a 9% discount rate.
1. Do you expect daily spot hire rates to increase or decrease next year? Provide adequate justification for your argument. (10 pts) Hint: To answer this, consider the following questions to understand how the supply and demand parameters will change over the next year: a. What is the expected increase in the iron ore shipments over the next year? b. What is the expected increase in the shipping capacity next year? To do this, find out how many ships are expected to be added next year, and how many are expected to be scrapped.
2. How would you characterize the long-term prospects of the capesize dry bulk industry? Justify your arguments.(10 pts)
3. Should Ms. Linn purchase $39M capesize? Make two 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. For both cases, assume that the company will operate the ship for 25 years and the salvage value for the ship is $6.7 million.
Use the spreadsheet provided for your calculations. In the third sheet of the spreadsheet, explain your calculations and assumptions. (60 pts)
4. What do you think of the company’s policy of not operating ships over 15 years old? As a consultant, would you recommend the company to maintain the assumption that the ship should be sold at 15 years of age, or rather recommend to use the capsize ship for a longer period? Why? Support your discussion with numerical analysis (i.e., repeat your analysis in Q3 with the assumption that the ship will operate for only 15 years) (20 pts).