Net Present Value and Ocean Carriers

Topics: Net present value, Free cash flow, Cash flow Pages: 3 (614 words) Published: September 27, 2012
The Charles H. Kellstadt Graduate School of Business
DePaul University

FIN 555: Financial Management
Prof. Randy Fisher

Case Study Questions: Ocean Carriers

These questions relate to the Ocean Carriers case in your course packet. You can find the data for this case on the course website in a spreadsheet named: Ocean Carriers Exhibits.xls.

This case provides the opportunity to make a capital budgeting decision by using discounted cash flow analysis to make an investment and corporate policy decision. Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year period beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future expected cash flows warrant the considerable investment in a new ship. For the questions below, assume that Ocean Carriers uses a 9% discount rate.

1. Do you expect daily spot hire rates to increase or decrease over the next few years? Give the reasons for your assessment. What factors drive average daily rates? What do you think of the long-term prospects of the capesize dry bulk industry?

2. How much is the cost of a new vessel in present value terms? Compared to the book value of the ship of $39M, what can you conclude about the effect of the installment payments?

3. Should Ms. Linn purchase the capesize carrier? Assume that it is going to be sold for scrap after 15 years. [Hint: Construct the Free Cash Flows of the project.]

4. Does your conclusion in (3) change if you instead assume that Ocean Carriers operates the capesize for the full life of 25 years before selling it for scrap value (grown by inflation)?

Assumptions on Tax Rates:

For questions (3) and (4) make two different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to a 35% corporate taxation rate. Second, repeat the same exercise assuming that Ocean Carriers...
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