TABLE OF CONTENTS2
LIST OF FIGURES2
LIST OF TABLES2
2.NATURE OF BUSINESS MODEL4
3.KEY FINANCIAL ISSUES4
4.ALTERNATIVE INVESTMENTS & RISK MITIGATION STRATEGIES6
4.2Alternative 1: Resale of Ship after 15 years of Operation7 4.3Alternative 2: Leasing or buying a Second hand Ship and renovate it7 4.4Alternative 3: Partnering8
4.5Alternative 5: Actively take part in Spot Market trading8 5.RECOMMENDATIONS8
List of Figures
Figure 1: Cash flow comparison for 15 and 25 year term (NY)9 Figure 2: Cash flow comparison for 15 and 25 year term (HK)9 Figure 3: Revenue and Operating Expenses (HK)10
List of Tables
Table 1: List of Assumptions made for NPV analysis4
Table 2: List of Limitations on NPV Analysis.4
Table 3: Estimation of Resale value of Carrier @15th year7
1.1 Executive Summary
Ocean Carriers Inc. (OCI) is an International provider of Marine transportation services mainly focussing on Dry Bulk commodities mainly iron ore and coal. OCI has offices located in New York and Hongkong. One of OCI’s customer’s is keen in committing for a 3 year lease starting from 2003 for a large dry bulk Capesize carrier of capacity 180,000 DWT in order to fulfil its own interests. There is a potential opportunity for OCI to expand its current fleet with an addition of a large Capesize vessel. Most of OCI’s current fleet had been already leased, beginning from 2003. Looking at the feasibility and future market beyond 2006, it was very important for OCI to commit this deal immediately, since commissioning of a new ship will take at least 10 months and in order to secure this ship delivery on time, the Ship building must be finalized 2years in advance i.e., in 2001.
NPV analysis of the project investment was performed in order to make a firm decision, based on the estimated future cash flows that this opportunity could generate. After considering alternative investment opportunities and risk mitigation strategies it was found that it is a good opportunity to invest in commissioning of new ship, provided the Ship is registered in HK instead of NY. The analysis carried out based on certain assumptions, limitations and approach adopted are described in sections below throughout this document. 1.2 Scope
The scope of this study is based on the available information extracted from the case study “Ocean Carriers 9-202-027, Rev. April 18, 2002” and the guidelines provided by Dr. Fitzsimmons in enabling us to make acceptable assumptions.
Project investment decision is based on the NPV of the project carried out based on these assumptions, limitations described in sections below and available data from case study.
The table below lists all the assumptions that have been made in order to carry out the NPV analysis.
For all practical purposes 365 days in a year is considered. Thus Leap year concept is not used. A2.
16 days of ship maintenance is considered for Ship older than 10 years until 25 years. A3.
For ship is registered in HK the taxes on Profits is Zero. Whereas ship registered in New York the tax applicable on profits is 35%. A4.
A discount rate of 9% is used to calculate PV in both cases, i.e., ship is registered in US or HK A5.
As mentioned in the case study the expected rate of inflation is 3% A6.
The capital expenditure for the period at the end (i.e., case_1 for 25th year or case2 for 15th year) would not be done as at the end of this period the ship would be scrapped or sold in second hand market. A7.
The working capital would be all liquidated and OCI will be able to realize the total value. A8.
The given Salvage value at end of 15th year ($5millions), is retained same until...