Analysis Ocean Carriers Case Study
Summary Answer to Problem 1
In considering whether Ocean Carriers should purchase the new capsize carrier for the potential customer, we completed a NPV analysis of the new vessel as follows: We assumed the first payment would be made on December 31, 2000. For the revenue that could be expected we utilized the given expected daily hire rate, which best represents Ocean Carriers future cash flows. We came to the OPREVE multiplying the annual operating days (357 in years 1 to 5 ; 353 in years 6 to 10 etc.) by the expected daily hire rate. The daily operating costs for the vessel were provided for year 1 at $4,000. For years 2-25, we first converted the real into the nominal growth rate of 4.03% and then used it to work out the daily operating costs. The OPEXP we calculated by multiplying the daily operating costs by 365 days (according to the case guidelines costs incurred 365 days a year). Survey costs were calculated using the data in the case. We assumed that the survey will be run at the end of 2007, 2012, 2017 and 2022 and therefore the depreciation of the survey costs would start the subsequent year. Also, we did not consider the survey costs for the last year in the amount of $ 1,250,000, since this investment would be futile given the scrapping in the same year. According to the instructions, the survey costs were depreciated using straight-line depreciation over the life of the survey. Depreciation of the vessel was also calculated using straight-line depreciation over 25 years. We calculated taxes at the given tax rate of 35% and 0% respectively. We assumed the initial outlay of networking capital would take place in year 2, thus at the same time of taking possession of the vessel. All net working capital will be liquidated at the end of year 25, just before scrapping the vessel. The CAPEX after Tax Scrap Value was computed by deducting the applicable tax rate of 35% or 0% from the scrap value at year 26. Free...
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