Ocean Carriers Recommendations and Analysis
We have carefully reviewed and analyzed the proposal for Ocean Carriers to lease a ship for a three-year period, beginning in early 2003. Our extensive analysis included considering the cash flows over the lifetime of this investment. We concluded that based on the expected future cash flows of this project the opportunity to take on the contract would not be advantageous for Ocean Carriers. We first considered the future expectations of the spot and daily hire rates. These rates are both driven by the supply and demand of the market. We expect that the spot hire rates will decrease in the next year, and will continue to decline in 2002, with a possible increase in 2003. This decision was based on the fact that there is not going to be an increase in demand for imports of iron ore and coal over the next two years, and there will be an increase of 63 vessels into the market. Additionally, we also anticipate the average daily hire rates will continue to decline until 2003. This forecast was provided by a shipping-industry consulting firm based on future expectations of iron ore shipments and percent of growth. As a result, Ocean Carriers’ cash flows over the next 2 years will decline. Another concerning factor in taking on this contract is the fact that the net present value calculated based a various options continues to be negative. Our calculation was based on the assumption that during the lifetime of the carrier, it would be always under contract, and would generate revenue in accordance with the forecasted daily hire rates shown in Exhibit 6. In calculating all options, we construct a free cash flow, and used discount rate of 9% to calculate the net present value. We used this calculation to determine the impact on Ocean Carrier’s available cash, since earnings do not represent the real profits needed to do activities. As a basis for comparing possible future opportunities, we first considered the present value of...
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