Case Background··························3 Dilemma································3 Scenarios under different tax rates and years
····························3 Alternative································5 Decision summary··························5 Appendix
Ocean Carrier Case Study
* Case Background
Mary Linn of Ocean Carriers is evaluating the purchase of a new capesize carrier for a 3-year lease proposed by a motivated customer. The leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s needs. In addition, the proposed contract with the customer is only for three years. Therefore, after three years, the ship will have to be leased to other customers. On the other hand, considering a favorable forecast of Australian and Indian production, Linn is optimistic about the demand for capesize in the long run. * Dilemma
According to this case, it is Linn’s responsibility to decide if the future market and firm conditions warrant a considerable investment in the new ship. The net present value of the investment in the new capesize carrier must be estimated in order to make an educated decision. Linn is facing two simple choices: to buy a new capsize vessel for leasing or not buying it so as to maintain the company’s previous operating status. The following is an analysis of the NPV of the investment, based on multiple scenarios. The scenario that garners the greatest favorable NPV is the optimal choice. * Scenarios under different tax rates and years
Net present value are calculated based on given data including annual operating days, daily hire rates, daily operating costs calculated at 3% inflation and 9% discounted rate, net working capital growing at the inflation rate and the current capesize price and market value after 15 years, and a new ship would be depreciated on a straight-line basis over 25 years. If Linn fail to...