We expect the daily hire rates to increase from 2001 to 2002, but then to decrease overall in the long term based on the assessment of the consulting firm. The consulting firm based their forecast on higher demand in iron ore shipments. They claim demand in iron ore shipments has historically shown a strong correlation with charter rates, and we believe this makes sense. Vessel size, distance of route, and demand for ore/coal are drivers of daily rates. Per the case, technological developments in ship construction play a role in capacity, as newer ships are bigger, faster, and more fuel efficient, increasing the overall shipping capacity of a fleet. Accordingly the long-term decline in daily hire rates makes sense because technology will continue to enable increased capacity, elongate the useful life of each ship, and the enable the relatively young fleet to last longer than ever before.
The cost of a new vessel is $37,095,400 (39,000+39,000*1.03+31,200,000*1.03^2); this figure represents taking the cost of the ship and bringing each of the payments into the dollar value at the time of the decision. By discounting the installments, we realize an effective 5% ((37,095,400 – 39,000,000)/ 39,000,000) deduction from the price of the ship if Linn sets aside the present value amount today.
Ms. Linn should not make the investment on the ship to secure the lease agreement. The present value of future revenue streams over 15 years total $23,980,255. By netting the present value of the investment, Linn will incur a loss of over $13 million today. The reason is because of the diminishing marginal return over 15 years as result of high ship operations, depreciation and maintenance. In the final year, these expenses make up 80% of her revenue before taxes. Additionally, the $5 million received from scrapping the ship 15 years in the future is only worth $3 million today. Net loss is still about $10 million.
If Ocean Carriers sells the capsize in the...
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