Ocean Carriers Case Report

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Ocean Carriers Case Report

Executive Summary
Ocean Carriers is evaluating a proposed lease for a ship over three years starting in 2003. Currently, Ocean Carriers does not have any ships that are available to meet this customer demand. This report will assist VP of Finance Mary Lynn to make a decision on whether or not to commission a new carrier and how long to hold on to this asset.

Based off a financial analysis using the data Ocean Carriers has provided, the final recommendation is that Ocean Carriers should build a new ship out of its Hong Kong base where the tax rate is 0% and scrap the ship when it is 25 years old. Following this recommendation would be the only scenario where Ocean Carriers sees a positive net present value of the investment—the investment would yield a NPV after 25 years of $977,267. Scrapping at any year before or after 25 years would be non-optimal. Scrapping before year 20 would result in a negative NPV and scrapping after year 25 would not yield as high as the year 25 NPV. Thus, Ocean Carriers should invest in the new ship only if it plans on commissioning the ship for a minimum of 20 years.

Assumptions & Problem Statement
To begin our analysis, we made several assumptions. We expect a 9% discount rate at 3% inflation for 365 days per year. The working capital of the firm will grow at this inflation rate and cash flows will be discounted at 9%. From these 365 days in a year do we calculate the actual days the ship is available for hire and we assume in these calculations that every day that is ship is available for hire, it will be used. Thus, the only days where the ship is not commissioned is the days of maintenance as defined in the problem description, and the ship will incur operating costs 365 days per year.

The scope of this analysis will attempt to determine the present value of a building a ship for $39 million and the anticipated life and salvage value of the ship.

Analysis
Scenario 1: Operate...
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