Ocean Carriers Assumptions and Methodology
Based on an NPV analysis considering multiple scenarios, Ocean Carriers should commission the construction of a new capesize carrier in the event they are operating with no corporate tax and chartering the ship for its entire 25 year life. Such is the recommendation assuming the forecasted hire rates and estimated costs are accurate over the long-term. However, if Ocean Carriers chooses to adhere to their policy of selling ships at market value after 15 years, they will incur a net loss on the investment regardless of whether operations are based in the United States or Japan. Future cash flows are based on given data including annual operating days, daily hire rates, daily operating costs calculated at 100 bps plus 3% inflation, net working capital growing at the inflation rate and the current capesize price and market value after 15 years. Cash flows were discounted at 9% and a top-down approach was used to derive the operating cash flows in every scenario. The first scenario assumes Ocean Carriers is a U.S. based firm subject to a 35% corporate income tax. The capesize depreciates straight-line over 5 years and is sold after 15 years at an after-tax salvage value of $3,250,000. In this case, the NPV is calculated at -$3,912,677.91. The next scenario assumes Ocean Carriers is not required to pay any taxes. Using the same depreciation method as in the first scenario and a net salvage value of $5,000,000, NPV is -$1,252,915.52. The difference between the first and second scenarios NPV is completely due to the increased net income that the Japanese firm experiences as a result of having no tax burden.
The third scenario assumes Ocean Carriers uses the Modified Accelerated Recovery System to depreciate the capesize over 20 years. The firm conducts business out of the U.S. and sells the capesize after 15 years. Such cash flows derive an NPV of -$7,229,176.50. Even though the firm...
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