Assume that Ocean Carriers uses a discount rate of 9%. Your case analysis must address the following specific questions:
1. What factors drive average daily hire rates? Do you expect daily spot hire rates to increase or decrease next year?
2. Should Ms. Linn purchase the $39 million capesize? (NOTE: the answer will depend on your answer to Q3 below.) Evaluate the impact of tax rate on the decision by evaluating two different scenarios:
(a) Ocean Carriers is a U.S. firm subject to 35% taxation.
(b) Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong.
3. What do you think of the company’s policy of not operation ships over 15 years old? Based on your analysis, should the firm scrap the new ship at 15 years of age or continue operating it till age 25? Your analysis of Q2 should also factor in firm’s “optimal” decision when the ship is 15 years old.
Daily hire rates are determined by supply and demand. The demand for capesizes is determined by
The world economy, especially its basic industries. Strong economy increases production and demand for iron ore and coal. Over 85% of the cargo carried by capesizes is these two products.
Changes in trade patterns. For example, if a Western European country decided to switch its supply of iron ore from the United States to Australia, the demand for capesizes would increase since the distance between Europe and Australia is greater than the distance between Western Europe and the United States.
Age of capesizes. A younger vessel could demand a daily premium, and an older vessel could demand a daily discount. For example, new ships earned a 15% premium in daily hire rates relative to the industry