Ocean Carriers Inc. is a shipping company specializing in the operation of capsizes bulk dry carriers. In January 2001, the vice president of finance for Ocean Carriers was evaluating a contract proposal. In the proposed contract, Ocean Carriers would lease one ship to a client for a three year time frame. The customer would begin utilizing the ship in 2003. In 2001, Ocean Carriers did not have a ship that would meet the needs of this customer, and thus was considering purchasing a new capsize carrier to be leased to the customer. The vice president of finance for Ocean Carriers was also interested in looking at the corporate policy of scrapping a vessel after 15 years, even though such vessels have a product life of 25 years. Analysis
In considering whether Ocean Carriers should purchase the new capsize carrier for the potential customer, we completed a net present value analysis of the ship. We utilized the given expected daily hire rate to calculate the revenue that could be expected over the lifetime of this vessel. We chose to use the expected daily hire rate because it most accurately represented Ocean Carrier¡¦s future cash flows: the contract terms in years 1-3 once the vessel is complete, and then expected rates in years 4-25. We came to the annual daily hire revenue using the annual operating days over the life of the new vessel. The daily operating cost for the vessel was provided for year 2 at $4,000. For years 3-26, we increased the operating costs at 1% over the inflation rate of 3%, which we assumed would remain constant for the life of the vessel. Appendix A shows operating costs are incurred 365 days per year, leading to annual operating costs of $1,460,000 in year 2, and $1,518,400 in year 3. Survey costs were calculated using Ocean Carriers¡¦ data, and we continued the practice of not incurring the cost of surveys the year prior to the boat being scrapped. Thus, no survey preparation costs were incurred in year 25. The costs...
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