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Memorandum To: CEO, Ocean Carriers Re: Ocean Carriers Capital Budgeting Mary Linn, Vice President of Finance, has been approached by a potential customer with a proposed lease of a ship for a three-year period, beginning in early 2003. The terms are very attractive but we currently do not have a ship that meets this customer’s needs. Ms. Linn has asked Group 4 to research three proposed scenarios to determine whether or not commissioning a new capesize carrier for this customer will be in the best interests of the company. The following are our findings and recommendations: Background Daily spot hire rates are expected to decrease over the next year because the iron ore shipments are expected to decrease while fleet …show more content…

Option 3: Sell the Carrier on the Second Hand Market After 15 Years If the company chooses to sell the carrier on the second hand market after 15 years, the selling price should be $11,343,760 (please see Table 5 for calculations). This selling price is equal to the NPV of the last ten years. (From 16th year to 25th year). A buyer would only can accept the selling price that makes their NPV positive. Because we assume that the buyer has the same daily hire rate, operating costs, depreciation, tax rate, and working capital requirements as Ocean Carrier we can also assume that the buyer’s NPV is same as the Ocean Carriers’ NPV of the last ten years. Another facet, from Ocean Carriers’ perspective, is that the selling price should be greater than the gain from continuing to operate the carrier. It should be noted that the zero time for computing the NPV is 15th year, not the first year, because the selling is happened in the end of the 15th year. For the same reason, the net working capital should also start from the 15th year. Attachments (10): Exhibit 1: Capital Expenditures Anticipated in Preparation for Special Surveys Exhibit 2: Capesize fleet by age category as of December 2000 Exhibit 3: Current order book for dry bulk capesizes by delivery date Exhibit 4: Daily hire rate adjustment factor for dry bulk capesizes based on age of vessel Exhibit 5: Worldwide iron ore vessel shipments, fleet size and average

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