Ocean Carriers Case Report Essay

1447 Words Jun 26th, 2012 6 Pages
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
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If the carrier is sold after 15 years, the after-tax scrap value will be $4,367,728. This value was found by taking the known scrap value at year 15 of $5,000,000 and using the inflation rate to determine the scrap value in year 25. With this, the net present value for Ocean Carriers after 25 years will be –$6,872,291.

Scenario 1B: Purchase carrier at 0% tax rate. If the boat were to be commissioned in Hong Kong, where there is 0% corporate income tax, the value of the scrap would become $6,719,582 and the NPV after 25 years will be $977,267.

Both scenarios are summarized in Table 1.

Since scenario 1 has a negative NPV, we recommend Ocean Carriers to not invest if there is a 35% tax rate in the US. In scenario 2, where the ship is built in HK with a 0% tax rate, then we recommend that Ocean Carrier invest in the ship. This analysis shows that working the ship at a 35% tax rate will not yield a profit on the investment even 25 years into the future, given the increasing costs of survey preparation and the diminishing number of days that the ship is actually able to make money and be commissioned.

Scenario 2: Operate carrier for 15 years and scrap or sell. Scenario 2A: Operate carrier for 15 years and scrap. Assume a 0% tax rate. Based on a PV analysis where the ship is decommissioned at year

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