Ocean Carriers

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The Charles H. Kellstadt Graduate School of Business
DePaul University

FIN 555: Financial Management
Summer 2013

Thomas M Carroll Phone: 312.362.8826
Office: Loop Campus tcarroll@depaul.edu

Case Study Questions
Capital Budgeting In Practice
Ocean Carriers

These questions relate to the Ocean Carriers case in your course packet. You can find the data for this case on the course website in a spreadsheet named: Ocean Carriers Exhibits.xls.

This case provides the opportunity to make a capital budgeting decision by using discounted cash flow analysis to make an investment and corporate policy decision. Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year
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How much could Ocean Carriers sell the capesize for on the second hand market (as opposed to selling it for scrap) after 15 years? Hint: Use Solver Tool in EXCEL

Assumptions on Tax Rates:

For questions (3.), (4.) and (5.) make 2 different assumptions. First, assume that Ocean Carriers is a U.S. established firm subject to 35% corporate taxation rate. Secondly, repeat the same exercise assuming that Ocean Carriers is located in Hong Kong or Bahamas , where owners of Hong Kong or Bahamas 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. How are your results affected? What do you conclude? –You might find it useful to relate this question to movies. What flag do carry vessels have? Why?

Useful Hints:

a. You should assume that operating costs will grow annually at 1% in real terms.

b. If Ocean Carriers purchase the ship then working capital will increase to 500,000 at the end of 2002. If the ship is sold in the second hand market then from that time onwards the buyer will have the same working capital requirements that Ocean Carriers would have had if the ship had not been sold.

c. Assume that Ocean Carriers has sufficiently high taxable income in each year so that any tax shields can be used immediately. You should also make this assumption for any firm that buys the ship in the second hand market.

d. Ocean Carriers uses a 9% discount

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