Ocean Carriers

761 Words Aug 4th, 2012 4 Pages
Case 1: Ocean Carriers
We think that daily spot hire rate will likely decrease next year. There are two reasons. First, there are 63 new vessels scheduled for delivery in 2001 to increase the supply of vessel and only few old vessels need to be retired, while the demand will not increase because imports of iron ore and coal would remain stagnant over next two years. Second, exhibit 5 shows that avg. spot rate of 2000 was higher than the rate of previous years and avg. 3-yr charter rate. In addition, the market will seemingly go up after two years. Therefore, ship owners should hope to sign short-term contract through using lower daily spot hire rate rather than locking low daily high rate for a long period.
Average daily rates are
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The reason is that the NPV of U.S. company for the 15-year project is $-8,180,953.79(US15) and the NPV value of Hong Kong company is $-403,998.93(HK15). In both circumstances, the company would lose money by selling it at 15 years.
Constructing Free Cash Flows allows the calculation for NPV, which enables an even comparison of inflows and outflows of the competing projects. EBITDA does not take into account the Income Tax. Unlevered Net Income (ATCF) does not account for the separation of depreciation, capital expenditures, and changes in Net Working Capital.
If the company is incorporated in the U.S., the NPV will be $-7,836,500.07(US25) after 25 years and will be $-6,395,945.22(US30) after 30 years. Therefore, the U.S. company should not purchase the vessel. If the company is established in Hong Kong, the NPV will be $1,522,472.92(25HK) after 25 years and will be $3,402,293.81(30HK) after 30 years. Therefore the 30 years should be the optimal number of years to operate the carrier before scrapping it after 30 years. In this situation, if the 15-year-selling policy is changed, the company should buy the carrier. For years 26-30, we assume that average daily charter rate is increased by $200 per year. The expected daily hire rate is calculated by multiplying Avg. Daily Charter Rate by adjustment factor for hire rate of 65%.
If the buying second hand company was incorporated in the U.S., the most…

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