Ocean Carriers Essay

Decent Essays
(a) Statement of Problem. Ocean Carriers is evaluating a proposed three year lease of a ship. Currently, no ships in Ocean Carrier's fleet meet the requirements of the customer. Since the new ship requires an investment of $39 million, Mary Linn, the Vice President of Finance for Ocean Carriers, needs to evaluate the proposal's NPV and determine whether or not to accept the proposal by considering expected cash flows, tax implications, and future market conditions. (b) Statement of Facts and Assumptions. In our analysis, we assumed that the ship was sold after 15 and 25 years, with and without tax. In both sets of calculations, the ship had a salvage value of $5 million for the sale of the steel to the demolition…show more content…
Therefore, when shipments decrease, the spot rate decreases substantially with demand while the charter rate is contracted and remains steady. In addition, the difference in the current spot rates and the 3-year charter rates can be explained jointly by the anticipated increase in shipping and decrease in average age of ships. In regards to the proposal, Ms Lin should not purchase the $39 million ship or accept the project unless the company is operating in a tax free environment. Coupled with the high tax rate of 35%, the initial $39 million purchase of the new ship is too much of a financial burden for Ocean Carriers since it's never fully recovered by expected future revenue. The NPV from operating the ship for 15 years with tax is negative $5,483,213 and negative $4,494,769 for 25 years of operation with tax. However, since the NPV is positive for both 15 years and 25 years without tax, at $1,541,527 and $3,718,714, Ms. Lin should accept the project and purchase the ship if operating in a tax free environment. The company should not keep the current operating policy of 15 years. Though the NPV is still negative, an increased operating period to 25 instead of 15 years increases NPV by approximately $1 million, indicating there is a greater benefit to operating the ship for a longer period. (d)
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