Ocean Carrier Case Study

INDEX

Case Background··························3 Dilemma································3 Scenarios under different tax rates and years ····························3 Alternative································5 Decision summary··························5 Appendix

Ocean Carrier Case Study * Case Background

Mary Linn of Ocean Carriers is evaluating the purchase of a new capesize carrier for a 3-year lease proposed by a motivated customer. The leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s needs. In addition, the proposed contract with the customer is only for three years. Therefore, after three years, the
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The first scenario assumes that Ocean Carriers is a U.S. based firm subject to a 35% corporate income tax. Under this scenario, the ship depreciates straight-line over 25 years and is sold, after 15 years, for an after-tax value of $385,831.92. In this case, the NPV is calculated at -$5,781,968.64.

If this project is operated by the office in New York, the company would be subject to a 35% corporate income tax. Under this circumstance, regardless of whether Ocean Carriers decided to operate the vessel for 15 years or 25 years, neither option would result in a positive NPV. The NPV at year 2017 would be $-5,781,968.64; the NPV at year 2027 is calculated as $-4,666,724.23. As a result, Linn would definitely make neither investment.

Assuming Ocean Carriers has no tax burden if the project operates in Hong Kong, the NPV after 15 years and after 25 years is positive. However, operating the vessel for 25 years would have a NPV of $3,780,965.33, which is almost three times larger than the NPV after 15 years, $1,339,629.17. Thus, Linn could make a decision to buy the new ship and to operate the vessel as long as possible.

The second scenario supposes that Ocean Carriers holds the ship for 25 years. The same tax rate assumptions used in the first scenario are

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