Money Talks
Group Name:
Group Members:
Eylul GUVEN (Class 21, 1646553) 1646553) , Irem ANNAK (Class 16, 1645027) 1645027)
Ocean Carriers EXECUTIVE SUMMARY Ocean Carriers is a shipping company, which has offices in New York and Hong Kong. They operate capsize dry bulk carriers and carry iron ore around the world. As the vice president of the company, Mary LINN is considering a new capsize lease proposal by a customer for a 3-year period beginning in early earl y 2003. The company needs to decide deci de whether the proposal proposa l is profitable or not. In order to do so there are factors that needed to be considered. The important ones are the profitability driven by hire rates, long term expectations of the industry, tax considerations and company policies. The most beneficial way wa y for Ocean Carriers is that to operate in Hong Kong due to income tax exemption. For the long-term profitability a revision of the company policies is needed. SUMMARY OF FACTS It is a dry bulk carrying industry, which ships iron and coal. As a company policy they are not operating vessels older than 15 years. Because of high cost regulations, if the vessel is older than 15 years they either sell it to second hand market or scrap. For the new delivery capsize, their initial plant investment is 39M $. They are making makin g the 10% of the payment immediately, immediatel y, 10% due in a year’s time and the rest will be paid on delivery time. They have a net working capital investment
of 500,000 $ with a rising inflation. After 15 years, in 2017, they appoint a price of 5,000$ as selling price for vessel. Their daily operating costs is 4,000 $ with a rising inflation of 1%. Maintenance costs are depreciated on a straight line basis for each 5 year time period starting from 2003; the amounts are 300,000$ 350,000$ 750,000$ 850,000$ respectively and at the end of 2007 the amount reaches a level of 1,250,000$. 1
They are in negotiation with a charterer for an offer trade of 20,000$ daily with an annual rising with 200 $ per day. The expected rate of inflation is 3% and the discount factor is 9%. STATEMENT OF PROBLEM The main problem of the case is whether to invest 39M $ in carrier or not. To resolve this ambiguity, daily spot rates needed to be revised with the factors influencing them. Also the tax exemption in Hong Kong and 35% tax in US needed to be considered. To conclude, 15-year policy of the company should be revised as well in order to decide whether it is profitable or not. ANALYSIS For the analysis of market conditions we need to consider supply and demand in the market. Trade patterns, state of the world economy and the market condition co ndition of iron ore and coal co al are the factors that influence demand. Ocean Carriers has the 85% of the world cargo shipment. Total number of vessels is equal to number of vessels in service last year plus new ships delivered minus scrapping and sinking. As a consequence, the number of ships ordered is based on future market expectations. The fact that newer ships have increased size and efficiency, they receive a premium in market which affect scrapping decisions. Supply is dependent on age and size of vessels, cost of repair and maintenance. Supply and demand specifies daily spot rates. Daily hire rates will decrease next year due to increase in fleet size and decrease in vessel shipment. When NPV is calculated in USA with 35% tax and in Hong Kong without any tax; implementing the project in USA is unfavourable for company because of a negative NPV of 6,348,815. Conversely in Hong Kong the value is 1,721,206 which leads a better position for Ocean Carriers. If we calculate the NPV values for 25 years we can see that NPV value for year 25 is higher than NPV of year 15. For the company, it will be better off to keep the ships operating operat ing rather than
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scrapping. On the other hand, 15-year policy is only reasonable because of excessive maintenance costs, preventing discounts on ships because of their age and efficiency of the newly bought ships. RECOMMENDATIONS With the help of the calculations, if the company decides to scrap their ships after 15 years they should invest only in Hong Kong because of tax t ax exemption compared to USA’s 35% tax, which
leads an unprofitable investment. Also; with regard to the long-term profits of the industry, the NPV evaluations show that Ocean Carriers needs to revise their 15 years of operating policy. EXHIBITS Exhibit A: NPV Graph for USA & Hong Kong
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Exhibit B: Calculations of USA for 15 years
Exhibit C: Calculations of USA for 25 years
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Exhibit D: Hong Kong in 15 years
Exhibit E: Hong Kong in 25 years
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