The intent of this study is to measure whether Ocean Carriers Inc. should instantly committee a new capesize bearer that would be $ 39 million. and would be completed two old ages therefore. in order to finalise a rental of the ship for a three-year period with a possible charterer in really good religion. The contrasting revenue enhancement ordinances between the two states where the company locates its office. and the different cost-benefit fortunes under different length of clip in service are considered in the analysis. Taking all available information into consideration. we extremely recommend that the company should buy the new capesize bearer. hold it registered under the Hong Kong office. and put it on a strategy for a 25-year service. Industry Prospects
Capesize bearers are chiefly used to transport Fe ore and coal worldwide. The day-to-day hire rates are hence determined by the entire exports of Fe ore and coal. the distance between the exporting states and the finishs. and the fleet size of capesizes in service. Harmonizing to the market tendencies. in the following few old ages. Australian production in Fe ore is expected to be strong and Indian Fe ore exports are expected to take off. However. imports of Fe ore and coal are expected to be dead in following two old ages.
Therefore. entire exports of Fe ore and coal will be level in the coming two old ages. and will lift unusually in the undermentioned few old ages. Besides. as East Asia states absorb the largest part of the Fe ore imports. the connection of India to the Fe ore exporting won’t significantly increase travel distance because Australia is about the same distance off by H2O.
Furthermore. in 2001 and 2002. 63 and 33 new capesize vass would be delivered adding up to about 17 % of entire capesizes presently in service. Consequently. in the first two old ages. the supply of capesizes would be greater than the demand. the day-to-day hire rates are expected to diminish. But in the mid-to-long tally. the day-to-day hire rates are expected to increase continuously. Grosss and Costss – Intuitions
Before traveling into the Numberss. we want to discourse some intuitions of this undertaking that support the determination of buying the capesize. First. the increasing mid-to-long tally daily engage rates will supply footing for promising future hard currency flows. Second. although the day-to-day hire rate for the first two old ages are expected to be low. the charterer had already offered a rate higher than expected to counterbalance the company. Third. a great part of the outgos come from the readying for particular studies which should be renewed every five old ages if the ship needs to remain in the concern. The high escalation of costs between the 2nd and 3rd studies. and the 4th and 5th studies. indicates that maximal net present value of the undertaking would be achieved when the bearer serves for either 15 old ages or 25 old ages. Free Cash Flows
In this portion. we will discourse the elaborate Numberss. Some premises are made based on the economic mentality and company features when ciphering free hard currency flows. We assume that rising prices rate is 3 % per one-year. and that operation cost would increase 1 % above rising prices rate per one-year. We assume that price reduction rate is 9 % . and will discourse the impact of a rate alteration subsequently. Provided that the scraping value is estimated to be $ 5 million at the terminal of the 15th twelvemonth. we estimate that the value would diminish to $ 4 million due to more wear in the steel. Please refer to Exhibits 1 to 4 for the computations of estimated free hard currency flows and NPVs.
We can see that if the company chooses to buy the capesize. hold it registered in Hong Kong alternatively of USA. and runs it for 25 old ages. the NPV will be the highest compared to other options. Besides. the Hong Kong option ( have the vas registered in Hong Kong ) dominates the USA option ( have the vas registered in USA ) because no revenue enhancement is required in Hong Kong in these operations. Besides. the 25-year option dominates the 15-year option because. even if the bit value is reduced to zero after 25 old ages. the NPVs for options that keep the capesize for 25 old ages are still higher than for 15 old ages. Sensitivity Analysis
In the above computations for the NPVs. we assume discount rate to be 9 % . If the price reduction rate is higher. the NPVs for the undertakings will be reduced because the benefits from entering depreciation and revenue enhancement deferring will
addition. For illustration. we found that the USA-25-year option will bring forth a positive NPV if the price reduction rate is lowered to 6. 67 % . However. even if the price reduction rate is every bit low as 0. 1 % . the HK option still dominates the US option. and the 25-year option still dominates the 15-year option. Decision
To sum up. if Ocean Carriers Inc. purchase a $ 39 million capesize bearer instantly. registry it in Hong Kong. subscribe the three-year contract with the charterer. and maintain the vas in concern for 25 old ages. based on appraisals. it would get the largest possible NPV of $ 3. 89 million on the undertaking.