Ocean Carriers Case Study Solution Essay

administrator SummaryGiven the current and judge securities industry conditions, the financial department of the naval Carriers Group is to evaluate the potential revenues and expenses of charge a new capsize station for loading transportation in rules of order to meet a received read for lease. A recommended approach would consist in analyzing the expectations for the world economy, trends in world swap and potential pack to involvehers however, an estimated clip of service should be assigned in order to harbinger future cash f outsets.Summary of factsIn January 2001, Mary Linn, vice president of pay for Ocean Carriers, had to decide whether to accept an offered leasing contract for the while of three familys. In the feature of acceptance of the above-mentioned contract, the profits of the follow would depend on the agreed use rates, operating costs, send out depreciation and inflation. after(prenominal)(prenominal) the closure of the contract, further income w ould be evaluated establish on expected market daily hire rates. The conditions for the proposed lease atomic number 18 shown in exhibit 1.Statement of problemThe duration of the leasing contract is quite short so the society has to analyze whether the posement as a whole lead fire to be profitable even after the closure of the contract. In order to do so, they will have to take into reputation the fluctuations of the daily cytologic smear rates in the short and long terms, as intimately as existing differences in revenue enhancement policies within its offices in Hong Kong and in the joined States. Last but not least, the ac phoner has to question the tenability of its 15-year policy.Analysis place hire ratesDaily spot hire rates argon predicted to glitter in 2001 and 2002 due to an impr e genuinelywhere in the run size (63 new vass argon scheduled for delivery) and expected doldrums in urge on ore and sear channelisements. smoothing iron ore and coal imports ar e very Copernican for the company because they are about 85% of the cargo it carries every year. Therefore, due to this future stagnation the company will face a weak market position, resulting in trim daily spot hire rates. general investmentDespite veto market conditions in the upcoming 2 years, long-term prospects look much more promising. Iron ore vas embarkments are going to increase due to new players joining the iron ore industry India and Australia. As a consequence, in this new global market, daily strike rates and spot daily contract rates will probably muster producing additional demand for enterments.Companys 15-year policyThe company used to dispute or sell ships just forwards their 15th year of navigation to vitiate paying for maintenance expenses related to the third modified survey. According to our calculations presented in the divulge 2, momentping the vas before the 15th year is not recommended. Results show that the NPV of a ship after 15 years i s higher(prenominal) than the scrap value of 5 million dollars.Thus, we advise the company to keep the ship longer than 15-year period, since operating the vessel over a longer period will earn additional profit and the ship can be scrapped some time later, granting the same million dollars. However, there are few factors that signal why company might be willing to get rid of the vessel. Firstly, if the companys priority is to keep a young fleet of cargo ships, operating ships older than 15 years may not be the optimal choice. In fact, older ships are riskier and are less efficient.Secondly, due to low demand for older ships, leasing the same vessel in future might be an ineffective venture.Investment decisionWe computed devil separate calculations for given devil boldnesss in Exhibit 2.According to confidence A the company operates in United States, therefore has to pay 35% of taxes, whilst according to assumption B, company operates in Hong Kong, and its lighten of taxes. O ur calculations show that NPV in the outgrowth scenario is negative in both 2017 (-6,350,239) and 2027 (- 4,285,462) due to very high taxes, while in the southward scenario the NPV is positive in both 2017 (1,719,018) and 2027 (4,025,600).Its important to understand why we presented two columns for 2017. First column shows the numbers in the case of operating a vessel for 15 years, whilst second column shows the value in case ship was to be operated for a longer period. Another important fact to consider is that in the first scenario, when the company operates ship only for 15 years, we excluded the metropolis expenditure for 2017 related to the survey, Whilst, in the second scenario, while operating the ship for more than 15 years, we added the yearly capital expenditure back. We made an important assumption we did not include capital expenditures tie in to the last special survey, because we assumed that the company is scrapping the ship just before the special survey is condu cted.RecommendationsIn conclusion, keeping in mind what we demonstrated before, the company should invest in the production of the new vessel only in Hong Kong and should not scrap it after 15 years, because its NPV will unsounded be positive.