Essay --

Ocean Carriers Case Report Hunter Taylor Cases in Financial Management 2/25/2014 Executive Summary The Ocean Carriers brand is looking into the profitability and risk associated with purchasing a new capesize carrier for use in an initial three year lease. At the moment, Ocean Carriers does not have any boats capable of meeting the size requirements that the lessee needs in order to fill their obligations. My analysis of this case brought the conclusion that there is no viable way to project the NPV of this project out of the red, or anywhere close to where it needs to be considering the risk associated with the building, leasing, and maintenance of the boat. If any ship is to be built, which is not my overall suggestion, it should be built in Hong Kong where no tax rate is applied. This is the only situation where the NPV of the project is positive, yet by just the slightest of margins. The Ocean Carriers company is responsible for determining if these small margins and NPV are worth the risk associated with this project. Scrapping at any year before or after 25 years would be non-optimal. Although the NPV increases each projected year in each possible scenario, the life span of the carrier is not infinite, and the costs associated with running the ship past 25 years far negate the increase in NPV. Assumptions & Problem Statement As with any projection of future events, assumptions had to be made in order to make sensible estimations. I used an expected 9% discount rate at 3% inflation per year. The working cap of the firm will grow at this inflation rate and cash flows will be discounted at 9%. Analysis Scenario 1: Operate carrier for 25 years and scrap. This situation proved to be one of the least attractive options.... ...rease 15% Changing Cells: Hire Rate 20,000 21,000 22,000 23,000 Hire Rate 20,200 21,200 22,200 23,200 Hire Rate 20,400 21,400 22,400 23,400 Result Cells: NPV 422,697 1,183,299 1,943,902 2,704,505 Conclusion If any ship is to be built, which is not my overall suggestion; it should be built in Hong Kong where no tax rate is applied. This is the only situation where the NPV of the project is positive, yet by just the slightest of margins. Following this recommendation would be the only scenario where Ocean Carriers sees a positive net present value of the investment. Aside from this somewhat formidable option, it is my suggestion that Ocean Carriers neglect this project.