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Ocean Carriers Group 4
Transcript of Ocean Carriers Group 4
Ocean Carriers Inc., a shipping company with offices in New York and Hong Kong, owned and operated capesize dry bulk carriers that mainly carried iron ore worldwide.
The manager was evaluating a proposed lease of a ship for a three-year period, beginning in early 2003.
No ship in Ocean Carrier’s current fleet met the customer’s requirements
Objective: To evaluate whether the company should
launch the project of new capesize carrier
designed by Péter Puklus for Prezi
1. Assumption about the risk of the charterer
In this case, we consider the risk that the charterer would stop paying before the end of the contract or terminate the contract early is 0.
2. Assumption about Cost of capital
According to the average historical data of the cost of capital of the capesize dry bulk industry, we assume that number of the ocean carrier is 9%.
3. Assumption on the special survey every five year
Every survey is made on the end of the year. If the vessel is demolished or sold in year 2017or 2022 or 2027, it happened before the special survey.
The forecasted trend about daily spot hire rate in 2002
According to the information provided by Exhibit 3, Exhibit 5 and Exhibit 6, we use two ways to analyze whether the daily spot rate will increase or decrease next year. Basically, these two ways are based on analysis of the supply of vessels and the demand of Iron ore vessel shipments, but the methods to calculate the fleet size are different.
evaluate the purchasing of capesize
Group 4: Wei huang
Cost of capital
maximum and minimum of the prediction of NPV:
Under taxes of 35% in USA, the NPV may fluctuate from -$9720936 to $471896, and under no tax condition, the NPV may fluctuate from -$2910963 to $9588200.
1.Define the objective
2.Find out all the assumptions about calculation of NPV
3.Predict the trend about daily spot hire rate in 2002 based on the analysis of supply and demand.
4.Characterize the long-term prospects of the capsize dry bulk industry
5.Evaluate the factors that drive average hire rate
6.Calculate NPV of the project under different tax assumptions
8.Evaluate the company’s policy of not operating ships over 15 years old
4. Assumption on the scrap value
The scrap value was 5 million when the vessel was used only 15 years. If the vessel is used more than 15 years, the scrap value is decreased on a straight-line basis and equal to 0 at the 25th year.
5. The approach to calculate the OCF
We use the bottom-up approach to calculate the OCF
6. Assumption on the tax
We make 2 different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted Hong Kong.
7. Assumption on the days of 1 year
We assume that one year is equal to 365 days.
8. The assumption on the daily hire rate
We assume that after 2005, the vessel can be operated at the daily hire rate as same as the rate at that time.
9. Assumption on the cost
For a new ship coming on line in early 2003, operating costs were expected to initially average $4,000 per day, and to increase annually at a rate of 1% above inflation. The expected rate of inflation was 3%.
The fleet size at the end of 2002 could be calculated:
612 + (612-552)*33/63=643(millions of tons)
This fact will result the decrease
of daily spot hire rate in 2002.
The every year’s changed number of fleet size from 1997 to 2001E.
So the fleet size at the end of 2002 could be calculated:
612+18=630(millions of tons)
The growth rate of fleet size is also greater than that of
iron ore vessel shipments. This result also indicates that the daily spot hire rate will decrease in 2002.
The analysis of the long-term prospects of the capsize dry bulk industry
When we analyze the long-term prospects, there are three factors we need to consider: the economy, the relationship of demand and supply, and the age category of the capsize fleet.
Then we also need to consider about the age
category of the capsize fleet on the exhibit 2
Conclude the above three factors, we think that the
long-term prospects of the capesize
dry bulk industry is not optimistic.
The factors drive average hire rates
The demand factors:
1 the grand world economic condition and the supplies in basic industry
2 the age of the ship
3 the size of capesize
4 trade barriers set up by the import governments and export
restrictions set up by the export government
5 competitors’ capability to attract the customers
6 customers' expectation
1 the expectation of the price by suppliers
2 the cost of shipping
3 the technology breakthroughs in making capesize
4 the hire rates of other kinds of vessels
The supply factors:
Valuation of the 15-year policy
The estimated future operation revenue in 15 years
In US：take taxes into account
NPV & IRR
with 35% tax
Ms Linn should not purchase the capesize
NPV & IRR
Ms Linn should purchase the $39m capesize
In HongKong：without tax