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Ocean Carriers

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by

Xiao Luo

on 24 September 2013

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Transcript of Ocean Carriers

Ocean Carriers

Background of Ocean Carrier
Shipping company
Offices in New York and Hong Kong
Operates capesize dry bulk carrier
Factors in calculating Earnings After Tax
Revenues (Rates decrease, repair days increase)
Operating Expenses (adjusted for inflation)
Depreciation & Special survey expenses (Straight line)


Revenue – Operating Expenses – Depreciation = EBIT
(then adjust for taxes to get EAT)
Factors in calculating yearly Cash Flows
Depreciation (non-cash expense)
Capital Expenditure (out of pocket expense)
Change in Net Working Capital
After-tax proceeds (at the end of period)

EAT + Depreciation – Capital Expenditure – Change in NWC + After tax proceeds = Cash flows
Invest in The US
Programs in the US have both negative NPV and less IRR. 25 years program is better than 15 years program, but it is still a bad option to invest in the US.
Invest in Hong Kong
Hong Kong has better NPV and IRR than the US due to no taxes, but 15 years program still has negative NPV and unsatisfied IRR. However, the 25 years program in Hong Kong has positive NPV and highest IRR.
Net Present Value (NPV)
Take cash flows each year and discount to get the present value of all future expected revenues.
If positive NPV then accept project , if negative NPV then decline.
If the project has a positive NPV then we can assume it’s IRR will be higher than the required rate of return.
Recommendation
25 Years in Hong Kong

Only one has positive NPV and IRR higher than require return rate.


Problem of the company
Whether they accept the new contract and purchase a new carrier or not?
Four option for the project
Investment in U.S. for 25 years
Investment in U.S. for 15 years
Investment in H.K. for 25 years
Investment in H.K. for 15 years
What will we Analyze
Analyze how our excel is working
Analyze investment in U.S. for 25 years and 15 years
Analyze investment in H.K. for 25 years and 15 years
Recommendation
15 Years in the US
NPV is
$-7,820,556.20
IRR is 5.22%

Negative NPV and IRR lower than require return rate(9%).
25 Years in the US
NPV is
$-6,850,065.00
IRR is 6.15%

Better NPV and IRR than 15 years. However, NPV is still negative.
The Difference Between 15 and 25
No matter which period above, the NPV is negative, and IRR is less than 9%,
which is the cost of capital to build this ship.
15 Years in Hong Kong
NPV is
$-1,267,778.09
IRR is 8.37%

Negative NPV and IRR lower than require return rate(9%).
25 Years in Hong Kong
NPV is $1,1016,003.69
IRR is 9.42%

NPV become positive and the IRR is higher than require return rate (9%).
The Difference Between 15 and 25
Even though 15 years program in Hong Kong has negative NPV and unsatisfied IRR due to depreciation, 25 years program has positive NPV and IRR which is higher than require return rate.
25 Years in the US
Highest negative NPV due to taxes
15 Years in Hong Kong
Negative NPV due to depreciation expense

15 Years in the US
Negative NPV and lowest IRR due
to depreciation expense

Xin Li
Lindsey Mitchell
Chunlei Zhang
Xiao Luo
Ziwei Jiang

Group Member:
Full transcript