In January 2001, Mary Linn, vice president of finance for Ocean Carriers, a shipping company with offices in New York and Hong Kong, was evaluating a proposed lease of a ship for a three-year period, beginning in early 2003. The customer was eager to finalize the contract to meet his own commitments and offered very attractive terms. No ship in Ocean Carrier's current fleet met the customer's requirements. Mary Linn, therefore, had to decide whether Ocean Carriers should immediately commission a new capsize carrier that would be completed two years hence and could be leased to the customer.
Investment Appraisal of New Capsize Vessel (cash flows in thousands of dollars)
Net Cash Flows
PV of Cash Flows
Net Present Value (NPV)
Net Working Capital
Ocean Carriers uses a 9% discount rate to evaluate its investment projects.
Do you expect daily spot hire rates to increase or decrease next year?
What factors drive average daily hire rates?
How would you characterize the long-term prospects of the capesize dry bulk industry?
Should Ms Linn purchase the $39M capesize? 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 from Hong Kong.
What do you think of the company’s policy of not operating ships over 15 years old?