Ocean carrier Essay

The scotch con heart and soulption of this report is to evaluate whether Ocean Carriers Inc. should at a time commission a newly capesize letter carrier that would cost $39 million, and would be immaculate two old age hence, in nine to finalize a lease of the ravish for a three-year period with a potence charterer in very good faith. The sepa mark tax regulations among the two countries where the keep family locates its office, and the polar cost-benefit circumstances under different length of time in benefit argon considered in the analysis. Taking all(a) available information into consideration, we highly advocate that the company should purchase the new capesize carrier, feature it registered under the Hong Kong office, and put it on a scheme for a 25-year service. Industry ProspectsCapesize carriers atomic number 18 mainly used to carry weight-lift ore and coal worldwide. The mundane subscribe to place atomic number 18 therefore determined by the total ex ports of branding squeeze ore and coal, the distance between the exporting countries and the destinations, and the fleet size of capesizes in service. According to the market trends, in the adjacent few years, Australian production in iron ore is judge to be noticeable and Indian iron ore exports are expected to take off. However, imports of iron ore and coal are expected to be stagnant in next two years.Therefore, total exports of iron ore and coal provide be mat in the coming two years, and leave alone rise remarkably in the undermentioned few years. Besides, as East Asia countries invite the largest portion of the iron ore imports, the joining of India to the iron ore exporting wont significantly adjoin travel distance because Australia is to the highest degree the same distance away by water.Moreover, in 2001 and 2002, 63 and 33 new capesize vass would be delivered adding up to about 17% of total capesizes currently in service. Consequently, in the first two years, the supply of capesizes would be enceinteer than the demand, the daily hire range are expected to decrease. But in the mid-to-long run, the daily hire sends are expected to increase continuously. R make upues and Costs Intuitions earlier going into the numbers, we want to discuss whatsoever intuitions of this project that support the decision of buying the capesize. First, the increasing mid-to-long run daily hire rates exit provide root word for promising future cash f paltrys. Secondly, although the daily hire rate for the first two years are expected to be low, the charterer had already offered a rate high than expected to compensate the company. Thirdly, a great portion of the expenditures come from the preparation for particular(prenominal) surveys which should be renewed every volt years if the ship needs to hang in in the business. The high escalation of costs between the second and third surveys, and the fourth and fifth part surveys, indicates that maximum net pr esent nourish of the project would be achieved when the carrier serves for all 15 years or 25 years. Free Cash FlowsIn this part, we will discuss the detailed numbers. Some assumptions are made base on the economic outlook and company characteristics when calculating redundant cash flows. We assume that inflation rate is 3% per annual, and that operation cost would increase 1% in a higher place inflation rate per annual. We assume that discount rate is 9%, and will discuss the impact of a rate change later. Provided that the challengee cling to is estimated to be $5 million at the end of the fifteenth year, we estimate that the value would decrease to $4 million imputable to more wear in the steel. enrapture refer to Exhibits 1 to 4 for the calculations of estimated expel cash flows and NPVs.We can see that if the company chooses to purchase the capesize, have it registered in Hong Kong rather of regular army, and runs it for 25 years, the NPV will be the highest compare d to former(a) alternatives. Besides, the Hong Kong selection (have the vessel registered in Hong Kong) dominates the USA option (have the vessel registered in USA) because no tax is required in Hong Kong in these operations. Also, the 25-year option dominates the 15-year option because, even if the scrap value is reduced to zero aft(prenominal) 25 years, the NPVs for options that keep the capesize for 25 years are still higher than for 15 years. Sensitivity AnalysisIn the above calculations for the NPVs, we assume discount rate to be 9%. If the discount rate is higher, the NPVs for the projects will be reduced because the benefits from recording disparagement and tax deferring willincrease. For example, we found that the USA-25-year option will produce a validatory NPV if the discount rate is lowered to 6.67%. However, even if the discount rate is as low as 0.1%, the HK option still dominates the US option, and the 25-year option still dominates the 15-year option. ConclusionTo sum up, if Ocean Carriers Inc. purchase a $39 million capesize carrier immediately, register it in Hong Kong, sign the three-year contract with the charterer, and keep the vessel in business for 25 years, based on estimations, it would acquire the largest possible NPV of $3.89 million on the project.