Ocean carrier Essay

The purpose of this report is to evaluate whether Ocean Carriers Inc. should immediately commission a new capesize carrier that would cost $39 million, and would be completed dickens years hence, in order to finalize a lease of the air for a three-year period with a potential charterer in very just faith. The contrasting levy regulations surrounded by the two countries where the company locates its office, and the different cost-benefit band under different length of time in service ar considered in the analysis. Taking all available information into consideration, we highly preach that the company should purchase the new capesize carrier, have it registered under the Hong Kong office, and put it on a scheme for a 25-year service. Industry ProspectsCapesize carriers are mainly employ to carry iron ore and coal worldwide. The daily hire rank are therefore determined by the total exports of iron 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 next few years, Australian production in iron ore is evaluate to be strong and Indian iron ore exports are expected to dumbfound 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 pull up stakes be flat in the coming two years, and will rise signally in the following few years. Besides, as East Asia countries absorb the largest package of the iron ore imports, the joining of India to the iron ore exporting wont significantly increase travel distance because Australia is almost the same distance onward by water.Moreover, in 2001 and 2002, 63 and 33 new capesize watercrafts would be delivered adding up to about 17% of total capesizes currently in service. Consequently, in the archetypal two years, the supply of capesizes would be greater than the demand, the daily hire grade are expected to decrease. But in the mid-to-long run, the daily hire browses are expected to increase continuously. Revenues and Costs IntuitionsBefore going into the numbers, we ask to discuss some intuitions of this project that support the decision of purchasing the capesize. First, the increase mid-to-long run daily hire rates will provide prat for promising future cash flows. Secondly, although the daily hire rate for the startle two years are expected to be low, the charterer had already offered a rate higher than expected to compensate the company. Thirdly, a great depute of the expenditures come from the preparation for special surveys which should be renewed every five years if the ship needs to stay in the business. The high escalation of be between the second and third surveys, and the fourth and fifth surveys, indicates that maximum terminal present value of the project would be achieved when the carrier serves for either 15 years or 25 years. Free Cash FlowsIn this part, we will discuss the detai led numbers. Some assumptions are made based on the economic outlook and company characteristics when calculating save cash flows. We choose that inflation rate is 3% per annual, and that operation cost would increase 1% above inflation rate per annual. We assume that discount rate is 9%, and will discuss the impact of a rate change later. Provided that the dough value is estimated to be $5 million at the end of the 15th year, we estimate that the value would decrease to $4 million due to to a greater extent wear in the steel. Please refer to Exhibits 1 to 4 for the calculations of estimated free cash flows and NPVs.We can see that if the company chooses to purchase the capesize, have it registered in Hong Kong instead of USA, and runs it for 25 years, the NPV will be the highest compared to other alternatives. Besides, the Hong Kong picking (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 act value is reduced to zero after 25 years, the NPVs for options that solemnize the capesize for 25 years are still higher than for 15 years. Sensitivity compendiumIn 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 dispraise and tax deferring willincrease. For example, we found that the USA-25-year option will produce a positive 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 gain ground the largest possible NPV of $3.89 million on the project.