Guide for Case Analyses "ocean Carriers"

Guide for Case Analyses "Ocean Carriers"

Objectives of case:

The key objective is to develop an understanding of how discounted cash flow analysis can be used to make investment and corporate policy decisions.

1. Determine the value and net present value of a real assets;

2. Distinguishing between book value and market value;

3. Identifying and forecasting incremental expected cash flows, including initial and ongoing capital expenditures, investment in net working capital, and proceeds from asset sales;

4. Understanding the tax consequences of depreciation and asset sales;

5. Evaluating whether a policy of reselling or scrapping a vessel is most valuable.

Guideline questions to cover in the case analysis:

1. What is the key issue addressed in this case? Or in other words, what is the major decision to be made by Ocean Carriers?

2. Do you expect daily spot hire rates to increase or decrease next year?

3. What factors drive average daily hire rates?

4. How would you characterize the long-term prospects of the capsize dry bulk industry?

5. Help Ms. Linn to make the purchase decision on the $39M capsize: should she buy it? Make two 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.

6. What do you think of the company's policy of not operating ships over 15 years old?

7. Any other issues that you would like to discuss about after studying the case?

Information that you might need to perform and case analyses:

1. Make the following assumptions when you carry out the cash flow forecasting (your Exhibit is also making the same assumptions):

Inflation rate is 3%;

Discount rate is 9%;

Corporate tax in the scenario of US firm is 35%;

Vessel is scrapped at the end of year 25;

NWC grows with inflation (case fact) which is 3%;

Vessel does not undergo the special survey in year 25, so the final CAPX is not requited;