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Ocean Carriers Recommendations and Analysis

Essay by   •  January 25, 2012  •  Case Study  •  403 Words (2 Pages)  •  3,098 Views

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We have carefully reviewed and analyzed the proposal for Ocean Carriers to lease a ship for a three-year period, beginning in early 2003. Our extensive analysis included considering the cash flows over the lifetime of this investment. We concluded that based on the expected future cash flows of this project the opportunity to take on the contract would not be advantageous for Ocean Carriers.

We first considered the future expectations of the spot and daily hire rates. These rates are both driven by the supply and demand of the market. We expect that the spot hire rates will decrease in the next year, and will continue to decline in 2002, with a possible increase in 2003. This decision was based on the fact that there is not going to be an increase in demand for imports of iron ore and coal over the next two years, and there will be an increase of 63 vessels into the market. Additionally, we also anticipate the average daily hire rates will continue to decline until 2003. This forecast was provided by a shipping-industry consulting firm based on future expectations of iron ore shipments and percent of growth. As a result, Ocean Carriers' cash flows over the next 2 years will decline.

Another concerning factor in taking on this contract is the fact that the net present value calculated based a various options continues to be negative. As a basis for comparing possible future opportunities, we first considered the present value of the cost of the new vessel. This was done by discounting the required payments for the initial cost of the carrier by 9% over the next three years. The result of this calculation determined that the present value of the vessel is $33,738,397. (Table 1.0: Present Value of new vessel)

Based on Ocean Carriers' policy to sell carriers for scrap after 15 years our first assumption was that this carrier will be sold for scrap at the end of 2017. To review the impact this would have on Ocean Carriers we constructed a free cash flow calculation. We used this calculation to determine the impact on Ocean Carrier's available cash, since earnings do not represent the real profits needed to do activities. The cash flows were calculated by considering the depreciation of the carrier, capital expenditures, changes in net working capital and the after tax proceeds from the sale of the equipment. The full calculation is shown below.

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