Given the current and expected market conditions. the fiscal section of the Ocean Carriers Group is to measure the possible grosss and disbursals of commissioning a new capsize ship for lading transit in order to run into a standard demand for rental. A recommended attack would dwell in analysing the outlooks for the universe economic system. tendencies in universe trade and possible contracts ; nevertheless. an estimated clip of service should be assigned in order to foretell future hard currency flows.
Summary of facts
In January 2001. Mary Linn. frailty president of Finance for Ocean Carriers. had to make up one’s mind whether to accept an offered leasing contract for the continuance of three old ages. In the event of credence of the above-named contract. the net incomes of the company would depend on the in agreement hire rates. operating costs. ship depreciation and rising prices. After the closing of the contract. farther income would be evaluated based on expected market day-to-day hire rates. The conditions for the proposed rental are shown in exhibit 1.
Statement of job
The continuance of the leasing contract is rather short so the company has to analyse whether the investing as a whole will turn out to be profitable even after the closing of the contract. In order to make so. they will hold to take into history the fluctuations of the day-to-day topographic point rates in the short and long footings. every bit good as bing differences in revenue enhancement policies within its offices in Hong Kong and in the United States. Last but non least. the company has to oppugn the reasonableness of its 15-year policy.
Topographic point hire rates
Daily topographic point hire rates are predicted to fall in 2001 and 2002 due to an addition in the fleet size ( 63 new vass are scheduled for bringing ) and expected stagnancy in Fe ore and coal cargos. Iron ore and coal imports are really of import for the company because they are about 85 % of the lading it carries every twelvemonth. Therefore. due to this future stagnancy the company will confront a weak market place. ensuing in lower day-to-day topographic point hire rates.
Despite negative market conditions in the approaching 2 old ages. long-run chances look much more promising. Iron ore vas cargos are traveling to increase due to new participants fall ining the Fe ore industry: India and Australia. As a effect. in this new planetary market. day-to-day charter rates and descry day-to-day charter rates will likely lift bring forthing extra demand for cargos.
Company’s 15-year policy
The company used to trash or sell ships merely before their 15th twelvemonth of pilotage to avoid paying for care disbursals related to the 3rd particular study. Harmonizing to our computations presented in the Exhibit 2. trashing the vas before the 15th twelvemonth is non recommended. Results show that the NPV of a ship after 15 old ages is higher than the scrap value of 5 million dollars.
Therefore. we advise the company to maintain the ship longer than 15-year period. since runing the vas over a longer period will gain extra net income and the ship can be scrapped some clip subsequently. allowing the same million dollars. However. there are few factors that signal why company might be willing to acquire rid of the vas. First. if the company’s precedence is to maintain a immature fleet of lading ships. runing ships older than 15 old ages may non be the optimum pick. In fact. older ships are riskier and are less efficient.
Second. due to low demand for older ships. renting the same vas in future might be an uneffective venture.
We computed two separate computations for given two premises in Exhibit 2. Harmonizing to premise A the company operates in United States. therefore has to pay 35 % of revenue enhancements. whilst harmonizing to premise B. company operates in Hong Kong. and it’s exempt of revenue enhancements. Our computations show that NPV in the first scenario is negative in both 2017 ( -6. 350. 239 ) and 2027 ( – 4. 285. 462 ) due to really high revenue enhancements. while in the 2nd scenario the NPV is positive in both 2017 ( 1. 719. 018 ) and 2027 ( 4. 025. 600 ) .
It’s of import to understand why we presented two columns for 2017. First column shows the Numberss in the instance of runing a vas for 15 old ages. whilst 2nd column shows the values in instance ship was to be operated for a longer period. Another of import fact to see is that in the first scenario. when the company operates ship merely for 15 old ages. we excluded the capital outgo for 2017 related to the study. Whilst. in the 2nd scenario. while runing the ship for more than 15 old ages. we added the annual capital outgo back. We made an of import premise ; we did non include capital outgos linked to the last particular study. because we assumed that the company is trashing the ship merely before the particular study is conducted.
In decision. maintaining in head what we demonstrated earlier. the company should put in the production of the new vas merely in Hong Kong and should non trash it after 15 old ages. because its NPV will still be positive.