Reference no: EM132300206
The purposxe of this case is to get an estimate the relevant financial data necessary to generate cash flow projections and calculate the Net Present Valune (NPV) of an investment opportunity. Assume throughout that Ocean Carrriers uses a 9% Weighted Average Cost of Capital as its discount rate.
1. Describe concisely the "strategic situation" faced by Ocean Carrrierrs. What are the prospects for future changes in daily hire rates? What factors drive average daily hire rates? How would you characterize the long-term prospects of the capesize dry bulk industry?
2. Please give an Estimate of the annual cas,h flows for the full 27 years of the project (which includes the two year lag before the ship is delivered). Assume that the vessel will be operated for its full life, and sold after 25 years of service for $5M. Also note that depreciation of the full $39M cost of the vessel will begin after it is delivered (i.e., no depreciation in years 1 or 2 prior to delivery). In addition, assume the initial $500K investment in working capital occurs at the time of delivery of the ship, and that the final working capital balance will be zero at the end of the last year of service (i.e., all working capital will be recovered during that year). Create two different cash flow scenarios based on two different assumptions regarding taxes. 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.
3. Based on the cash flows derived above, should Ms. Chinn purchase the $39M capesize? Does the answer depend on which of the two tax treatments discussed in question 2 above is used?
4. The company’s stated policy is to sell its ships after 15 years of service. Is that the optimal decision if you assume that the ship’s scrap value will be $5M irrespective of whether it is sold after 15 or 25 years? How much would selling the ship after 15 years change the NPV of the investment? (Assume the US tax treatment for purposes of this question)