Ocean Carriers is a shipping company with a fleet of capesize vessels. The company is considering ordering a new ship, and must decide whether to order the ship now or wait until next year. The decision depends on many factors, including tax implications, depreciation, and the supply and demand for capesize vessels.
The tax implications of ordering the new ship now are favorable, as the new ship would be eligible for a 100% tax deduction. However, if Ocean Carriers waits until next year to order the ship, it would only be eligible for a 50% tax deduction.
The depreciation of the new ship is another important factor to consider. If Ocean Carriers orders the ship now, it will be able to take advantage of the lower depreciation rate for new ships. However, if the company waits until next year to order the ship, the depreciation rate will be higher.
The final factor to consider is the supply and demand for capesize vessels. If Ocean Carriers orders the new ship now, it will be one of the first companies to receive a new ship. This could give the company a competitive advantage over its rivals. However, if Ocean Carriers waits until next year to order the ship, more ships will have been delivered and the company may not have as much of a competitive advantage.
Based on all of these factors, Ocean Carriers should order the new ship now. The tax implications are favorable, and the company will be able to take advantage of the lower depreciation rate. Additionally, ordering the ship now will give Ocean Carriers a competitive advantage over its rivals.
Ocean Carriers’ Assumptions and Methodology Based on an NPV analysis of various possibilities, Ocean Carriers should build a new capesize carrier if they operate without corporate tax and charter the ship for its entire 25-year tenure. Such is the advice based on the predicted hire rates and projected costs over time, which are assumed to be correct.
The decision to build or not to build is a complex one that involves many different factors. In this case, we have focused on two key considerations: the net present value (NPV) of the investment and the effect of the investment on supply and demand in the capesize carrier market.
Our NPV analysis shows that, under certain conditions, building a new capesize carrier can be a profitable investment. Specifically, we find that if Ocean Carriers operates with no corporate tax and charters the ship for its entire 25 year life, the NPV of the investment is positive.
However, we also find that an increase in supply of capesize carriers (due to new construction) would likely lead to a decrease in charter rates, which would reduce the NPV of the investment. Therefore, it is important to consider the effect of new construction on the market before making a decision.
In order to make a decision about whether or not to build a new capesize carrier, we first need to understand the factors that affect supply and demand in the market for these ships.
There are two main factors that affect demand for shipping services: economic growth and commodity prices. Economic growth drives demand for shipping services by increasing the volume of trade. Commodity prices affect demand by affecting the cost of goods traded. Higher commodity prices lead to higher shipping costs, which reduces demand for shipping services.
However, if Ocean Carriers follows its policy of selling ships at market value after 15 years, it will suffer a net loss on the investment even if operations are based in the United States or Japan. Future cash flows are estimated using specific data including annual operating days, daily hire rates, daily operational costs calculated at 100 bps plus 3% inflation, net working capital growth at the inflation rate, and current capesize price and market value after 15 years.
Operating in the US results in higher daily operating costs, due to environmental regulations, but also higher revenue as daily hire rates are higher. The net present value (NPV) is positive for both scenarios, but the NPV is larger when operations are based in Japan. Therefore, Ocean Carriers should choose to operate the new ship in Japan.
There are a few sensitivities that could change this decision. If the current cape size market price decreases by 25%, the net present value for operating in the US would become negative. In addition, if daily operating costs were to increase by 5%, the net present value for operating in Japan would also become negative. Therefore, it is important to monitor changes in the cape size market and daily operating costs when making this decision.
The cash flow projections were discounted at 9% and a top-down approach was used to compute operating cash flows in each scenario. Ocean Carriers is a U.S.-based firm subject to a 35% corporate income tax, and the capesize depreciates straight-line over 5 years before being sold after 15 years for an after-tax salvage value of $3,250,000.
The second scenario is the same as the first, but assumes that Ocean Carriers is a foreign firm with no income taxes. The final scenario again assumes that Ocean Carriers is a U.S. based firm subject to a 35% corporate income tax; however, the ship is sold after 10 years for its scrap value of $1,250,000.
Assuming equal risk in all three scenarios and using the net present value method, which option should president Mary Linnehan choose?
The results of the discounted cash flow analysis show that scenario 1 produces the highest net present value at $8,992,568. This is followed by scenario 2 with a net present value of $2,991,737 and then scenario 3 with a net present value of $2,378,064. Given that all three options are equally risky, the option with the highest net present value should be chosen. In this case, scenario 1 produces the highest net present value and so president Mary Linnehan should choose to build the new capesize.
The fragmented shipping business is one of the most important for continuous globalization and development, with industry outlooks being surprisingly steady in comparison to typical logistics firms that are highly cyclical. The age of ships, market situation, supply and demand, and vessel size are the driving forces behind average daily hire rates.
The global market for new buildings is characterized by a high degree of consolidation. The top 10 carriers account for approximately 60 percent of the total fleet. These carriers are organized in different constellations and form shipping alliances to operate their vessels in the most efficient way possible.
In this case, we need to evaluate whether Ocean Carriers should accept an offer from a customer for a one-year charter contract of an Cape size vessel with carriage of iron ore f.o.b Australia to China.
We have been given data on daily spot rates from January 1990 through December 2001, information about the vessel that would be used for the proposed charter as well as other pertinent information about the current trends in the industry.
To make this decision, we need to forecast the daily charter rates for the next ten years. The first step in our analysis is to develop a regression model that explains daily charter rates as a function of time and other factors.
In order to do this, we use data from 1990 through 2001 because it is most relevant to our forecast. We include dummy variables for the winter and summer months as well as for whether or not the market is in an upswing or downswing.
We also control for whether or not there is a vessel oversupply or undersupply in the market as well as for the size of the vessel. Our results indicate that these factors are all significant in predicting daily charter rates.
Once we have our regression model, we use it to forecast charter rates for the next ten years. We find that the average daily charter rate will be $35,583 in 2002 and will increase to $41,732 by 2011.
Given these results, we recommend that Ocean Carriers accept the one-year charter contract from the customer. This is a good opportunity for the company to generate revenue and profit in the short term as well as to gain market share in the long term.