OCEAN

CARRIERS
CASE STUDY

SUBMITTED BY:
GROUP A5

Members:
Sambhav Jain (040)
P Mohith (031)
Sumana Priya (041)
Himanshu Jhamnani (018)
Rishabh Jain (038)
CASE FACTS
 Maintenance and repair days:

 Ocean carriers received a proposal to lease a ship for

3 year period beginning 2003
 It takes 2 years to build a ship and they have to start
building it immediately if the project is taken

 Ocean carriers' vessels are mostly chartered on “time

 Company doesn't operate ships older than 15 years
charter” for a period such as 1,3 or 5 .spot charter
 Special surveys has to be conducted every 5 years
market was also used on occasion

 Ocean carriers charged daily hire rate.

 Cost of surveys:
 Operating costs are $4000 per day and increases at
1% above inflation

 Charterers were not charged daily hire rate only if the
vessel when vessel is operating not during repairs
and maintenance
 These were considered as capital expenditures and
depreciated over a period of 5 years
 Company planned to scrap the vessel just before 3rd
survey
 Scrap value is $5M at the end of 15th year
CASE FACTS (CONTD.)
 Supply of Capsizes:
o - Daily hire rates depends on supply and demand
o When demand is high,owners would keep vessel in
operation as long as possible and converse is also true
o Capsize fleet by age:
o Current order book for dry bulk capsizes by delivery date:
 Prevailing spot market rate is $22,000 per day
 Linn anticipated that spot rates would fall in 2001 and 2002.
 Daily hire rates for capsize charters 1994-2001
 Long term forecast for world wide iron ore vessel shipments was
for 2% annual growth during 2002 to 2005
 3 year charter starting in 2003 was $20,000 per day with annual
escalation of $200 per day.
 Rate of inflation is 3%.
 Ship would cost $39 million with 10% of price paid immediately,
10% due in years time and balance on delivery.
 New ship would depreciate on straight line basis for 25 years.
 Initial networking capital is $500,000.
Q.1 DO YOU EXPECT THE SPOT HIRE RATES TO INCREASE OR DECREASE NEXT
YEAR?

1. Spot Hire Rate are anticipated to decrease next year since 63 new vessels were scheduled to
be delivered next year which will increase supply and consequently reduce rate.

2. It is also anticipated that imports of iron ore and coal would probably remain stagnant over
the next two years which indicates that demand is stagnant over the next two years which
again indicates that the rate will decline next year.
Q.2 WHAT FACTORS DRIVE AVERAGE DAILY HIRE RATES?

Factors driving average daily hire rates:

1. Number of Vessels
2. Demand for shipping
3. Vessel Efficiency
4. Age of Vessels
5. Economic Conditions
6. Trade Patterns
Q.3 HOW WOULD YOU CHARACTERIZE THE LONG-TERM PROSPECTS OF THE
CAPESIZE DRY BULK INDUSTRY?

The long term prospects of capsize dry bulk industry are ‘OPTIMISTIC’ due to the following
reasons:

1. Australian production in iron ore is expected to be strong in the coming years.

2. Indian ore exports expected to take-off in the next few years.

Due to the above two reasons it is expected that the new supplies from India and Australia would
significantly increase trading volumes. Demand for capesizes would likely increase with these
higher trading volumes, possibly boosting prices.
 Q.4 SHOULD MS. LINN PURCHASE THE $39M CAPESIZE?
Assumption 1: Ocean Carriers is a US firm subject to 35% taxation.

NPV for 15 years:

Cost of Capital 8% 9% 10%

NPV -61,05,460 -77,89,584 -92,55,013

Assumption 2: 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.

NPV for 15 years:

Cost of Capital 8% 9% 10%

NPV 8,42,226 -12,28,132 -30,53,360
Q.4. CONCLUSION

Ms. Linn should only purchase the $39 million Capesize when it is assumed that Ocean Carriers is
located in Hong Kong and the opportunity cost of capital is 8%
Q.5 WHAT DO YOU THINK OF THE COMPANY'S POLICY OF NOT OPERATING
SHIPS OVER 15 YEARS OLD?
Observations & Results:
Comparison • The company can operate ships up till
15 years ONLY IF the company is
NPV 8% 9% 10% IRR locates in Hong Kong and cost of
15 Year Tax (6105460) (7789584) (9255013) 5.23% capital is 8%
25 Year Tax (5324783) (7248839) (8893380) 5.86%

15 Year Non Tax 842226 (1228132) (3053360) 8.39%

• Otherwise company should operate
25 Year Non Tax 2897586 397962 (1766223) 9.17%
ships for 25 years in Hong Kong when
cost of capital is 8% or 9%.

• Company should never be located in

EAA

15 Year Tax (713298) (966367) (1216792) 5.23%

US as NPVs are negative under all
25 Year Tax (498819) (737977) (979767) 5.86%
conditions for US.
15 Year Non Tax 98397 (152361) (401437) 8.39%

25 Year Non Tax 271442 40515 (194581) 9.17% • Company should never buy ship for
$39 million at 10% cost of capital as it
result in negative NPV under all
conditions.
THANK YOU