Ocean Carriers Case

EXECUTIVE SUMMARY Ocean Carriers, a shipping company with offices in New York and Hong Kong, is evaluating a customer’s proposal of a 3-year lease for a dry bulk carrier. Since no ship in Ocean Carriers’ fleet is able to meet the client’s requirements in January 2001, the company needs to assess the profitability of an investment project in a new vessel with anticipated delivery in 2003. In our analysis, we consider the effects of factors such as future prospects for supply and demand, market and industry growth, and hire rates; we compare two scenarios with different tax regimes, and we conclude that the investment would be profitable if operated in Hong Kong, where income taxes are 0%. Furthermore, we provide evidence to suggest that the company should reconsider its policy of operating vessels for no longer than 15 years. SUMMARY OF FACTS Ocean Carriers is evaluating an investment with an initial cost of $39 million, with an additional $500,000 investment in net working capital. Operating costs are expected to amount to $4,000 per day, and increase at a rate of 1% above inflation. We considered a 9% discount rate, a 3% rate of inflation, and a corporate tax rate of 35% in the US and 0% in Hong Kong. Revenues during the lease period will be $20,000 per day, with an annual escalation of $200 per day; afterwards they will align to market conditions. We examined both the case should ascertain whether its policy of not operating vessels older than 15 years is the best available strategy. ANALYSIS Since the investment decision will depend on the lease terms as well as on market conditions, we have evaluated the short and long term prospects for daily spot hire rates. Average daily hire rates are driven by vessels’ specific factors such as age (the older the ship, the lower the rate), fuel consumption, speed and also by the length of the chartering period. Daily spot hire rates are determined by supply and demand for vessels. Demand is determined by the number of cargo...