Ocean Carriers Case

Ocean Carriers

February 21, 2011

FIN 361 MW 3:30

Ilona Babenko

Prepared By:

Michael Begley, Levi Chapa, Kelly Crowe, Beth Crumrine, Colby Denton

Key Assumptions

Throughout the analysis of this case we had several assumptions when making calculations.

1. Our first assumption is that the 3 year contract starting in 2003 is guaranteed, therefore the revenues for those years are guaranteed.

2. Secondly, we assume that the expected daily hire rates provided in the case are fairly accurate and are suitable for use in all calculations.

3. Third, we assumed the 9% cost of capital would remain stagnant throughout the useful life of this ship.

4. Finally, we assumed that this ship was not the only source of revenue for the company, allowing Ocean Carriers to recognize cost savings on taxes in years with negative profits.

We also made some other small assumptions throughout the calculation process, but these are discussed later in the paper with their direct relation to the results.

Analysis

The majority of our calculations were done using Excel. Using the information provided in the case, we calculated free cash flows for each year of the useful life of project. Using this data we were able to calculate NPV under different situations, calculate the impact of taxes, and make suggestions for the future decisions of Ocean Carriers. The spreadsheet used in these calculations can be found in Appendix 1.

Results

Spot Hire Rate Projections

The relation of spot hire rates with worldwide demand makes it difficult to make perfect assumptions of changes in these rates over the years. There are several factors that can indicate the general direction spot hire rates will be going in the following years. The first thing we need to consider is the number and age of ships available for use. Currently the supply of capsizes is fairly high and most of the ships are very young. As of 2000, there are 29 ships under 5 years old available for...