Ocean Carriers

Lecture Note 6

Case study

“Ocean Carriers”

Introduction

* In January 2001, Mary Linn, Vice President of Finance of Ocean Carriers, a shipping company with offices in New York and Hong Kong, was evaluating a proposed lease of a ship for a three year period, beginning in early 2003. The customer was eager to finalize the contract to meet his own commitments and offered a very attractive terms. Next Page

* No ship in Ocean Carrier’s current fleet met the customer’s requirements. Linn, therefore, had to decide whether Ocean Carriers should immediately purchase a new capesize carrier (a large cargo ship) that would be completed two years hence and could be leased to the customers.

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* However, the proposed contract with the customer is only for three years. Therefore, after the three years, the ship will have to be leased for other customers.

* It is Linn’s responsibility to decide if future market conditions warranted a considerable investment in the new ship.

* The objective of this case study is to estimate the net present value of the investment in the new capesize carrier.

* The case presents necessary information for you to compute the net present value of the project.

* However, before computing the net present value of the project, let us look at the following two items

• How the Capesize Carriers’ business is conducted.

• The future prospect of the market.

How the Ocean Carrier’s business is conducted.

* A capesize carrier is a large ship too large to go through the Panama Canal, thus has to go through the Cape Horn to travel between the Atlantic and Pacific oceans.

* Ocean Carriers’ vessels were mostly charted on a “time hire” basis for a period such as one year, three year or five years.

* However, spot charter market is also available.

How the Ocean Carrier’s business is conducted. (Contd)

* The customer of Ocean Carriers who charters a vessel pay a daily hire rate for the entire length...