Testing

Possible Discussion Questions for Ocean Carriers

1. From reviewing the case, do you expect daily spot hire rates to increase or decease next year? Why?

2. What factors appear to be the drives for average daily hire rates?

3. How would you characterize the long-term prospects of the dry bulk capsize shipping industry?

4. Assume that Ocean Carriers uses a 9.0% project cost of capital for investments of this nature and uses straight line depreciation. Should Ms. Linn recommend that Ocean Carriers purchase the $39 million capsize? Make two different assumptions in developing your solution. First, assume that Ocean Carriers is a U.S. firm with income subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any taxes on profits make overseas (outside of Hong Kong) and are also exempted to from paying any tax on profits made on cargo uplifted (picked up for shipment) from Hong Kong.

5. Does the company’s policy of not operating ships over 15 years old make good financial sense?

(The timing of the cash flows with case may be initially confusing. Ocean Carriers is making a decision in January of 2001 with a new ship to be placed in operation in 2003. The payment for the ship is to be made in three installments: 2001, 2002, and 2003. The firm will begin to receive cash inflows from leasing the ship in 2003. However, the final payment for the ship at the beginning of 2003 and the total 2003 cash inflows from the lessee will probably not occur on the same date. The cash inflows will occur over the year, but the final payment at the beginning of the year.

There are two alternative approaches for dealing with this using Excel. Using the Excel NPV function, you might define t = 0 as the year 2000 when the initial payment is made when the ship is ordered. Then t = 1 is 2001 with the second payment for the ship, t = 2 is 2002 for the final ship payment, and t = 4...