Assignment 2

Assignment 2: Ocean Carriers

Refer to the HBA case “Ocean Carriers” and answer the questions below.

Note: You should complete the related textbook chapters (RWJJ Chapters 7 & 8) before attempting this case. In particular, you may want to study the Baldwin Case first (Chapter 8.2 + material on LMES).

Start by constructing a spreadsheet showing 25-year projections for these items (and others if needed):

a) Age of Ship

b) Daily Hire rate

c) Daily Operating Cost

d) Days Hired (per year)

e) Revenue

f) Operating Costs

g) Depreciation

h) Tax Paid

i) Capital Expenditures (CAPEX)

j) Change in Net Working Capital ( NWC)

k) After-tax proceeds from asset sales

l) Cash Flow (CF)

m) Present Value of Cash Flow (PV(CF))

n) Net Working Capital (NWC)

o) Book Value (aka accounting value or depreciated value) of the Asset (the capsize)

p) Scrap Value (aka salvage value) of the Asset (the capsize)

Suppose Ocean Carriers uses a 9% discount rate.

1) Should Ls Linn purchase the $39M capsize? Make two different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to a 35% statutory (and effective) marginal tax rate. Second, assume that Ocean Carriers is domiciled in Hong Kong for tax purposes, where ship owners 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, i.e., assume a zero tax rate.

2) What do you think of the company’s policy of not operating ships over 15 years old?

3) Suppose Ocean Carriers pays fixed annual dues of $500,000 to an association of ship owners that provides services to its members such as light houses, lobbying efforts, etc. Should a portion of these dues be included in the NPV calculation for the capsize? If so, what portion seems right?

4) Suppose that, two years ago, Ocean Carriers lost a large lawsuit related to a maritime accident where it allegedly caused a...