'“Ocean Carriers” Case Essay\r'

' call for that sea Carriers uses a 9% discount pass judgment.\r\n1) Do you evaluate day-to-day gl are deal up range to sum up or decrease next year? (5 points)\r\n2) What factors begin chance(a) withdraw rates? (5 points)\r\n3) How would you characterize the long prospects of the cape surface dry bulk industry? (10 points)\r\n4) Should Ms Linn obtain the $39M cap size? Make 2 different assumptions. First, suck up that naval Carriers is a US firm pillowcase to 35% evaluateation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay both(prenominal) tax on profits made overseas and are similarly exempted from paying whatever tax on profit made on weight uplifted from Hong Kong. (75 points)\r\n5) What do you think of the comp some(prenominal)’s form _or_ system of government of not operating ships over 15 years senior? (5 points)\r\nSolutions:\r\n1) Daily power use rates should be determi ne by hand over and read. Supply: The keep down of ships available equaled the number of watercrafts in service the previous year plus any newborn ships delivered minus any morselpings and sinkings. Demand: The exact for dry bulk capesizes was determined by the creative activity economy, e surplusly its basic industries.\r\nAs shown in promenade 5, since over 85% of the cargo carried by capesizes was constrict ore and coal, the amount of press out ore vessel shipments approximately reflects the assume for dry bulk capesizes. The amount of sink size reflects the cut of capesizes.\r\nAs shown in screening 3, the number of new ships delivered in 2001 is 63. Since there had been very hardly a(prenominal) scrappings in recent years, and most of the capacity of the ecumenic fleet of capesizes was fairly young, we muckle assume that the deepen of fleet size during 2001 mainly comes from these new ships. Similarly, we good deal forebode the fleet size in 2002 forget be: 612+(612-552)*(33/63) ≈ 643\r\nFrom Exhibit 6, according to the forecast of the consulting group, iron ore vessel shipments will be 445 millions of tons in 2002. We offer compute the growth rates of supply and demand in 2002.\r\nWe can see from the dishear ten-spot above that the supply will grow high-velocity than the demand, so I expect daily spot hire rate to decrease next year. This can withal be explained according to the Linn’s analysis. With Australian nullify product in iron ore expected to be fond and Indian iron ore exports expected to take withdraw in the next some years, Linn took an sanguine view of the long-term market demand for capesizes. However, she also considered that imports of iron ore and coal would probably remain stagnant over the next two years sequence supply outgrowths. We can reasonably anticipate that spot rates would fall in 2001 and 2002.\r\n2) As mentioned in 1), daily spot hire rates are determined by supply and demand. De mand: As illustrated in the case, the demand for dry bulk capesizes was determined by the world economy, especially its basic industries. oer 85% of the cargo carried by capesizes was iron ore and coal. outturn and demand for these products increased in a untroubled economy. Changes in trade patterns also affected the demand for capesizes. Supply: The number of ships available equaled the number of vessels in service the previous year plus any new ships delivered minus any scrappings and sinkings.\r\nOcean carriers unyielding to deliver new ships or scrap obsolete ships mainly based on the demand. Supply was also affected by the increases in size and energy the newer ships offered. Moreover, ages of ships affected the accompany’s scrap decisions and ripened ships receiver lower daily hire rates. In summary, the world economy, changes in trade patterns, the increases in size and efficiency of new ships (technology) and ages of ships drive daily hire rates.\r\n3) As illu strated in the case, with Australian production in iron ore expected to be strong and Indian iron ore exports expected to take off in the next few years, Linn took an plausive view of the long-term market demand for capesizes. Linn expected that Australian and Indian ore exports would begin in 2003, and that new supplies would significantly increase trading volumes. Demand for capesizes would likely increase with these higher(prenominal) trading volumes, possibly boosting prices.\r\nFrom the table above, we can get hold that worldwide iron ore vessel shipments and study rates had been very strongly associated historically. Iron ore vessel shipments and daily hire rate changed in the corresponding direction. Moreover, 3-yr charter rates changed much to a greater extent than iron ore vessel shipments, while spot rates tended to fluctuate more widely than 3-yr charter rates. As mentioned above, Australian production in iron ore expected to be strong and Indian iron ore exports expe cted to take off in the next few years. I expect worldwide iron ore vessel shipments to increase stably in the long run, which would have a exacting effect on daily hire rates.\r\nIn terms of supply, the number of ships available equaled the number of vessels in service the previous year plus any new ships delivered minus any scrappings and sinkings. As shown in Exhibit 2, most of the capacity of the worldwide fleet of capesizes was fairly young, there would be very few scrappings in next years. As shown in Exhibit 3, numbers of new ships delivered experienced a downward(prenominal) trend, which means the supply would increase more tardily in the long run. As a result, daily hire rates would be expected to make grow in the long run. I take an optimistic view of the long-term prospects of the capesize dry bulk industry.\r\n4) fit in to the information in the case, we can get the adjacent table:\r\nOperating years: Initially, 8 geezerhood a year were scheduled for maintenance and repairs. The clipping allotted to maintenance and repairs increased to 12 days per year after five years of operation, and to 16 days a year for ships older than ten years. Daily operating costs: For a new ship coming on line in early 2003, operating costs were expected to initially average $4,000 per day, and to increase annually at a rate of 1% above inflation. The expected rate of inflation was 3%. Expenditures for special surveys: Capital expenditures expect in preparation for the special surveys would each be depreciated on a straight-line basis over a 5-year period. Depreciation: The ship would cost $39 million, and the hold dear would be depreciated on a straight-line basis over 25 years.\r\nMoreover, the ship would cost $39 million, with 10% of the corrupt price payable immediately and 10% due in a year’s time. The balance would be due on delivery. In addition, Linn expected to make a $500,000 initial enthronisation in net working capital, which she anticipate d would grow with inflation. Capital expenditures for special surveys would occur in 2007 and 2012. The company estimated the scrap value to be $5M at the end of the fifteenth year. We have to consider tax difference when the ship is sold since the ship has a book of account value of 15,600,000. Tax loss =(15,600,000-5,000,000)*35%=3,710,000. We can calculate heart cash flows as follows:\r\nAssume that Ocean Carriers uses a 9% discount rate, NPV is negative. So Ms Linn should not purchase the $39M capsize.\r\nb) Assume Ocean Carriers is located in Hong Kong, we can calculate total cash flows as follows:\r\nAssume that Ocean Carriers uses a 9% discount rate, NPV is positive. So Ms Linn should purchase the $39M capsize.\r\n5) I think it is a good policy to sell the vessel into the secondhand market, or â€Å"scrap” the vessel just before the third special survey. By carrying out this policy, the company could avoid moody capital expenditures of the third, fourth and fifth s urveys. At the same time, the company could benefit from the scrap value of $5M. In addition, the company could charge higher daily hire rates because vessels are comparatively younger. So I think the company’s policy of not operating ships over 15 years old is good.\r\n'