OCEAN CARRIERS ANALYSIS

DATE:

8/29/2007

TO:

MS MARY LINN

CC:

PROF. TOM MILLER

FROM: RYAN DALE SEELKE

RE:

DECISION ON CAPE SIZE CARRIER

PRIORITY:[URGENT]

Ms Mary Linn,
After careful cash flow analysis and a discount rate (WACC) of 9%,
commissioning a capsize carrier for 25 years is the only appropriate option
for our firm. However, if the discount were instead 10%, both options would
fail the NPV test by yielding negative results. I make this recommendation
after thorough analysis of estimated cash flow and with the desire that our
required 15-year life span will be amended.
With the expected 9% discount rate, commissioning a capsize carrier for
15 years and then scrapping it as is company policy would ultimately yield a
NPV of (1,252,916). However, if Ocean Carriers decided to commission its
ship for 25 years, then the NPV would be a positive 368,557. Since current
company policy is to scrap ships after 15 years, management should look at
these numbers in detail and consider revising its dated policy.
As
mentioned above, this recommendation hinges on a 9% discount rate. If our
cost of debt or cost of equity would change, then this would change our
WACC and thus our discount rate. Therefore, if either the cost of equity or
debt increases and our subsequent discount rate were to be 10% rather
than the expected 9%, then both options would yield a negative NPV and
neither should be undertaken. If the opposite happened, and the discount
rate was 8%, then both options would yield a positive NPV. In this case, the
25-year option is more profitable due to its NPV being greater. Details are
below (Italics showing recommendation at appropriate discount rate).

15 Year
25 Year

7/16/2007

8%
$815,580
$2,865,29
7

Discount Rate
9%
10%
($1,252,916) ($3,076,460)
$368,557

Confidential

($1,793,116)

OCEAN CARRIERS ANALYSIS: DECISION ON CAPE SIZE CARRIER

Event
Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

15 Year
Discounted
Operating
Cash Flow
$0
$0
$0
$4,386,002
$4,033,065
$3,706,990
$3,004,351
$2,440,887
$2,205,441
$2,023,295
$1,855,438
$1,700,636
$1,448,466
$1,301,784
$1,189,629
$1,086,363
$991,309
$606,264
$31,979,920

15 Year
Discounted
Investment
Cash Flow
($3,900,000)
($3,577,982)
($26,681,256)
($11,583)
($10,945)
($10,343)
($9,773)
($173,346)
($8,727)
($8,247)
($7,793)
($7,364)
($131,396)
($6,575)
($6,213)
($5,871)
($5,548)
$1,330,125
($33,232,836)

NPV
($1,252,916)

25 Year
Discounte
d
Operating
Cash Flow

$4,386,002
$4,033,065
$3,706,990
$3,004,351
$2,440,887
$2,205,441
$2,023,295
$1,855,438
$1,700,636
$1,448,466
$1,301,784
$1,189,629
$1,086,363
$991,309
$606,264
$547,345
$493,370
$443,952
$398,728
$306,107
$272,006
$240,872
$212,552
$186,775
$92,818
$35,174,445

25 Year
Discounted
Investment
Cash Flow
($3,900,000)
($3,577,982)
($26,681,256)
($11,583)
($10,945)
($10,343)
($9,773)
($173,346)
($8,727)
($8,247)
($7,793)
($7,364)
($131,396)
($6,575)
($6,213)
($5,871)
($5,548)
($178,548)
($4,954)
($4,681)
($4,424)
($4,180)
($131,605)
($3,733)
($3,527)
($3,333)
($3,150)
$99,208
($34,805,887)

NPV
$368,557

With current projections of cash flow and the estimated 9% discount

rate, this project is acceptable only if the company allows the
commissioning of 25-year old ships. However, if economic conditions
change or the cost of capital changes, then this recommendation may
change as well.

**Cash Flows are based on a 9% Discount Rate.

7/16/2007

Confidential