2/28/2022 Written Case

Analysis

Submitted By-
BJ21124 | Adarsh Nethwewala
BJ21136 | Chinmayi Lanka
BJ21150 | Mohak Khare
BJ21157 | Pallavi Mehrotra
BJ21177 | Utkarsh Gupta
Executive Summary
Ocean Carries Inc. is a shipping company primarily engaged in ownership and operations of dry bulk
carriers utilized for iron ore and coal exports, with its headquarters located in both New York City and
Hong Kong.
The company had received a leasing offer in the advent of 2001 from a potential charterer, lasting for a
period of 3 years starting 2003. However, the current composition of the fleet is not suitable to meet the
customers desired requirement, hence there was the need to evaluate the proposal related to
commissioning of a new capsize. Since the contract would last for a period of 3 years, Ocean Carriers
would have to account for the potential markets risk factors from the start of 2003.
Earlier, the company’s strategy was to not operate ships for a period exceeding 15 years (for the purpose
of avoiding third survey) by either scrapping the vessels or selling the off in the secondary market.
The ship would cost $39 million, with 10% being payable immediately, another $3.9 million in 2002 and
the balance being payable on delivery. The vessel had a residual value of $5 million (with the
depreciation being calculated on straight-line basis) if sold after 15 years or $0 if utilized for 25 years.
The charterer offers $20,000 per day with an annual escalation offered at $200 for the three-year contract
starting from 2003. The annual operating costs are expected to be $4,000 per day with expected annual
increase of 1% above inflation. Corporate Tax rate has been assumed to be 20%. We have assumed that
the ship is sold at the end of the 15th year, right before the end year survey of the 15th year.
According to our analysis, the NPV is negative and hence, the new capsize should not be undertaken.
However, we see that there are favourable conditions for business to flourish in future. For example, over
85% of capsizes involved iron ore or coal. The production and demand for these products being
determined by economic factors, with a boom expected to highly boost the overall demand. As Australian
and Indian economy’s production and export patterns are expected to improve in the coming future, the
probability of a strong economic performance in this sector is highly possible. Hence, given the expected
strong economic expectations and the long gestation period, the project can be undertaken.

Problem Statement
The company had received a leasing offer in the advent of 2001 from a potential charterer, lasting for a
period of 3 years starting 2003. However, the current composition of the fleet is not suitable to meet the
customers desired requirement, hence there was the need to evaluate the proposal related to
commissioning of a new capsize. Since the contract would last for a period of 3 years, Ocean Carriers
would have to account for the potential markets risk factors from the start of 2003. Also, if the investment
is undertaken, the management would have to determine whether to register the ship in New York or
Hong Kong and whether to invest for a period of 15 years or to extend the project for 25 years.

Analysis
We have primarily used the NPV analysis to determine the financial effectiveness of this move. We have
considered the rent from the contract for the first 3 years and then considered spot contract income for the
remaining 12 years of the useful life of the ship.
 For spot income, we have taken a conservative approach and continued with the spot rates at 2000, i.e
$22000. We assume the ship will be hired for all duration it is available for hire.
For operations and maintenance costs, we have taken the days as mentioned in the case, depending upon
the life of the ship. For the survey costs, to be depreciated over 5 years, we have taken the succeeding 5
years from the conduct of the survey. For example: the cost of survey conducted in year 5 is depreciated
over years 5-9.
For WACC, we have taken 8% as the company is a long-standing company that deals with customers that
reduce the risk of default of payment. So even with the long gestation and recovery period, the WACC is
not extremely high.

CapEx (Survey
Timelines Cash outflows Cash inflows Depreciation Profit calculations
costs) 8% Repairs schedule
Cash flow
Operating & (PAT+depreciation tax
Years of ship Net working Maintenance shield added+CapEx
Years operation Cost of ship capital costs Rent revenue Scrap value PBT PAT added back) PVF PV of cash flows Days needed Rate per day
1 3900000 500000 -4400000 -4400000 -4400000 0.9259 -4074074 0
2 3900000 515000 -4415000 -4415000 -4415000 0.8573 -3785151 0
3 31200000 530450 -31730450 -31730450 -31730450 0.7938 -25188654 0
4 1 0 1460000 7140000 2266666.667 3413333 2730666.667 3184000 0.7350 2340335 8 4000
5 2 0 1518400 7211400 2266666.667 3426333 2741066.667 3194400 0.6806 2174055 8 4160
6 3 0 1579136 7282800 2266666.667 3436997 2749597.867 3202931 0.6302 2018390 8 4326.4
7 4 0 1642301.44 9032100 2266666.667 5123132 4098505.515 4551839 0.5835 2655954 8 4499.456
8 5 0 1707993.498 8246700 2266666.667 60000 4272040 3417631.869 3930965 0.5403 2123778 8 4679.43424
9 6 0 1776313.238 8154300 2266666.667 60000 4111320 3289056.077 3802389 0.5002 1902141 12 4866.61161
10 7 0 1847365.767 8154300 2266666.667 60000 4040268 3232214.053 3745547 0.4632 1734913 12 5061.276074
11 8 0 1921260.398 8154300 2266666.667 60000 3966373 3173098.349 3686432 0.4289 1581047 12 5263.727117
12 9 0 1998110.814 8154300 2266666.667 60000 3889523 3111618.016 3624951 0.3971 1439518 12 5474.276202
13 10 0 2078035.246 7766000 2266666.667 70000 3421298 2737038.47 3260372 0.3677 1198832 12 5693.24725
14 11 0 2161156.656 7678000 2266666.667 70000 3250177 2600141.342 3123475 0.3405 1063421 16 5920.97714
15 12 0 2247602.922 7678000 2266666.667 70000 3163730 2530984.329 3054318 0.3152 962848 16 6157.816225
16 13 0 2337507.039 7678000 2266666.667 70000 3073826 2459061.035 2982394 0.2919 870532 16 6404.128874
17 14 0 2431007.321 7678000 2266666.667 70000 2980326 2384260.81 2907594 0.2703 785832 16 6660.294029
18 15 0 2528247.614 6142400 5000000 2266666.667 6347486 5077988.576 5531322 0.2502 1384208 16 6926.70579

NPV -8812072

Assumptions
 365 days in a year
 Ship is sold at the end of 15th year
 Corporate tax rate is assumed to be 20% for
that of US

Recommendations
According to our analysis, the NPV is negative and hence, the new capsize does not appear to be a viable
option. However, favourable conditions for the business to flourish in the future does exist. For example,
over 85% of capsizes involved iron ore or coal. The production and demand for these products being
determined by economic factors, with a boom expected to highly boost the overall demand. Moreover, the
Australian and Indian economy’s production and export patterns are expected to improve in the coming
future indicating the possibility of a strong economic performance in this sector. Hence, given the
expected strong economic expectations and the long gestation period, the project can be undertaken.