# Ocean Carrier Case Study

Essay by nikky • March 1, 2012 • Case Study • 438 Words (2 Pages) • 3,297 Views

**Page 1 of 2**

The question that the case is asking should the company commission a new capsize vessel for a customer who needs it on lease for 3 years.

The decision can be made by doing a discounted cash flow analysis and calculating the NPV. If the NPV is positive we commission the vessel else we do not.

The NPV is calculated as below

1. The revenues are for the daily charter rate on the days the ship is in operation. For the initial 3 years, the rate is $20,000 starting and then increases by $200 for next year and another year

2. From year 4, once the charter expires, the daily spot rates given in the Exhibit 6 are used.

3. The operating cost is given as $4,000 per day and will increase by 1% above the inflation rate (which is 3%) and so 4%

4. The life of the vessel is 25 years for depreciation

5. every 5 years a special survey is done which is depreciated over the 5 years

6. Initial working capital is $500,000 and will increase by inflation rate of 3%. The total change in working capital over the life of the project is zero

7. The payment for the vessel is done as 10% in the beginning, 10% next year and balance 80% after that)

8. The salvage value of the ship at the end of 15 years is $5,000,000

9. The discount rate is not given and so an assumed rate of 10% is taken to discount the cash flows.

11. Tax rate is taken as 35%

12. Two analysis are done - one for 15 years (since it is mentioned that the vessel may be sold after 15 years) and one for 25 years, the life of the vessel.

The NPV comes as below

15 years 25 years

NPV -6,814,246 -6,408,384

In the both the cases, the NPV is negative suggesting that the vessel should not be commissioned. The NPV for 25 years is less negative than for 15 years implying that incremental NPV for 15 to 25 years is positive. If the vessel is to be commissioned, 25 years is a better choice than 15 years.

12. You may consider on financial parameters such as the demand for export of iron ore from India, the production of vessels etc which may lead to an increase in the daily charter rate and so make the NPV positive. A scenario analysis is done in which the NPV is made 0 and the charter rate estimated. This comes to $24,086 in 2006 for 15 years period and $21,774 for 25 year period. These value look quite high in relation to existing values and so it may not be a good project to take up.

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