The Background

Ocean Carriers Inc. is a global firm that owns and operates dry bulkhead shipping services. The majority of their cargo composes of Iron ore, with any one delivery ranging from an impressive 50,000 to 210,000 deadweight tons. The company has locations worldwide, with its premiere offices located within the New York and Hong Kong regions. In 2001, they were propositioned by a customer who was eager to establish a contract beginning in early 2003. As the customer was enthusiastic to finalize the contract, they offered Ocean Carriers Inc. very attractive terms for a boat charter. Unfortunately, no ships in the companys current fleet met the customers requirements. Consequently, this lead Ocean Carriers to consider the purchase of a new capesize vessel. Construction of this vessel would take approximately two years and could be leased to other customers once this charter expired. Typically, boat commissions could be cancelled within one year with a loss of deposit. The attractive terms were as follows: To charter a ship, it would cost 39 million dollars with 10% of the purchase payable immediately and 10% due in a years time. The remaining amount would be due upon delivery of the vessel. An initial investment of $500,000 is expected to be required in networking capital. This amount would grow with inflation. The expected rate of inflation is 3%. The new ship would be depreciated on a straight line basis.

The Business
Ocean Carriers incorporated typically held a standard charter with their clientele, with a time-basis that could range anywhere from 1-5 years. Spot market opportunities were also available with these rates with a tendency to be very volatile based on current-year demands. In exchange for the daily hire rate, the typical charter was as follows: Charter gave clientele over cargo and destination of the bulkhead Company would provide crew and maintenance for the ship o Crew would also manage supplies, repairs, maintenance, and pay any fees and insurance required of the ship In exchange for these privileges, clientele would pay a daily hire rate that would increase at expected rate of 1% over inflation o This rate was not charged while the ship was being serviced On an annual basis, there was an estimate of 8 days of maintenance for the first five years of the ships life, 12 days until its tenth year, and 16 days afterwards.

Company carriers followed a policy of not operating a ship after 15 years due to expensive required maintenance regulations. Every five years, international regulations required a special survey to be undertaken in order to evaluate seaworthiness of vessels. These cash outlays could be considered a capital expenditure which, in turn, would raise the cost-basis of these vessels.

Ships would be scrapped at approximately a value of 5 million at the end of their 15th year.

Demand
The daily rate was based off of market supply and demand of carriers. There is a direct correlation between market supply and the number of existing capesize vessels in service combined with the number of newly constructed ships in a given year; the market demand varies each with year with the demand for iron ore along with its corresponding shipping requirements. Currently, market standards indicated that the majority of the capesize vessel fleet was very young.

Contracts for deliveries were initiated two years before construction, and carriers typically took ten years to build. However, these contracts were somewhat flexible and allowed for cancellation of vessel construction based on market demand for the first year. The following exhibit illustrates projected delivery dates for bulkhead capesize vessels.

Market Conditions
Approximately 85% of all bulkhead cargo was iron ore or coal. As one might imagine, there is a direct correlation between strong economies and demand for dry bulkhead shipping capacity. Spot market prices were very volatile, with very high highs and low lows. Rates for charters or spots were typically determined based off of the age of the vessel; newer ships commanded a sizeable premium, while older ships offered a discount. The following exhibit illustrates the daily hire adjustment factor for capesizes based on age.

Market experts indicated a projected increase in the demand for iron ore in Indian and Australian markets, a good forecast for the companys potential performance. However, the next two years are projected to be relatively stagnant in terms of iron ore demand growth, with 63 new vessels expected to arrive in 2001. This would indicate that Ocean Carriers would undergo two stressful years of unfavorable market conditions while the new vessel was under construction. Exhibit 5 indicates historical iron ore rates, spot rates, and ore shipments.

Assumptions
In our first scenario, our assumption is that Ocean Carriers is a US firm and must pay the 35% US tax rate. The ship will be evaluated based on the 15 year life span resulting from company policy, with a resale value in 2017 calculated with discount rate of 12%. In scenario two, Ocean Carriers is a Hong Kong firm with no taxes on overseas profits. The Hong Kong inflation rate is projected to be .4% along with a discount rate of 9% according to the CIA Fact Book.

Methodology
SWOT Analysis
To better understand the company we have a general understanding of operations:

Strength
- New Vessels hold more cargo and are overall more efficent. - Higher profitability from increased daily charter rate premium

Weakness
- Relies to heavily on one industry. Company should differentiate operations - Contracts for Boats occur on a long term basis. Hard to forcast -no income earned on maintence days

Opportunity
- Forecasted improvement in Indian and Australian economies could help the shipping industry - Different Headquarters could provide different tax benefits to the firm

Threat
- Business demand is tied heavily to global economic health - Difficult to forecast long term demand - Threat of international regulation -Third Party Credit risK

Calculations
The following is a brief summary of our calculations. Please refer to the provided spreadsheet for more information. Our first step for this case is to evaluate the total cash flow required for the investment. Our second step would be to calculate periodical increases in cash flow, including maintenance fees. Next, we would figure out the operating revenue from the project and the projects corresponding costs: For a new ship arriving in 2003, estimates indicated that operating costs were approximately $4,000 per day and increased at a 1% rate above inflation.

Charters would not charge the daily rate for the time spent under maintenance, although operating costs were still incurred

After calculating operating revenue and operating costs, the next step is to calculate the required tax payment. This would require us to undergo the following steps: Calculate depreciation on a straight line basis Use regional tax rate to calculate tax payments

After evaluating the projects cash flows, we evaluated the project s based on an MPV analysis, a breakeven point analysis, and a scenario analysis.

Recommendations
Based on our analysis, the project only appears to be profitable in our 25 year scenario in Hong Kong. However, we only receive a net amount of 330,436 dollars for a 25 year project. Given the fact that our discount rates are somewhat arbitrary, it would be in the companys best interest to reject the case given the little profit and uncertainty present in the case. More information is necessary for a more in depth analysis.