“Ocean Carriers” case

Assume that Ocean Carriers uses a 9% discount rate. 1) Do you expect daily spot hire rates to increase or decrease next year? (5 points)

2) What factors drive daily hire rates? (5 points)

3) How would you characterize the long-term prospects of the capesize dry bulk industry? (10 points)

4) Should Ms Linn purchase the $39M capsize? Make 2 different assumptions. First, assume that Ocean Carriers is a US firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong. (75 points)

5) What …show more content…
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 trend, which means the supply would increase more slowly in the long run. As a result, daily hire rates would be expected to rise in the long run. I take an optimistic view of the long-term prospects of the capesize dry bulk industry.

4) According to the information in the case, we can get the following table:

Operating days: Initially, 8 days a year were scheduled for maintenance and repairs. The time 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 anticipated 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 value would be depreciated on a straight-line basis over 25 years.