Ocean Carriers

This document is gives an analysis of Ocean Carriers, a company which does business in lease contracts
for ships. An analysis is made of the daily spot hire rates, the long-term prospects for the business, a
certain investment opportunity and the policy of not operating ships over 15 years.
Daily spot hire rates are determined by the supply and demand. Therefore, predicting the forecast for
next years daily spot hire rates depends on the supply of the shipping capacity and the demand of the
shipping capacity.
The number of ships available determines the supply capacity. According to the case, the number of
available ships is defined by the number of ships in the previous year, minus the ships that are being
scrapped, and plus the ships that will be ordered. In the case is not mentioned how many ships will be
scrapped next year, so an assumption needs to be made. On the other hand, in the case is mentioned
that that Ocean Carriers has a policy of not operating vessels older than 15 years. According to Exhibit 2,
which represents the capesize fleet by age category as of December 2000, 25 millions of deadweight
tons are transported by ships older than 15 years. In the last few years, according to the case, the
amount scrappings have been low, so with these two facts in mind, we assume that all ships in the range
of 20 to 24 years and all ships over 24 years will be scrapped (8 deadweight tons). This is less than 10
percent of the capesize fleet that will disappear. The current book order for ships is presented in Exhibit
3, and states that there will be 63 new dry bulk capesizes in 2001 (next year). The available data about
Ocean Carriers states that supply is affected by the increases in size and efficiency that the newer ships
offer. Because of improvements related to size, speed and efficiency, less ships are needed to carry the
same amount of cargo. We expect that the (new) ships in the range 0 to 5 years are able to moderate
the cargo of the scrapped ships, and due to the improvements of the ships, we expect an increase in
supply capacity.
The demand capacity of the ships is expected to remain stagnant of the next two years, according to the
case. However, increase in trading volumes will start from 2003, whereas Australian and Indian ore
exports would begin. Spot rates are therefore expected to fall in 2001 and 2002, where they are
expected to increase in 2003. Therefore demand will decrease in 2001, where an increasing supply
capacity and a decreasing demand capacity would lead to higher daily spot hire rates.
Average daily hire rates are determined by the demand and supply. Supply is set by the available ships
and the efficiency of the ships. The amount of available ships is defined by the number of ships in the
previous year, minus the ships that are being scrapped, and plus the ships that will be ordered, as
mentioned before. Availability of the ships is also determined by the maintenance and repair days of a
ship. What cargo the vessel carries, world economy and changes in trade patterns are factors that set
the demand.
The long-term prospects are optimistic. The long-term forecast for worldwide iron ore vessel shipments
was for 2% annual growth during 2002 to 2005, and then dropping to 1.5% thereafter, according to the
case. This is also supported by the calculation made in Exhibit 6, where economy factors for this
business seem favorable.
In order to determine whether Ms Linn should purchase a $ 39 million capesize, a net present value
analysis need to be conducted (see Appendix). There are two different scenarios - that Ocean Carriers is

1) a US firm and subject to 35 % taxation, or 2) that the company is located Hong Kong where no
taxation is required.
According to the first scenario NPV is $ - 6,970,182
The second scenario shows a NPV of $ 826,665
In conclusion, if Oceans Carriers is located in the US, they should not take the opportunity because the
NPV is negative. If they operate in Hong Kong, they dont have to pay taxes, and therefore can have a
positive NPV.
By using the policy of not operating ships over 15 years old, the company protects it selves from
uncertainties and risks inheriting form the age of the ships. The disadvantage of this policy is that the
company cannot take advantage of the ROI in the later years in which the investments in the ships have
been paid off. This means the policy of the maximum of 15 years is not maximizing the profits and
returns of the investment. By using a more optimal policy the company would be able make more
profits on the investments. This policy would mean that the ships would be discarded after a longer year
of service.

Appendix

Exhibit 3

Current order book for dry bulk capesizes by delivery date

2001

Number of vessels

2002

63

2003

33

2004

21

US calculation (35% tax)

Age
Days
of Even
Daily Daily
of
Annual
Shi t Calende Hire Operatin M& M&R Annual Operatin Depreciatio
p Year r Year Rate g Costs R
cost Revenue g Costs
n
USD

USD

Days USD

USD

USD

USD

EBIT

Tax

EBIAT

CAPEX

USD

USD

USD

USD

After-Tax
CAPEX
Proceeds
Depreciatio Changes in
from
n
NWC
Sale
Cash Flow
USD

USD

USD

PV(CF)

NWC

USD

USD

- 2 000

2 2 002
3 2 003

4 2 004

5 2 005

6 2 006

7 2 007

8 2 008

9 2 009

10 2 010

11 2 011

10

12 2 012

11

13 2 013

12

14 2 014

13

15 2 015

14

16 2 016

15

17 2 017

16

18 2 018

17

19 2 019

18

20 2 020

19

21 2 021

20

22 2 022

Scrap
Value

USD

USD

3 900 000

1 2 001

Book
Value

20 00
0
20 20
0
20 40
0
18 71
4
17 28
3
17 48
1
17 68
2
17 88
6
18 09
2
17 42
8
17 62
8
17 83
1
18 03
6
18 24
3
14 76
2
14 93
2
15 10
4
15 27
8
15 45
4
14 65
4

4 000 8
4 160 8
4 326 8
4 499 8
4 679 8
4 867 12
5 061 12
5 264 12
5 474 12
5 693 12
5 921 16
6 158 16
6 404 16
6 660 16
6 927 16
7 204 16
7 492 16
7 792 16
8 103 16
8 427 16

160 00
0
161 60
0
163 20
0
149 71
2
138 26
4
209 77
2
212 18
4
214 63
2
217 10
4
209 13
6
282 04
8
285 29
6
288 57
6
291 88
8
236 19
2
238 91
2
241 66
4
244 44
8
247 26
4
234 46
4

7 140 00
0 1 460 000
7 211 40
0 1 518 400
7 282 80
0 1 579 136
6 680 89
8 1 642 301
6 170 03
1 1 707 993
6 170 79
3 1 776 313
6 241 74
6 1 847 366
6 313 75
8 1 921 260
6 386 47
6 1 998 111
6 152 08
4 2 078 035
6 152 17
2 2 161 157
6 223 01
9 2 247 603
6 294 56
4 2 337 507
6 366 80
7 2 431 007
5 151 93
8 2 528 248
5 211 26
8 2 629 378
5 271 29
6 2 734 553
5 332 02
2 2 843 935
5 393 44
6 2 957 692
5 114 24
6 3 076 000

500 000

- 500 000 - 420 840 500 000

1 560 000

4 120 000

1 442 000 2 678 000

15 000

4 223 000 3 260 931 515 000

1 560 000

4 133 000

1 446 550 2 686 450

15 450

4 231 000 2 997 347 530 450

1 560 000

4 143 664

1 450 282 2 693 382

15 914

4 237 468 2 754 064 546 364

1 560 000

3 478 597

1 217 509 2 261 088

16 391

3 804 697 2 268 616 562 754

1 560 000

2 902 038

1 015 713 1 886 324 - 300 000

16 883

3 129 442 1 711 912 579 637

1 620 000

2 774 480

971 068 1 803 412

60000

17 389

3 406 023 1 709 368 597 026

1 620 000

2 774 380

971 033 1 803 347

60000

17 911

3 405 436 1 567 958 614 937

1 620 000

2 772 498

970 374 1 802 123

60000

18 448

3 403 675 1 437 749 633 385

1 620 000

2 768 365

968 928 1 799 437

60000

19 002

3 400 436 1 317 781 652 387

1 620 000

2 454 049

858 917 1 595 132 - 350 000

60000

19 572

2 845 560 1 011 695 671 958

1 630 000

2 361 015

826 355 1 534 660

70000

20 159

3 144 501 1 025 669 692 117

1 630 000

2 345 416

820 896 1 524 520

70000

20 764

3 133 757

937 766 712 880

1 630 000

2 327 057

814 470 1 512 587

70000

21 386

3 121 201

856 888 734 267

1 630 000

2 305 800

807 030 1 498 770

70000

22 028

3 106 742

782 494 756 295

1 630 000

993 690

347 792

645 899 - 750 000

70000

22 689

1 503 210

347 351 778 984

1 710 000

871 890

305 162

566 729

150000

23 370

2 253 359

477 698 802 353

1 710 000

826 743

289 360

537 383

150000

24 071

2 223 313

432 411 826 424

1 710 000

778 087

272 331

505 757

150000

24 793

2 190 964

390 936 851 217

1 710 000

725 754

254 014

471 740

150000

25 536

2 156 204

352 966 876 753

1 710 000

328 246

114 886

213 360 - 850 000

150000

26 303

1 047 057

157 249 903 056

7 800 000
39 000 00
0
37 440 00
0
35 880 00
0
34 320 00
0
32 760 00
0
31 500 00
0
29 880 00
0
28 260 00
0
26 640 00
0
25 020 00
0
23 750 00
0
22 120 00
0
20 490 00
0
18 860 00
0
17 230 00
0
16 350 00
0
14 640 00
0
12 930 00
0
11 220 00
0

3 305 58
9
3 404 75
7
3 506 89
9
3 612 10
6
3 720 47
0
3 832 08
4
3 947 04
6
4 065 45
8
4 187 42
1
4 313 04
4
4 442 43
5
4 575 70
8
4 712 98
0
4 854 36
9
5 000 00
0
5 150 00
0
5 304 50
0
5 463 63
5
5 627 54
9 510 000
4
5 796 37
8 650 000
0

21

23 2 023

22

24 2 024

23

25 2 025

24

26 2 026

25

27 2 027

14 82
3
14 99
3
15 16
6
15 34
1
13 44
8

8 764 16
9 115 16
9 480 16
9 859 16
10 253 16

237 16
8
239 88
8
242 65
6
245 45
6
215 16
8

5 173 22
7 3 199 040
5 232 55
7 3 327 001
5 292 93
4 3 460 081
5 354 00
9 3 598 485
4 693 35
2 3 742 424

1 730 000

244 187

85 466

158 722

170000

27 092

1 861 630

256 498 930 147 6 920 000

1 730 000

175 556

61 444

114 111

170000

27 904

1 816 207

229 578 958 052 5 190 000

1 730 000

102 853

35 998

66 854

170000

28 742

1 768 113

1 730 000

25 524

8 934

16 591

170000

29 604

1 716 987

205 044 986 793 3 460 000

1 016 39
182 675
7 1 730 000

170000

- 1 016 397

5 290 679

516 412

1 730 000

- 779 072
- 272 675 - 506 397
Calender
Initial
Book
Event Year Year
investment
Value
Cash Flow
0

2000

2001

2002

3900000

3900000 3900000

3900000

7800000 3900000
3120000
0

3 050 67
9

5 970 26
1
6 149 36
9
6 333 85
0
6 523 86
6
6 719 58
2

PV(CF)
3900000
3577981,65
1
26260415,7
9
33738397,4
4

31200000 39000000

Sum
PV(CF)=

26 768 21
5

NPV=

26 768 21
5
6 970 182

After-Tax
Proceeds
from Sale

Cash Flow

PV(CF)

NWC

USD

USD

USD

USD

PV=

Hong Kong calculation (0% tax)

Age
Daily
of Event Calender Hire
Ship Year
Year
Rate
USD

Daily
Days
Operating of
Costs
M&R
USD

Days

M&R
cost

Annual
Revenue

USD

USD

Annual
Operating
Costs
Depreciation
USD

USD

EBIT

Tax EBIAT

USD

USD

USD

CAPEX
Changes in
CAPEX Depreciation
NWC
USD

USD

Book
Value

Scrap
Value

USD

USD

- 2 000

3 900 000

1 2 001

7 800 000

2 2 002

500 000

- 500 000 - 420 840 500 000 39 000 000

3 2 003

20 000

4 000

160 000 7 140 000

1 460 000

1 560 000 4 120 000

- 4 120 000

15 000

5 665 000 4 374 419 515 000 37 440 000 3 305 589

4 2 004

20 200

4 160

161 600 7 211 400

1 518 400

1 560 000 4 133 000

- 4 133 000

15 450

5 677 550 4 022 120 530 450 35 880 000 3 404 757

5 2 005

20 400

4 326

163 200 7 282 800

1 579 136

1 560 000 4 143 664

- 4 143 664

15 914

5 687 751 3 696 648 546 364 34 320 000 3 506 899

6 2 006

18 714

4 499

149 712 6 680 898

1 642 301

1 560 000 3 478 597

- 3 478 597

16 391

5 022 206 2 994 577 562 754 32 760 000 3 612 106

7 2 007

17 283

4 679

138 264 6 170 031

1 707 993

1 560 000 2 902 038

- 2 902 038 - 300 000

16 883

4 145 155 2 267 542 579 637 31 500 000 3 720 470

8 2 008

17 481

4 867 12

209 772 6 170 793

1 776 313

1 620 000 2 774 480

- 2 774 480

60000

17 389

4 377 091 2 196 714 597 026 29 880 000 3 832 084

9 2 009

17 682

5 061 12

212 184 6 241 746

1 847 366

1 620 000 2 774 380

- 2 774 380

60000

17 911

4 376 469 2 015 048 614 937 28 260 000 3 947 046

10 2 010

17 886

5 264 12

214 632 6 313 758

1 921 260

1 620 000 2 772 498

- 2 772 498

60000

18 448

4 374 049 1 847 646 633 385 26 640 000 4 065 458

11 2 011

18 092

5 474 12

217 104 6 386 476

1 998 111

1 620 000 2 768 365

- 2 768 365

60000

19 002

4 369 364 1 693 272 652 387 25 020 000 4 187 421

10

12 2 012

17 428

5 693 12

209 136 6 152 084

2 078 035

1 620 000 2 454 049

- 2 454 049 - 350 000

60000

19 572

3 704 477 1 317 070 671 958 23 750 000 4 313 044

11

13 2 013

17 628

5 921 16

282 048 6 152 172

2 161 157

1 630 000 2 361 015

- 2 361 015

70000

20 159

3 970 857 1 295 209 692 117 22 120 000 4 442 435

12

14 2 014

17 831

6 158 16

285 296 6 223 019

2 247 603

1 630 000 2 345 416

- 2 345 416

70000

20 764

3 954 653 1 183 416 712 880 20 490 000 4 575 708

13

15 2 015

18 036

6 404 16

288 576 6 294 564

2 337 507

1 630 000 2 327 057

- 2 327 057

70000

21 386

3 935 671 1 080 491 734 267 18 860 000 4 712 980

14

16 2 016

18 243

6 660 16

291 888 6 366 807

2 431 007

1 630 000 2 305 800

- 2 305 800

70000

22 028

3 913 772

985 761 756 295 17 230 000 4 854 369

15

17 2 017

14 762

6 927 16

236 192 5 151 938

2 528 248

1 630 000 993 690

- 993 690 - 750 000

70000

22 689

1 851 002

427 717 778 984 16 350 000 5 000 000

16

18 2 018

14 932

7 204 16

238 912 5 211 268

2 629 378

1 710 000 871 890

- 871 890

150000

23 370

2 558 521

542 390 802 353 14 640 000 5 150 000

17

19 2 019

15 104

7 492 16

241 664 5 271 296

2 734 553

1 710 000 826 743

- 826 743

150000

24 071

2 512 673

488 689 826 424 12 930 000 5 304 500

18

20 2 020

15 278

7 792 16

244 448 5 332 022

2 843 935

1 710 000 778 087

- 778 087

150000

24 793

2 463 295

439 528 851 217 11 220 000 5 463 635

19

21 2 021

15 454

8 103 16

247 264 5 393 446

2 957 692

1 710 000 725 754

- 725 754

150000

25 536

2 410 217

394 548 876 753 9 510 000 5 627 544

20

22 2 022

14 654

8 427 16

234 464 5 114 246

3 076 000

1 710 000 328 246

- 328 246 - 850 000

150000

26 303

1 161 944

174 503 903 056 8 650 000 5 796 370

21

23 2 023

14 823

8 764 16

237 168 5 173 227

3 199 040

1 730 000 244 187

- 244 187

170000

27 092

1 947 096

268 274 930 147 6 920 000 5 970 261

22

24 2 024

14 993

9 115 16

239 888 5 232 557

3 327 001

1 730 000 175 556

- 175 556

170000

27 904

1 877 651

237 344 958 052 5 190 000 6 149 369

23

25 2 025

15 166

9 480 16

242 656 5 292 934

3 460 081

1 730 000 102 853

- 102 853

170000

28 742

1 804 111

209 219 986 793 3 460 000 6 333 850

24

26 2 026

15 341

9 859 16

245 456 5 354 009

3 598 485

1 730 000

170000

29 604

1 725 921

183 625 1 016 397 1 730 000 6 523 866

25

27 2 027

13 448

10 253 16

215 168 4 693 352

3 742 424

1 730 000 - 779 072

6 660 677

650 134

25 524

25 524

- - 779 072

170000 - 1 016 397

4 693 352

Sum PV(CF)= 34 565 063

PV=
NPV=

34 565 063
826 665

- 6 719 582