Ocean Carriers

Submitted By:
Fahad Ashraf (13E00003)
Atif Raza (13E00088)
Rana Sohail (13E00075)
Sara Samdani (13E00097)
Nadia Virk (13E00096)
Maira Taj (11E00132)

Submitted To: Dr. Nawazish Mirza

Case Facts:
Following are some critical facts about the case:
1. Ocean

carriers

provides

capesize

shipping
ships

company
for

the

transportation of iron and coal (Note that

they are not the manufacturer of the ships)
2. Their offices are located in New York &
Hong Kong
3. They were offered attractive rates by a
customer who is supposed to lease their
ship for a period of Three Years.
4. None of their existing ship meets the
requirement of this customer & in order to
serve this NEW customer, they have to
take a capital budgeting decision for the
manufacturing of the new ship that costs
39 Millions USD.
5. Ocean carriers prefer to charter the ships
on time charter basis such as one year,
three year, or five year. They didnt prefer
the spot charter rates.
6. For this ship to operate, an operating cost
of 4000 USD per day is to be born by
ocean carriers for 365 days. This cost is
supposed to grow by 1% over the inflation
rate of 3% i.e 4% in total every year.

7. Maintenance days are 8 for first five years,

12 for next five years & then 16 for the
ships older then ten years.
8. A Survey Cost (Treated as Capital
Expenditure) is to be born by Ocean
Carriers from 2007 to onward, which is to
be depreciated by SL method. (Exhibit #
1).
9. Ocean carriers provide ships to the
customers with full operation and
maintenance
10.. Customer is charged a per day rate based
on:
a. Spot rate, rate charged to customers
with out contracts.
b. Contractual rate, rates charged to the

customers that have a proper

contract with the Ocean Carriers.
11. Ships with different years (life) earn either
premium rate or discount rate as
mentioned in exhibit # 4
12. In 2001, 63 new vessels will be added to
the over all fleet world wide.
Exhibits:

Case Analysis:
Firm / Industry Analysis:
1. The industry in which Ocean Carriers
operates is highly dependent upon global
economic conditions.
2. Stronger the economy, more the demand of
iron ore & coal.
3. More the demand of iron ore & coal, more
the need of ships for transportation of
material.
4. The demand is dependent on trade pattern.
5. Spot charter rates were more fluctuating as
compared with the contractual rates.
6. Companies

would

prefer

to

have

contractual rates while charters would like

to follow the spot rates.
7. As seen from Exhibit # 3, we can see that
63 ships will be delivered, that might
reduce the spot rates, resulting in reduction

in

revenue

of

the

company

(ocean

carriers).
8. If the demand of Ore from Australia &
India increases more then what is being
fulfilled by the addition of the new 63
ships, the spot rates will increase.
9. There is always risk associated, as
termination of contract is possible. In this
particular case the risk anticipated by VP
of Finance is low.
10. One of the major risks associated with this
special ship is that, after the termination of
contract with the existing Charter, there
is a strong possibility that might be NO
other Charter seeks for such a special ship.
In that case, Ocean Carriers might have to
bear a loss on daily rates.
Business Analysis:
We made financials of the said project with
different

assumptions

based

on

different

scenarios to find out the best possible financial

results to choose the best option in the end at the
time of decision. While company has offices in
cities of Hong Kong and New York so we assume
that company has a chance to register this ship in
New York or Hong Kong.
Scenario No. 1: New York

Assumptions:
Registration of Ship in New York
Corporate Tax Rate in US: 35%
Required Rate of Return: 12%

Input Values:
Revues: Daily Charter Rate x (365 Days
of Maintenance)
Operating Expenses: Daily Expenses x 365
(Expenses increase at 4% annual rate)
Survey Cost is Capital expenditures and to
depreciate in 5 years with SL.
Depreciation is taken in 25 Years with
Straight line Method.
Loss in the sale of equipment is taken with
the difference in Net Book value and the
Scrap Value.
Net Income is formulated by difference of
Revenues and Costs.
Survey Depreciation and Ship
Depreciations are added Back.
Capital Cost of Ship, Capital expenditure
of Survey and Injection of NWC is
subtracted.
Disposal of NWC and Disposal of Scrap
Ship is added back in year 15.

Results:
NPV is Negative i.e. - 10,911,334 USD
IRR: 3.8%
NPV is negative and IRR is very low compared
to required rate of return so Miss Mary Linn
should reject this Business option based on
financials and Market analysis.
Scenario No. 2: Hong Kong
Assumptions:
Registration of Ship in New York
Corporate Tax Rate in US: 16.5%
Required Rate of Return: 12%
Input Values:
Revues: Daily Charter Rate x (365 Days
of Maintenance)
Operating Expenses: Daily Expenses x 365
(Expenses increase at 4% annual rate)
Survey Cost is Capital expenditures and to
depreciate in 5 years with SL.
Depreciation is taken in 25 Years with
Straight line Method.
Loss in the sale of equipment is taken with
the difference in Net Book value and the
Scrap Value.
Net Income is formulated by difference of
Revenues and Costs.

 Survey Depreciation and Ship

Depreciations are added back.
Capital Cost of Ship, Capital expenditure
of Survey and Injection of NWC is
subtracted.
Disposal of NWC and Disposal of Scrap
Ship is added back in year 15.
Results:
NPV is Negative i.e. 7,627,615 USD
IRR: 6.1%
NPV is negative and IRR is very low compared
to required rate of return so Miss Mary Linn
should reject this Business option based on
financials and Market analysis.
Results are better than US scenario but still the
figures are still not suitable enough to take
different decision.