TOWSON UNIVERSITY

Ocean Carries
Case Report
Darlene Guerra
Caroline Jones
Emad Pilipe
Michael Shinners
Linh Toomey

Executive Summary
Ocean Carriers is an international shipping company. Mary Linn, Vice President of
Finance for Ocean Carriers, is considering investing in a new ship and leasing it to the clients
because the existing ships of Ocean Carriers do not fit the needs of the clients. The company will
be leasing its ship through a charterer and will charge a daily rate of $22,000 per day with an
annual escalation of $200 per day. Ocean Carriers wants to ensure that the company receives a
considerable return on their new investment, especially after the three year lease expires.
Estimations for future vessel orders are not reliable and the daily rates it would receive are
known to fluctuate and are considerably less than that of the contract size.
We first constructed a capital budgeting (base case) model to generate the cash flows of Ocean
Carriers new investment. Assuming that the U.S tax rate is 35%, cost of capital is 9%, and
salvage value at year 25 is $1,000,000, we computed an NPV and IRR for year 15 at
$(7,740,667.93) and 5.25% respectively (Exhibit 2). For year 25, we generated an NPV and IRR
of $(7131855.74) and 5.92% respectively (Exhibit 3). The negative NPV in both years signaled
that the company should not undertake the project. In order to generate a positive NPV, we
decided to conduct a sensitivity analysis to understand the impact of variables such as the tax
rate, premium daily charter, cost of capital, and operating costs. Our analysis projected that the
current tax rate has a negative impact on the NPV. However, at a 0 % tax rate, the company can
generate a positive NPV of $ 516,911 as shown in (Table 1). In order to generate the positive
NPV at a 0% tax rate Ocean Carriers would have to receive a tax exempt status from the U.S.
government, which is very unlikely. The company could however, move its operations to Hong
Kong, where it can receive this favorable tax rate. Additionally, the company can generate a
positive NPV by charging a higher daily charter rate while leasing the ship, a rate of 5.15%, as
noted in (Table 3), this will help the company realize an NPV of $2,141,304.20.
In order to undertake the project and generate a healthy return on the investment, Ocean
Carriers should not agree to the three-year lease term. According to the sensitivity analysis we
conducted, a higher daily charter can help the company generate a positive NPV. They should
pursue such a rate in their contract terms. Additionally, Ocean Carriers do not charge their clients
when the ship is under maintenance, and they assume the full costs of repairs. We believe that if
Ocean Carriers start charging their clients the daily rates even when the ship is under
maintenance, it will become another area of generating income. Moreover, the daily rates are
only charged when the vehicle is fully functional, and Ocean Carriers loses on income when the
ship is under maintenance. If the company starts charterers on a 365-day basis, it can become an
opportunity to generate additional income.