Ocean Carriers Case Analysis

Ocean Carriers Case Analysis

By:

Corporate Financial Strategies

Executive Summary

Mary Linn is the Vice President of Finance for Ocean Carriers, a shipping company, with offices in New York and Hong Kong, that owned and operated capesize dry bulk carriers that carried iron ore worldwide. In 2001, Mary Linn received an opportunity for a lucrative shipping deal, but this deal came with strings attached. Since no ship in Ocean Carrier's current fleet met the customer’s requirements, Linn had to evaluate whether or not to commission a new capesize carrier for this customer’s shipping needs. Linn had to evaluate a proposed lease of a ship for a three-year period, beginning in early 2003. Ocean Carriers had to determine if the new carrier would be profitable for them after the three-year lease with the customer was up.

Facts of the case:

• Cost of the new carrier would be $39 million.

• The project would be financed over a three-year period (2000-2003).

• 10% of the total cost is due in the first year ($3.9 million), 10% of the total cost is due the second year ($3.9 million), and the remainder of the ship’s cost is due in the third year ($31.2 million).

• Ships are depreciated on a straight-line basis.

• Salvage value of the ship, after 15 years in commission, is $5 million.

• Revenues are not earned and depreciation is not recognized until the ship is placed into operation.

• Operating costs were expected to average $4,000 per day, and increase annually at 1% above inflation.

• Expected Inflation rate was 3%.

• Charters are not charged daily rate for maintenance/repair days - operating costs were still incurred on these days.

• Every five years, international regulations mandated a special survey to ensure seaworthiness. Special surveys became costly after the 15th year of operation.

• Two options on where the ship should be registered: New York (35% marginal tax rate) or Hong Kong (no marginal tax rate).

Conflictions:

As stated previously, Ocean Carriers is presented with a potential deal regarding the construction of a brand new capesize carrier. The customer is asking for a deal that Ocean Carriers currently cannot fulfill. If the deal is taken,