Oceans Carriers Case Study

Ocean Carriers Inc. is a shipping company that owns and operates capsize dry bulk carriers that mainly carries iron ore worldwide. Originally, the company had implemented a policy, which decided that it would not operate vessels older than 15 years old. Due to international regulations, the company was mandated to complete a special survey that would ensure whether vessels were seaworthy. These regulations also required that the vessels undergo maintenance by the fifteenth year should it choose to continue operating them, whose expenditures would prove to be costly. Or at the fifteenth year, the vessels would be scraped and demolished, in which Ocean Carriers Inc. would then sell the metal for an approximated value of $5 million.

Our analysis required us to determine whether it is worth maintaining the ships and operating them for an additional 10 years, pushing the vessel age to 25 years. In order to determine whether Ocean Carriers Inc. should pursue a longer project life, we had to calculate the project’s NPV in both the United States and Hong Kong. The main difference between the host countries is that in the United States, Oceans Carriers Inc. is required to pay a 35% company tax, while there is no tax requirement in Hong Kong. We decided to design a balance sheet statement in order to determine what the projected net revenue cash flows would be so that we would be able to discount them and conclude whether the addition of these cash flows would pose a positive or negative NPV.

In order to calculate the company’s expected revenues over the life of the ship, we used the provided daily hire rates as projected on a yearly basis and multiplied that by the operation days while making the needed adjustment on a yearly basis. We then had to subtract the operating income that consisted of the operating costs that were said to inflate yearly by 1% and the ship’s annual depreciation which was depreciated on a straight line basis (25 years). After