# Ocean Carriers Inc.: Case Study: Ocean Carriers Inc.

Ocean Carriers Inc. is a global provider and operator of capesize dry bulk carriers carrying mainly iron ore. The objective of this analysis is to determine whether Ocean Carriers should launch the two year production of a new capsize carrier incurring costs of $39 million. To thoroughly analyze this decision, various factors should be considered such as net present value of future cash flows, current and future expectations of supply and demand determining costs of production and expected revenues from future orders. It is recommended to minimize costs that Ocean Carriers consider producing the capsize carrier in Hong Kong as it provides tax benefits as well as an optimal geographical location to receive resources.

SUMMARY

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As a ship gets older, its ability to attract income falls. We can approach this concept from two angles. Firstly, maintenance costs increase (in 2003, estimated to be 16 days of maintenance, forgoing $64,000 of income) as do the capital expenditures anticipated for special surveys (an additional $750,000). Additionally, vessels older than 25 years are subject to 35% discount hire rate what significantly lowers the company’s profits ( Exhibit 1).From the sustainability viewpoint on firm’s operation, the negative externality effect on the environment of using less fuel-efficient older ships should be taken into consideration for the long-term prospect. Contrary operating ships over 15 years old is certainly beneficial when looking at company’s net present value for 25 years being

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Since the Hong Kong option produces a positive NPV of ….. as compared to ……… for New York in 15 years, it would be more preferable for the company to launch the project in its Asian office. The greater DCF value of Hong Kong is a result of a no corporate tax policy and an advantage of proximity to Indian and Australian markets(comparative advantage over New York location). Since NPV for Hong Kong is positive and IRR of….. is higher than the real interest rate of 5.825%, the investment would be recommended.In the calculations we have committed to, a fundamental to our analysis, assumption, of a disposition of 15-year old ship after a 3-year lease and 12 year internal usage. Hence only two capital expenditures for the surveys will be taken into account :$300,000 in 2007 and $350,000 in 2012 together with the expected daily charter rate for 1st year of an investment of $20,000 and daily operating costs of $4000. Eventually if the company decides to sell off the ship after 15 years at the scrap value of $5,000,000 and conducting the straight line depreciation for 25 years of an initial investment , the net pure loss on the sell will amount to $10.6m (accounted in Capital Losses & Gains).Additionally when considering, the taxation in New York, the payback period(Exhibit 4) increases to 14 from 11