Ocean Carriers Case Report
Ocean Carriers is evaluating a proposed lease for a ship over three years starting in 2003. Currently, Ocean Carriers does not have any ships that are available to meet this customer demand. This report will assist VP of Finance Mary Lynn to make a decision on whether or not to commission a new carrier and how long to hold on to this asset.
Based off a financial analysis using the data Ocean Carriers has provided, the final recommendation is that Ocean Carriers should build a new ship out of its Hong Kong base where the tax rate is 0% and scrap the ship when it is 25 years old. Following this recommendation would be the only scenario where Ocean Carriers sees a positive net present value …show more content…
This suggests that Ocean Carriers would need to operate more than 15 years before the investment becomes profitable, if it were to earn money from the ship’s scrap value and nothing from a ship sale. Although the effects of the survey costs are not felt in this scenario, the ship is still not profitable because of its heavy initial investment. Scenario 2A: Operate carrier for 15 years and sell. Assume 0% tax rate. If Ocean Carriers were to sell the ship in 15 years, they would expect to sell to a buyer for $11,908,196. This value would cause the buyer’s NPV to go to $0. The selling price is at least double the scrap value of the ship, however, discounting the selling price to present value, the sale would only be worth $2,751,665. Therefore, the NPV, found by adding the PV of Ocean Carriers if they scrapped at year 15 with the PV of the sale value, would be –$1,107,830. The results for both scenarios are summarized in Table 2 below.
It should be noted that Ocean Carriers would not capture the entirety of the buyer’s willingness to pay. To calculate the buyer’s highest bid, we do a similar calculation but ignore depreciation. The buyer’s highest bid for the carrier is actually $16,211,425, which would actually result in a negative NPV for the buyer. However, even at the highest willingness to pay for the carrier, Ocean Carriers would still have a negative NPV of –$113,469, resulting in our recommendation to