Ocean Carriers Case Ocean Carriers uses a 9% discount rate. 1. Do you expect daily spot rate to increase or decrease next year? Daily spot rates are expected to decrease next year because 63 new vessels are scheduled for delivery over the next year and imports of ore and coal would most likely remain stagnant over the next two years. Imports of iron ore and coal and the number of vessels available are two big factors of spot rates. 2. What factors drive average daily hire rates?
Daily hire rates are driven by the world economy, specifically the iron ore and coal markets, since they made up 85% of the cargo carried by vessels. The higher the demand for these products, the higher the daily rate that could be charged. Trade patterns also affected the demand for vessels. Higher rates could be charged for trade between Australia and Western Europe then can be charged for trade between Western Europe and the United States because the longer distance between Australia and Western Europe.
The age of the vessel also played a role in daily hire rates. A younger boat could demand a daily premium, while the market demands a discount for older boats. For example, new ships earned a 15% premium in daily hire rates relative to the industry wide average and 25 year old ships received a 35% discount form the industry wide average. 3. Should Ms. Linn purchase the $39M capesize? Make two different assumptions. First, assume that Ocean Carriers is a US firm subject to 35% taxation.
Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong. No, Ms. Linn should not purchase a $39M capesize assuming the firm is subject to 35% taxation. Under this assumption, the NPV of the project is -$2,235,504. Alternatively, under the assumption of no taxation, the NPV of the investment is $6,133,877.
Since the net value of the investment is positive, Ms. Linn should purchase the capesize. 4. What do you think of the company’s policy of not operating ships over 15 years old? The policy of not operating ships over 15 years old is not a good policy. If, instead of selling the capesize at the end of year 15, we continue to create income from the boat through its life of 25 years, the NPV of the project would actually be higher, 1,077,169. Therefore the company would be better off using the boat for 25 years then selling after 15.