Refer to the HBS case “Ocean Carriers” and answer the questions below. Each student must turn in a hardcopy of her/his solution and answers in class at the start of the week-4 lecture. She/he must also up-load a softcopy of her/his solution spreadsheet on LMES by then, too. Note: You should complete the related textbook chapters (RWJJ Chapters 7 & 8) before attempting this case. In particular, you need to study the Baldwin Case first (Chapter 8. 2 + material on LMES). Start by constructing a spreadsheet showing 25-year projections for these items (use attached template): a) Age of Ship
b) Event Year c) Calendar Year d) E[Iron Ore Shipments] e) E[Daily Charter Rate] f) Adjustment Factor g) E[Daily Hire Rate] h) Daily Operating Cost i) Days Hired (per year) j) Revenue ($M) k) Operating Costs ($M) l) Depreciation m) Taxable Income n) Tax Paid o) After-Tax Income p) Operating Cash Flow q) Capital Expenditures (CAPEX) r) Change in Net Working Capital (? NWC) s) Asset Sales (after tax) t) Free Cash Flow (FCF) u) PV Factor: 1/(1+r)t v) PV of Cash Flow (PV[CF]) w) Net Working Capital x) Book Value ($M)
y) Scrap Value ($M) Suppose Ocean Carriers uses a 9% discount rate.
1) Should Ms Linn purchase the $39M capsize? Make two different assumptions. First, assume that Ocean Carriers is a U. S. firm subject to a 35% statutory (and effective) marginal tax rate. Second, assume that Ocean Carriers is domiciled in Hong Kong for tax purposes, where ship owners 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, i.
e. , assume a zero tax rate. 2) What do you think of the company’s policy of not operating ships over 15 years old? Assume that Ocean Carriers can fully utilize any tax benefit it derives from asset sales. 3) Suppose Ocean Carriers pays fixed annual dues of $500,000 to an association of ship owners that provides services to its members such as light houses, lobbying efforts, etc. Should a portion of these dues be included in the NPV calculation for the capesize?
If so, what portion seems right? 4) Suppose that, two years ago, Ocean Carriers lost a large lawsuit related to a maritime accident where it allegedly caused a competitor’s ship to sustain extensive damage. As a result, Ocean Carriers was fined $10,000,000, which it settled to pay over 10 years. Should the balance of this fine (now standing at $8,000,000) be included in the NPV calculation for the capesize?