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. Answer
With 35% tax in the US we have a negative NPV of 35% hence recommended not to proceed with the project. If Ocean carriers were domiciled in HK where there is no tax the projection is of a positive NPV of close to 5M USD over a period of 25 years. Hence the project can be approved/accepted. 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.
When choosing 15 years as the useful life of the ship Ocean Carriers is being conservative. But due to this policy the company is making some mistakes of not reaping the benefits from the return on the investment beyond 15 years( similar shortfall as the payback method). The company could perhaps increase the useful life of the ship to 18-20 years(there will be still some salvage value remaining after this). 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?