Group name: Pretty Woman corporate team

Daniela Rossini (1649649) Class 17; Giorgi Kolbaia (1651397) Class 17; Luca
Beisans (1675347) Class 17; Maxence de Poulpiquet (1646504) Class 17

Executive Summary
Given the current and expected market conditions, the financial department of the Ocean
Carriers Group is to evaluate the potential revenues and expenses of commissioning a new
capsize ship for cargo transportation in order to meet a received demand for lease. A
recommended approach would consist in analyzing the expectations for the world economy,
trends in world trade and potential contracts; however, an estimated time of service should be
assigned in order to predict future cash flows.

Summary of facts
In January 2001, Mary Linn, vice president of Finance for Ocean Carriers, had to decide
whether to accept an offered leasing contract for the duration of three years. In the event of
acceptance of the above-mentioned contract, the profits of the company would depend on the
agreed hire rates, operating costs, ship depreciation and inflation. After the closure of the
contract, further income would be evaluated based on expected market daily hire rates. The
conditions for the proposed lease are shown in exhibit 1.

Statement of problem
The duration of the leasing contract is quite short so the company has to analyze whether the
investment as a whole will prove to be profitable even after the closure of the contract. In
order to do so, they will have to take into account the fluctuations of the daily spot rates in the
short and long terms, as well as existing differences in taxation policies within its offices in
Hong Kong and in the United States. Last but not least, the company has to question the
tenability of its 15-year policy.

Analysis
Spot hire rates
Daily spot hire rates are predicted to fall in 2001 and 2002 due to an increase in the fleet size
(63 new vessels are scheduled for delivery) and expected stagnation in iron ore and coal
shipments. Iron ore and coal imports are very important for the company because they are
about 85% of the cargo it carries every year. Therefore, due to this future stagnation the
company will face a weak market position, resulting in lower daily spot hire rates.

Overall investment
Despite negative market conditions in the upcoming 2 years, long-term prospects look much
more promising. Iron ore vessel shipments are going to increase due to new players joining
the iron ore industry: India and Australia. As a consequence, in this new global market, daily
charter rates and spot daily charter rates will probably rise producing additional demand for
shipments.

Companys 15-year policy

The company used to scrap or sell ships just before their 15th year of navigation to avoid
paying for maintenance expenses related to the 3rd special survey.
According to our calculations presented in the Exhibit 2, scrapping the vessel before the 15th
year is not recommended. Results show that the NPV of a ship after 15 years is higher than
the scrap value of 5 million dollars. Thus, we advise the company to keep the ship longer
than 15-year period, since operating the vessel over a longer period will earn additional profit
and the ship can be scrapped some time later, granting the same million dollars.
However, there are few factors that signal why company might be willing to get rid of the
vessel. Firstly, if the companys priority is to keep a young fleet of cargo ships, operating
ships older than 15 years may not be the optimal choice. In fact, older ships are riskier and
are less efficient.
Secondly, due to low demand for older ships, leasing the same vessel in future might be an
ineffective venture.

Investment decision
We computed two separate calculations for given two assumptions in Exhibit 2. According to
assumption A the company operates in United States, thus has to pay 35% of taxes, whilst
according to assumption B, company operates in Hong Kong, and its exempt of taxes. Our
calculations show that NPV in the first scenario is negative in both 2017 (-6,350,239) and
2027 (- 4,285,462) due to very high taxes, while in the second scenario the NPV is positive in
both 2017 (1,719,018) and 2027 (4,025,600).

Its important to understand why we presented two columns for 2017. First column shows the
numbers in the case of operating a vessel for 15 years, whilst second column shows the
values in case ship was to be operated for a longer period. Another important fact to consider
is that in the first scenario, when the company operates ship only for 15 years, we excluded
the capital expenditure for 2017 related to the survey, Whilst, in the second scenario, while
operating the ship for more than 15 years, we added the yearly capital expenditure back.
We made an important assumption; we did not include capital expenditures linked to the last
special survey, because we assumed that the company is scrapping the ship just before the
special survey is conducted.

Recommendations
In conclusion, keeping in mind what we demonstrated before, the company should invest in
the production of the new vessel only in Hong Kong and should not scrap it after 15 years,
because its NPV will still be positive.

Gio Schermata 2014-03-02 alle 22.44.04 Sche Schermata

2014-03-02 alle 22.44.04 Schermata 2014-03-02 alle 22.44.04
Schermata 2014-03-02 alle 22.44.04 rmata 2014-03-02 alle

22.44

Exhibit 2
Year

2000

Event year

2001

2002
1

2003

2004

Age of ship
Capital investment

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2017

2026

2027

10

11

12

13

14

15

16

17

17

26

27

10

11

12

13

14

15

15

24

25

$ 3,900,000 $ 3,900,000 $ 31,200,000

Depreciation of ship's value (yearly)

$ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $ 1,560,000 $

1,560,000 $

1,560,000 $

1,560,000 $

1,560,000

Accumulated Dempreciation

$ 1,560,000 $ 3,120,000 $ 4,680,000 $ 6,240,000 $ 7,800,000 $ 9,360,000 $ 10,920,000 $ 12,480,000 $ 14,040,000 $ 15,600,000 $ 17,160,000 $ 18,720,000 $ 20,280,000 $ 21,840,000 $ 23,400,000 $

23,400,000 $

37,440,000 $

39,000,000

Year-end book value of a ship

$ 37,440,000 $ 35,880,000 $ 34,320,000 $ 32,760,000 $ 31,200,000 $ 29,640,000 $ 28,080,000 $ 26,520,000 $ 24,960,000 $ 23,400,000 $ 21,840,000 $ 20,280,000 $ 18,720,000 $ 17,160,000 $ 15,600,000 $

Working Capital

15,600,000 $

1,560,000 $

546,364 $

562,754 $

579,637 $

597,026 $

614,937 $

633,385 $

652,387 $

671,958 $

692,117 $

712,880 $

734,267 $

756,295 $

756,295 $

986,793 $

Capital Expenditure

60,000 $

60,000 $

60,000 $

60,000 $

60,000 $

70,000 $

70,000 $

70,000 $

70,000 $

70,000 $

150,000 $

170,000

Accumulated Capital Expenditure

60,000 $

120,000 $

180,000 $

240,000 $

300,000 $

370,000 $

440,000 $

510,000 $

580,000 $

650,000 $

500,000 $

515,000 $

530,450 $

650,000 $

800,000 $

2,250,000 $

Total Book Value 1

$ 37,940,000 $ 36,395,000 $ 34,850,450 $ 33,306,364 $ 31,702,754 $ 30,099,637 $ 28,497,026 $ 26,894,937 $ 25,293,385 $ 23,682,387 $ 22,071,958 $ 20,462,117 $ 18,852,880 $ 17,244,267 $ 15,706,295 $

15,556,295 $

296,793 $

Expected hire rate (daily)

20,000 $

20,200 $

20,400 $

18,714 $

17,283 $

17,481 $

17,682 $

17,886 $

18,092 $

17,428 $

17,628 $

17,831 $

18,036 $

18,243 $

14,762 $

14,762 $

15,341 $

13,448

Expected operating cost (daily)

4,000 $

4,160 $

4,326 $

4,499 $

4,679 $

4,867 $

5,061 $

5,264 $

5,474 $

5,693 $

5,921 $

6,158 $

6,404 $

6,660 $

6,927 $

6,927 $

9,859 $

10,253

12

12

12

12

12

16

16

16

16

16

16

16

Maintenance days

16

Operating revenue

$ 7,140,000 $ 7,211,400 $ 7,282,800 $ 6,680,898 $ 6,170,031 $ 6,170,793 $ 6,241,746 $ 6,313,758 $ 6,386,476 $ 6,152,084 $ 6,152,172 $ 6,223,019 $ 6,294,564 $ 6,366,807 $

5,151,938 $

5,151,938 $

5,354,009 $

Operating costs

$ 1,460,000 $ 1,518,400 $ 1,579,136 $ 1,642,301 $ 1,707,993 $ 1,776,313 $ 1,847,366 $ 1,921,260 $ 1,998,111 $ 2,078,035 $ 2,161,157 $ 2,247,603 $ 2,337,507 $ 2,431,007 $

2,528,248 $

2,528,355 $

3,598,485 $ 3,742,424.08

Pre-tax earnings 2

$ 4,120,000 $ 4,133,000 $ 4,143,664 $ 3,478,597 $ 2,842,038 $ 2,774,480 $ 2,774,380 $ 2,772,498 $ 2,768,365 $ 2,444,049 $ 2,361,015 $ 2,345,416 $ 2,327,057 $ 2,305,800 $

1,063,690 $

913,583 $

25,524 $

(609,072)

Tax expense (35%)

$ 1,442,000 $ 1,446,550 $ 1,450,282 $ 1,217,509 $

807,030 $

372,292 $

319,754 $

8,934 $

(213,175)

After-tax earnings

$ 2,678,000 $ 2,686,450 $ 2,693,382 $ 2,261,088 $ 1,847,324 $ 1,803,412 $ 1,803,347 $ 1,802,123 $ 1,799,437 $ 1,588,632 $ 1,534,660 $ 1,524,520 $ 1,512,587 $ 1,498,770 $

691,399 $

593,829 $

16,591 $

(395,897)

5,000,000

994,713 $

971,068 $

971,033 $

970,374 $

968,928 $

855,417 $

826,355 $

820,896 $

814,470 $

4,693,352

Assumption A : USA
Capital investment and scraping

$ (3,900,000) $ (3,900,000) $ (31,200,000)

(500,000) $

(15,000) $

(15,450) $

(15,914) $

(21,386) $

734,267 $

(22,028) $

(29,604) $

986,793

Operating revenue

$ 7,140,000 $ 7,211,400 $ 7,282,800 $ 6,680,898 $ 6,170,031 $ 6,170,793 $ 6,241,746 $ 6,313,758 $ 6,386,476 $ 6,152,084 $ 6,152,172 $ 6,223,019 $ 6,294,564 $ 6,366,807 $

5,151,938 $

5,151,938 $

5,354,009 $

4,693,352

Operating costs

$ 1,460,000 $ 1,518,400 $ 1,579,136 $ 1,642,301 $ 1,707,993 $ 1,776,313 $ 1,847,366 $ 1,921,260 $ 1,998,111 $ 2,078,035 $ 2,161,157 $ 2,247,603 $ 2,337,507 $ 2,431,007 $

2,528,248 $

2,528,355 $

3,598,485 $

3,742,424

(16,883) $

(17,389) $

(17,911) $

(18,448) $

300,000

994,713 $

971,068 $

971,033 $

970,374 $

968,928 $

(19,002) $

(19,572) $

(20,159) $

(20,764) $

Change in working capital

Capital expenditure

(16,391) $

5,000,000 $

350,000

855,417 $

826,355 $

820,896 $

814,470 $

750,000 $

Tax expense (35%)

$ 1,442,000 $ 1,446,550 $ 1,450,282 $ 1,217,509 $

807,030 $

372,292 $

319,754 $

8,934 $

(213,175)

Operating cash flow3

$ 4,238,000 $ 4,246,450 $ 4,253,382 $ 3,821,088 $ 3,167,324 $ 3,423,412 $ 3,423,347 $ 3,422,123 $ 3,419,437 $ 2,868,632 $ 3,164,660 $ 3,154,520 $ 3,142,587 $ 3,128,770 $

2,251,399 $

1,553,829 $

1,746,591 $

1,164,103

Net cash flow4

$ (3,900,000) $ (3,900,000) $ (27,462,000) $ 4,231,450 $ 4,237,932 $ 3,805,174 $ 3,150,933 $ 3,406,529 $ 3,405,958 $ 3,404,212 $ 3,400,989 $ 2,849,630 $ 3,145,088 $ 3,134,361 $ 3,121,823 $ 3,107,384 $

7,985,666 $

1,531,801 $

1,716,987 $

7,150,896

Present Value @9%

$ (3,900,000) $ (3,577,982) $ (23,114,216) $ 3,267,456 $ 3,002,258 $ 2,473,102 $ 1,878,799 $ 1,863,488 $ 1,709,336 $ 1,567,394 $ 1,436,615 $ 1,104,325 $ 1,118,188 $ 1,022,362 $

2,011,348 $

385,814 $

199,115 $

760,802

$ (6,350,239) $

(7,975,773) $

(5,046,134) $

(4,285,462)

934,195 $

853,095 $

Net Present Value (NPV)

Internal Rate of Return (IRR)

5.3438%

Assumption B : Hong Kong

Capital investment and scraping

5,000,000 $

5,000,000

Change in working capital

$ (3,900,000) $ (3,900,000) $ (31,200,000)

$

(21,386) $

734,267 $

(22,028) $

(29,604) $

986,793

Operating revenue

$ 7,140,000 $ 7,211,400 $ 7,282,800 $ 6,680,898 $ 6,170,031 $ 6,170,793 $ 6,241,746 $ 6,313,758 $ 6,386,476 $ 6,152,084 $ 6,152,172 $ 6,223,019 $ 6,294,564 $ 6,366,807 $

5,151,938 $

5,151,938 $

5,354,009 $

4,693,352

Operating costs

$ 1,460,000 $ 1,518,400 $ 1,579,136 $ 1,642,301 $ 1,707,993 $ 1,776,313 $ 1,847,366 $ 1,921,260 $ 1,998,111 $ 2,078,035 $ 2,161,157 $ 2,247,603 $ 2,337,507 $ 2,431,007 $

2,528,248 $

2,528,355 $

3,598,485 $

3,742,424

(500,000) $

(15,000) $

(15,450) $

(15,914) $

Capital expenditure
Tax expense (35%)
Operating cash flow

$
$

(16,391) $

(16,883) $

(17,389) $

(17,911) $

(18,448) $

300,000
-

$
$

(19,002) $

(19,572) $

(20,159) $

(20,764) $

350,000
-

750,000 $

$ 5,680,000 $ 5,693,000 $ 5,703,664 $ 5,038,597 $ 4,162,038 $ 4,394,480 $ 4,394,380 $ 4,392,498 $ 4,388,365 $ 3,724,049 $ 3,991,015 $ 3,975,416 $ 3,957,057 $ 3,935,800 $

2,623,690 $

1,873,583 $

1,755,524 $

950,928

Net cash flow

$ (3,900,000) $ (3,900,000) $ (26,020,000) $ 5,678,000 $ 5,688,214 $ 5,022,683 $ 4,145,647 $ 4,377,597 $ 4,376,991 $ 4,374,587 $ 4,369,917 $ 3,705,047 $ 3,971,443 $ 3,955,257 $ 3,936,293 $ 3,914,414 $

8,357,957 $

1,851,555 $

1,725,921 $

6,937,721

Present Value @9%

$ (3,900,000) $ (3,577,982) $ (21,900,513) $ 4,384,458 $ 4,029,674 $ 3,264,399 $ 2,471,914 $ 2,394,695 $ 2,196,664 $ 2,014,181 $ 1,845,900 $ 1,435,827 $ 1,411,986 $ 1,290,120 $ 1,177,922 $ 1,074,655 $

2,105,117 $

466,351 $

200,151 $

738,122

1,719,018 $

82,252 $

3,285,700 $

4,025,600

Net Present Value (NPV)

Internal Rate of Return (IRR)

9.9944%

1.
2.

= year-end book value + working capital - accumulated capital expenditure

= op. revenue - op. costs - yearly depreciation - yearly capital expenditure

3. = op. revenue - op. costs - yearly capital expenditure - tax expense

4. = op. cash flow + capital investment and scraping + change in working capital