OCEAN CARRIERS ANALYSIS

DATE: 8/29/2007
TO: MS MARY LINN
CC: PROF. TOM MILLER
FROM: RYAN DALE SEELKE
RE: DECISION ON CAPE SIZE CARRIER
PRIORITY: [URGENT]

Ms Mary Linn,

After careful cash flow analysis and a discount rate (WACC) of 9%,
commissioning a capsize carrier for 25 years is the only appropriate option
for our firm. However, if the discount were instead 10%, both options would
fail the NPV test by yielding negative results. I make this recommendation
after thorough analysis of estimated cash flow and with the desire that our
required 15-year life span will be amended.

With the expected 9% discount rate, commissioning a capsize carrier for

15 years and then scrapping it as is company policy would ultimately yield a
NPV of (1,252,916). However, if Ocean Carriers decided to commission its
ship for 25 years, then the NPV would be a positive 368,557. Since current
company policy is to scrap ships after 15 years, management should look at
these numbers in detail and consider revising its dated policy. As mentioned
above, this recommendation hinges on a 9% discount rate. If our cost of
debt or cost of equity would change, then this would change our WACC and
thus our discount rate. Therefore, if either the cost of equity or debt
increases and our subsequent discount rate were to be 10% rather than the
expected 9%, then both options would yield a negative NPV and neither
should be undertaken. If the opposite happened, and the discount rate was
8%, then both options would yield a positive NPV. In this case, the 25-year
option is more profitable due to its NPV being greater. Details are below
(Italics showing recommendation at appropriate discount rate).

Discount Rate
8% 9% 10%
15 Year $815,580 ($1,252,916) ($3,076,460)
$2,865,29
25 Year 7 $368,557 ($1,793,116)

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 OCEAN CARRIERS ANALYSIS: DECISION ON CAPE SIZE CARRIER

25 Year
15 Year 15 Year Discounte 25 Year
Discounted Discounted d Discounted
Event Operating Investment Operating Investment
Year Cash Flow Cash Flow NPV Cash Flow Cash Flow NPV
0 $0 ($3,900,000) ($1,252,916) ($3,900,000) $368,557
1 $0 ($3,577,982) ($3,577,982)
2 $0 ($26,681,256) ($26,681,256)
3 $4,386,002 ($11,583) $4,386,002 ($11,583)
4 $4,033,065 ($10,945) $4,033,065 ($10,945)
5 $3,706,990 ($10,343) $3,706,990 ($10,343)
6 $3,004,351 ($9,773) $3,004,351 ($9,773)
7 $2,440,887 ($173,346) $2,440,887 ($173,346)
8 $2,205,441 ($8,727) $2,205,441 ($8,727)
9 $2,023,295 ($8,247) $2,023,295 ($8,247)
10 $1,855,438 ($7,793) $1,855,438 ($7,793)
11 $1,700,636 ($7,364) $1,700,636 ($7,364)
12 $1,448,466 ($131,396) $1,448,466 ($131,396)
13 $1,301,784 ($6,575) $1,301,784 ($6,575)
14 $1,189,629 ($6,213) $1,189,629 ($6,213)
15 $1,086,363 ($5,871) $1,086,363 ($5,871)
16 $991,309 ($5,548) $991,309 ($5,548)
17 $606,264 $1,330,125 $606,264 ($178,548)
18 $31,979,920 ($33,232,836) $547,345 ($4,954)
19 $493,370 ($4,681)
20 $443,952 ($4,424)
21 $398,728 ($4,180)
22 $306,107 ($131,605)
23 $272,006 ($3,733)
24 $240,872 ($3,527)
25 $212,552 ($3,333)
26 $186,775 ($3,150)
27 $92,818 $99,208
$35,174,445 ($34,805,887)
With current projections of cash flow and the estimated 9% discount
rate, this project is acceptable only if the company allows the commissioning
of 25-year old ships. However, if economic conditions change or the cost of
capital changes, then this recommendation may change as well.

**Cash Flows are based on a 9% Discount Rate.

7/16/2007 Confidential 2