Ocean Carriers Case

Group Name: D.A.M

Class 32
Michelle Dorman
Stefano Aquilino
Karina Martinez

Executive Summary:
While examining the information concerned with the case, we have determined the main issue as
a decision on whether or not constructing a new capsize carrier would be a profitable long term
investment for Linn. After reviewing all factors relevant to this issue, we have decided that this
would not be a worthy investment if built in the U.S., considering a 35% tax rate. We suggest
that Ocean Carriers manufacture the new ship within Hong Kong under a 0% tax rate. In
reference to their 15-year scrap policy, we ask Ocean Carriers to consider extending their ships
lives to take advantage of potential future profitability.
Summary of Facts:
M. Linn must decide on whether the investment project of building a new vessel and leasing the
vessel for a 3 year contract should be accepted. All data relevant to our final recommendation to
Linn is summarized in exhibits 1 and 3; with all applicable financial performance indicators
located in exhibits 2 and 4.
Statement of Problem:
The proposed contracted lease period is relatively short therefore the company must decide
whether or not it would be profitable to proceed with the investment of the new ship despite the
completion of the contract. Ocean Carriers shall have to consider existing variances in taxation
policies within its current office nations of the USA and China. Additionally fluctuations in the
spot rates shall have to be analyzed, throughout the projected life of the ship. Finally the 15 year
policy should be questioned, considering whether this is a suitable business decision.

Analysis on the U.S. Investment Plan

Concluding extensive analysis we believe that the investment into the new vessel in the
USA would not derive the profit the company initially anticipated.

Following financial analysis, a key investment decision tool, NPV reflected a

considerably negative result as seen in exhibit 2 (derived from exhibit 1), while taking
into consideration the 35% tax rate. Consequently this has negatively impacted the
projected profitability index coming out at a rate of -7.92% . On the basis of financial
results alone these are figures justifiable of the investment.

In coming to this negative NPV figure, we have evaluated various factors that would be
influential in developing such a result.

Despite the initial client offering favorable terms within the contracted period, postclosure of the contract the industry is subjected to declining spot hire rate forecasts.
According to current industry data, reference Exhibit 5, we have realized that the growth
rate of the fleet size is outstripping the growth rate of iron ore vessel shipments. The
average growth rate of iron ore vessel shipments between the years of 1994 and 2001 is
2.43%, in comparison to the average fleet size growth rate at 3.31%. Therefore, we can
anticipate that the supply of ships in the market will drive down the spot hire rates.

As well as the previous data we have presented, we expect average hire rates to decrease
due to expectations of a declining industry. Despite previous data suggesting a growth
trend in the iron ore vessel shipment, a predicted problem is that the industry is expected
to become stagnant over the next two years. There have been several estimates projecting

growth in the industry, however there are no guarantees that these conservative estimates
will hold. Hence, spot rates could fall at an even quicker rate than projected.

Following our statements about the capsize dry bulk industry, we have developed a sense
of pessimism about its long-term prospects.

Analysis on the China Investment Plan

The economic climate of Hong Kong proves to be a significantly better investment option from a
financial standpoint. Due to Hong Kong being a tax haven, the expected financial results of the
proposed project would be sufficient support of the investment project. Our calculations of the
NPV approximate a positive return for the project over a fifteen year period; this additionally
satisfies the 15-year vessel life policy. Furthermore, the IRR, payback period, and the
profitability index (refer to exhibit 4, data derived from exhibit 3) all convincingly outperform
the current U.S. investment plan. Because of Chinas exportation strength, economically demand
will be sufficient to counter balance the declining spot rate.
Analysis on 15-Year Policy
Given the current economic conditions of operating costs above the inflation rate and the spot
rates decreasing instead of increasing in line with inflation, we believe the returns will not
compensate the company enough to maintain individual ship life past the 15 year mark.
Recommendations:
After carefully analyzing the future prospects of the investment in both countries, we recommend
that Linn invests in the construction of a new capsize carrier in Hong Kong. We have also
considered the current 15-year policy and we feel that Ocean Carriers should maintain the policy.

Exhibits and Tables:

Exhibit 1: (Cash flows and discounted values incorporating a 35% tax rate)

Exhibit 2
NPV @ 35% taxation
IRR
Profitability index
Payback

-2,806,422

Do not invest
7.58%
-7.92%
12 years

Exhibit 3 (Cash flows and discounted values incorporating 0% tax rate)

Exhibit 4
NPV @ 0% taxation
IRR
Profitability index
Payback

5,629,181

Invest
11.92%
14.43%
9 years