ocean carries hbs case study

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Ocean Carriers Case Study Rashidul Esrar (3019094) | Class 17 | Group Lone Wombat Executive Summary Ocean Carriers must analyze the costs and benefits of commissioning a new capsize carrier to lease to an eager customer. We evaluate global trends based on economics and future cash flow expectations to recommend that Ocean Carriers immediately commission a new capesize carrier based on a comparison of NPV throughout the lifetime of the new carrier ship. In fact, NPV of the new carrier is larger than the worth of the scraps after 15 years. The Facts Mary Linn, Ocean Carriers' VP of Finance, must decide whether or not to accept a leasing contract for the duration of three years. Expenses include cost of commissioning a new capesize ship, maintenance, operations, and depreciation throughout its lifetime while revenue depends on the charter rate. After the contract expires, further income would be evaluated based on expected market daily hire rates, assuming another lease is not signed for simplification. The Problem Due to the relatively short term of the contract, Ocean Carriers has to analyze whether or not to the investment in commissioning a new capesize is profitable even after the term of the contract. In order to do so, we take into account the fluctuations of the daily spot rates in the short and long terms along with the differences in taxation policies in Hong Kong and the United States. Ultimately, we assess the practicality of Ocean Carriers’ policy of decommissioning ships after 15 years. Analysis Spot Hire Rates Average daily hire rates are dependent on fleet size and the supply and demand of items being shipped. As 63 new vessels are scheduled for delivery in the upcoming year, daily spot hire rates are predicted to drop during 2001-2002 due to the increase in fleet size. Couple this

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Harvard Business School's case study on ocean carriers solution

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Page 1: Ocean Carries HBS Case Study

Ocean Carriers Case Study Rashidul Esrar (3019094) | Class 17 | Group Lone Wombat

 Executive Summary

Ocean Carriers must analyze the costs and benefits of commissioning a new capsize carrier to

lease to an eager customer. We evaluate global trends based on economics and future cash

flow expectations to recommend that Ocean Carriers immediately commission a new

capesize carrier based on a comparison of NPV throughout the lifetime of the new carrier

ship. In fact, NPV of the new carrier is larger than the worth of the scraps after 15 years.

The Facts

Mary Linn, Ocean Carriers' VP of Finance, must decide whether or not to accept a leasing

contract for the duration of three years. Expenses include cost of commissioning a new

capesize ship, maintenance, operations, and depreciation throughout its lifetime while

revenue depends on the charter rate. After the contract expires, further income would be

evaluated based on expected market daily hire rates, assuming another lease is not signed for

simplification.

The Problem

Due to the relatively short term of the contract, Ocean Carriers has to analyze whether or not

to the investment in commissioning a new capesize is profitable even after the term of the

contract. In order to do so, we take into account the fluctuations of the daily spot rates in the

short and long terms along with the differences in taxation policies in Hong Kong and the

United States. Ultimately, we assess the practicality of Ocean Carriers’ policy of

decommissioning ships after 15 years.

Analysis

Spot Hire Rates

Average daily hire rates are dependent on fleet size and the supply and demand of items

being shipped. As 63 new vessels are scheduled for delivery in the upcoming year, daily spot

hire rates are predicted to drop during 2001-2002 due to the increase in fleet size. Couple this

Page 2: Ocean Carries HBS Case Study

increase in fleet size with expected stagnation in coal and iron ore shipments, which account

for 85 percent of cargo per year, and Ocean Carriers should expect a drop in daily spot hire

rates because of its weaker position in the market.

Future Prospects

There is reason to be optimistic about long-term prospects for market demand of capesizes.

India’s and Australia’s entrance into the iron ore market should make iron ore vessel

shipments increase, and as a consequence, time charter rates and spot charter rates should

increase, thus leading to an increased demand for shipments.

Making a Decision

U.S. Assumption—

Table 1 displays the 2017 NPV and 2027 NPV as -$6.35m and -$4.29m, which can be

attributed to the 35 percent tax rate.

Hong Kong Assumption—

Table 1 displays the 2017 NPV and 2027 NPV as $1.72m and $4.03m, which can be

attributed to the tax-exempt status.

When examining Table 1, it is interesting to note the two columns for 2017: one models the

company operating the ship for 15 years and the other models operating the ship past 15

years, which includes capital expenditures associated with the 3rd special survey.

15-year Policy?

Ocean Carriers scraps or sells ships by the 15th year of commission in order to forgo the

maintenance expenses that result from readying the ship to pass its 3rd special survey.

Referring to Table 1, we do not recommend scrapping the vessel because the NPV of a 15

year-old ship is higher than the $5m value of the scraps. Therefore, Ocean Carriers can

operate ships past the 15-year period to generate additional revenue that will outweigh the

Page 3: Ocean Carries HBS Case Study

expenses of maintaining ships for the 3rd survey; these ships can also be scrapped after 15-

year for $5m.

There are associated risks and questions about efficiency, however, when considering

operating ships older that 15 years. Additionally, older ships are less desirable and may be

more difficult to lease.

Recommendations

After thorough examination of the numbers and possible market scenarios, Ocean Carriers

should invest in producing a new capesize ship from its Hong Kong office; furthermore, the

ship should not be scrapped after 15 years because its NPV is worth more than the scrapped

parts.

Exhibits & Tables

Page 4: Ocean Carries HBS Case Study

Table 1