Ocean Carriers

Harvard Business School Case 202-029

Case Software 202-702
Copyright 2001 by the President and Fellows of Harvard College
This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.

Exhibit 1

Capital Expenditures Anticipated in Preparation for Special Surveys

2007

2012

2017

2022

2027

300,000

350,000

750,000

850,000 1,250,000

Exhibit 3

Current order book for dry bulk capesizes by delivery date

2001

Number of vessels

2002
63

2003
33

2004
21

Exhibit 4

Daily Hire Rate Adjustment Factor for Dry Bulk Capesizes Based on Age of Vessel

Over 24 years 20 to 24 years 15 to 19 years 10 to 14 years

0.65

0.75

0.8

5 to 9 years Under 5 years

1.05

1.15

Exhibit 5

Worldwide Iron Ore Vessel Shipments, Fleet Size and Average Daily Hire Rates for Capesize Charters, 1994-2001
1994

1995

1996

1997

Iron ore vessel shipments

375

397

385

424

Fleet size

NA

NA

NA

540

Avg. spot rate

$16,851

$20,149

$11,730

$14,794

Avg. 3-yr charter rate

$18,250

$18,544

$14,079

$16,063

Step 1: Determine Actual PV of Capsize Cost @ 9% DCF

Date
Cost

Description
Year
PV of Yearly
Installments
Actual Capsize cost

age Daily Hire Rates for Capesize Charters, 1994-2001

1998

1999

2000

2001E

420

410

440

436

523

523

552

612

$10,105

$9,427

$22,575

$13,076

$12,626

$15,344

Determine Actual PV of Capsize Cost @ 9% DCF

Jan-01
$3,900,000.00

Jan-02
$3,900,000.00

Jan-03
$31,700,000.00

2nd Installment to ship

(10% of 39M cost)

3rd (final) Installment to ship

builder (remaining balance
due + 500,00 NWC)

$3,900,000.00

$3,577,981.65

$26,681,255.79

Initial installment to secure

ship builder's contract (10%
of 39M cost)

$34,159,237.44

Exhibit 6

Forecasted Daily Time Charter Rates for New Capesize Vessel

Age of Ship

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Event Year Calendar Year

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

Iron Ore
Shipments
(Millions of Tons)
440
436
445
454
463
472
479
486
493
501
508
516
524
532
540
548
556
564
573
581
590
599
608
617
626
636
645
655

% Growth
7.30%
-0.90%
2.00%
2.00%
2.00%
2.00%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%
1.50%

Avg Daily Charter

Rate
15,344
14,747
15,072
15,403
15,742
16,088
16,273
16,460
16,650
16,841
17,035
17,231
17,429
17,629
17,832
18,037
18,245
18,454
18,667
18,881
19,098
19,318
19,540
19,765
19,992
20,222
20,455
20,690

% Growth
21.50%
-3.90%
2.20%
2.20%
2.20%
2.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%
1.20%

Adjustment
Factor for
Hire Rate

1.15
1.15
1.15
1.15
1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80
0.80
0.80
0.80
0.80
0.75
0.75
0.75
0.75
0.75
0.65

Adjusted
Daily Hire
Rate

17,713
18,103
18,501
18,714
17,283
17,481
17,682
17,886
18,092
17,428
17,628
17,831
18,036
18,243
14,762
14,932
15,104
15,278
15,454
14,654
14,823
14,993
15,166
15,341
13,448

Expected
Daily Hire
Rate

20,000
20,200
20,400
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
###
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Scenario (Case) 1 - Ocean Carriers U

Project NPV

15 year Capesize Carrier taxed at 35%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($33,232,836) + $24,912,586 = ($8,320,250)< 0
NPV < 0, not considered a profitable undertaking
IRR

nhruban:
For IRR we would
include the tiered
investments rather
than the total of $39MM

4.558%

Reject

Step 1: Determine the PV of Initial In

Purchase:

-$39,000,000.00

Age of Ship

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount Rate
Calendar Year Capsize Purchase
2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Actual PV Cost of Capsize:

9.00%
PV Capsize
-$3,900,000.00
-$3,577,981.65
-$26,260,415.79

CAPEX

-$300,000.00

-$350,000.00

-$33,738,397.44

Step 2: Determine PV of Operating & T

Age of Ship

Event Year
-2
-1
0
1
2
3
4

0
1
2
3
4
5
6

Calendar Year
2000
2001
2002
2003
2004
2005
2006

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714

5
6
7
8
9
10
11
12
13
14
15

7
8
9
10
11
12
13
14
15
16
17

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$16,460
$16,650
$16,841
$17,035
$17,231
$17,429
$17,629
$17,832
$18,037
$18,245
$18,454

1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

(Case) 1 - Ocean Carriers US Firm taxed at 35%

nhruban:
For NPV we would take
Cashflows for periods D16:D18
as well as U42:U56 and then
discount them another way
would be @NPV(0.09,range
described above,starting with
D17)+D16

+ $24,912,586 = ($8,320,250)< 0

p 1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
$0.00

Change WC

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$756,294.86

Capsize Scrap
Value

$5,000,000.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$1,155,365.88
$5,756,294.86

PV Investment
Cash Flow
-$3,900,000.00
-$3,577,981.65
-$26,681,255.79
-$11,582.75
-$10,945.17
-$10,342.68
-$9,773.36
-$173,345.65
-$8,727.01
-$8,246.62
-$7,792.68
-$7,363.73
-$131,395.54
-$6,575.35
-$6,213.41
-$5,871.38
-$5,548.19
$1,330,125.34

: Determine PV of Operating & Terminal Cash Flows

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$20,000
$20,200
$20,400
$18,714

357
357
357
357

$7,140,000
$7,211,400
$7,282,800
$6,680,898

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44

Capsize
Depreciation

nhruban:
1,360,000
ok

1,360,000
1,360,000
1,360,000

nhruban:
typo,
should say
1.56MM,
the ship
has a BV of
0

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

357
353
353
353
353
353
349
349
349
349
349

$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

$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71

$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Discounted Initial
Project Investment

nhruban:
Initial project investment discounted
would be the values 2000 through
2001, you wouldn't discount the NWC
investments because those are
accounted for in your calculations
below

($33,232,835.62)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR
nhruban:
typo, should say:
1,56MM, terminal value
is at the end of 25
years is 0

Survey Depreciation
nhruban:
typo,
should say
1.56MM,
the ship
has a BV of
0

$0
$0
$0
$0

Profitability Index
(PI)
($39,000,000.00)
0.74
$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86
$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$6,187,693.61
4.558%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

Total
Depreciation

Tax Rate: 35.00%

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$1,360,000
$1,360,000
$1,360,000
$1,360,000
nhruban:
Addtl. Depreciation
would start in year 5

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

Tax at 35%

$1,512,000.00
$1,516,550.00
$1,520,282.40
$1,287,508.80

$2,808,000.00
$2,816,450.00
$2,823,381.60
$2,391,087.76

$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$0

nhruban:
Addtl.
Depreciation $3,042,037.50
$1,420,000
would start in year 5

$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,360,000

$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$1,064,713.13
$1,041,067.92
$1,041,033.08
$1,040,374.16
$1,038,927.82
$925,417.06
$896,355.37
$890,895.63
$884,469.94
$877,029.89
$442,291.64

$1,977,324.38
$1,933,411.85
$1,933,347.15
$1,932,123.44
$1,929,437.37
$1,718,631.69
$1,664,659.97
$1,654,520.45
$1,642,587.02
$1,628,769.79
$821,398.75

nhruban:
Here we would also want to consid
effects (for the with tax scenario) o
of the vessel. The vessel has a boo
of $39MM minus the sum of deprec
$15,600,000, the vessel can only b
$5,000,000, so the company will in
loss from the sale in the amount o
$10.6MM, this will lead to an instan
refund ($3.71MM) which has to be
considered in calculating the Incom
tax

9%
Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91

Capsize Scrap
Value

nhruban:
ok

Capsize Scrap
after Tax Value

Operating Cash
Flows

$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86

PV of Operating Cash
Flows

nhruban:
ok $3,206,877.99

$2,947,757.30
$2,708,568.32
$2,226,877.71

$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
-$756,294.86

$5,000,000.00

nhruban:
Here we would also want to consider the tax
effects (for the with tax scenario) of the sale
of the vessel. The vessel has a book value
of $39MM minus the sum of depreciation =
$15,600,000, the vessel can only be sold for
$5,000,000, so the company will incur a
loss from the sale in the amount of
$10.6MM, this will lead to an instant tax
refund ($3.71MM) which has to be
considered in calculating the Income after
tax

$3,250,000.00

$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$6,187,693.61

$1,849,217.40
$1,674,237.32
$1,535,727.56
$1,408,180.49
$1,290,653.29
$1,112,489.52
$1,002,836.65
$916,818.43
$837,670.64
$764,863.43
$1,429,810.02

Total Discounted
Operating Cash

$24,912,586.08

Scenario (Case) 2 - Ocean Carriers Hon

Project NPV

15 year Capesize Carrier taxed at 0%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($33,232,836) + $33,194,869 = ($37,966)< 0
NPV < 0, not considered a profitable undertaking
IRR

9.198%

Reject

Step 1: Determine the PV of Initial I

Purchase:

-$39,000,000.00

Age of Ship

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount Rate
Calendar Year Capsize Purchase
2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Actual PV Cost of Capsize:

9.00%
PV Capsize
-$3,900,000.00
-$3,577,981.65
-$26,260,415.79

CAPEX

-$300,000.00

-$350,000.00

-$33,738,397.44

Step 2: Determine PV of Operating & T

Age of Ship

Event Year
-2
-1
0
1
2
3
4

0
1
2
3
4
5
6

Calendar Year
2000
2001
2002
2003
2004
2005
2006

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714

5
6
7
8
9
10
11
12
13
14
15

7
8
9
10
11
12
13
14
15
16
17

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$16,460
$16,650
$16,841
$17,035
$17,231
$17,429
$17,629
$17,832
$18,037
$18,245
$18,454

1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

se) 2 - Ocean Carriers Hong Kong Firm taxed at 0%

+ $33,194,869 = ($37,966)< 0

p 1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
$0.00

Change WC

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$756,294.86

Capsize Scrap
Value

$5,000,000.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$1,155,365.88
$5,756,294.86

PV Investment
Cash Flow
-$3,900,000.00
-$3,577,981.65
-$26,681,255.79
-$11,582.75
-$10,945.17
-$10,342.68
-$9,773.36
-$173,345.65
-$8,727.01
-$8,246.62
-$7,792.68
-$7,363.73
-$131,395.54
-$6,575.35
-$6,213.41
-$5,871.38
-$5,548.19
$1,330,125.34

Determine PV of Operating & Terminal Cash Flows

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$20,000
$20,200
$20,400
$18,714

357
357
357
357

$7,140,000
$7,211,400
$7,282,800
$6,680,898

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000

nhruban:
should be 1.56M
previous tab

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

357
353
353
353
353
353
349
349
349
349
349

$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

$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71

$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Profitability Index
(PI)
($39,000,000.00)
0.98
$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66
$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$8,379,985.25
9.198%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

Discounted Initial
Project Investment

($33,232,835.62)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR

Tax Rate: 0.00%

Survey Depreciation

Total
Depreciation

nhruban:
$0 see
should be 1.56MM
$0
previous tab

$0
$0

$1,360,000
$1,360,000
$1,360,000
$1,360,000

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

Tax at 0%

$0.00
$0.00
$0.00
$0.00

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$0

$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,360,000

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$45,654,048.05

9%

Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91

Capsize Scrap
Value

Capsize Scrap
after Tax Value

Operating Cash
Flows

$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66

PV of Operating Cash
Flows

$4,374,419.41
$4,022,119.56
$3,696,647.57
$2,994,577.14

$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
-$756,294.86

$5,000,000.00

$5,000,000.00

$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$8,379,985.25

$2,431,651.94
$2,196,714.20
$2,015,048.11
$1,847,645.78
$1,693,271.94
$1,441,507.42
$1,295,208.63
$1,183,415.80
$1,080,491.28
$985,760.74
$1,936,389.81

Total Discounted
Operating Cash

$33,194,869.34

Scenario (Case) 3 - Ocean Carriers

Project NPV

25 year Capesize Carrier taxed at 35%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($34,805,887) + $26,916,515 =
NPV < 0, not considered a profitable undertaking
IRR

6.272%

Reject

Step 1: Determine the PV of Initial

Purchase:

-$39,000,000.00

Age of Ship

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

Discount Rate

9.00%

Calendar Year Capsize Purchase

2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

PV Capsize
-$3,900,000.00
-$3,577,981.65
-$26,260,415.79

Actual PV Cost of Capsize:

-$33,738,397.44

CAPEX

-$300,000.00

-$350,000.00

-$750,000.00

-$850,000.00

Step 2: Determine PV of Operating &

Age of Ship
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

Calendar Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15
$16,460
1.05
$16,650
1.05
$16,841
1.05
$17,035
1.05
$17,231
1.05
$17,429
1.00
$17,629
1.00
$17,832
1.00
$18,037
1.00
$18,245
1.00
$18,454
0.80
$18,667
0.80
$18,881
0.80
$19,098
0.80
$19,318
0.80
$19,540
0.75
$19,765
0.75
$19,992
0.75
$20,222
0.75
$20,455
0.75
$20,690
0.65

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714
$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762
$14,932
$15,104
$15,278
$15,454
$14,654
$14,823
$14,993
$15,166
$15,341
$13,448

Case) 3 - Ocean Carriers US Firm taxed at 35%

$26,916,515 = ($7,889,372)< 0

1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
-$778,983.71
-$802,353.22
-$826,423.82
-$851,216.53
-$876,753.03
-$903,055.62
-$930,147.29
-$958,051.70
-$986,793.26
-$1,016,397.05
$0.00

Change WC

Capsize Scrap
Value

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
-$22,688.85
-$23,369.51
-$24,070.60
-$24,792.71
-$25,536.50
-$26,302.59
-$27,091.67
-$27,904.42
-$28,741.55
-$29,603.80
$1,016,397.05

Determine PV of Operating & Terminal Cash Flows

$0.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
-$772,688.85
-$23,369.51
-$24,070.60
-$24,792.71
-$25,536.50
-$876,302.59
-$27,091.67
-$27,904.42
-$28,741.55
-$29,603.80
$0.00
$1,016,397.05

PV Investment
Cash Flow
-$3,900,000.00
-$3,577,981.65
-$26,681,255.79
-$11,582.75
-$10,945.17
-$10,342.68
-$9,773.36
-$173,345.65
-$8,727.01
-$8,246.62
-$7,792.68
-$7,363.73
-$131,395.54
-$6,575.35
-$6,213.41
-$5,871.38
-$5,548.19
-$178,547.67
-$4,954.19
-$4,681.48
-$4,423.79
-$4,180.27
-$131,604.62
-$3,732.73
-$3,527.26
-$3,333.10
-$3,149.62
$99,208.29

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$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
$14,932
$15,104
$15,278
$15,454
$14,654
$14,823
$14,993
$15,166
$15,341
$13,448

357
357
357
357
357
353
353
353
353
353
349
349
349
349
349
349
349
349
349
349
349
349
349
349
349

$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
$5,211,268
$5,271,296
$5,332,022
$5,393,446
$5,114,246
$5,173,227
$5,232,557
$5,292,934
$5,354,009
$4,693,352

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46
$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71
$7,203.77
$7,491.92
$7,791.60
$8,103.27
$8,427.40
$8,764.49
$9,115.07
$9,479.68
$9,858.86
$10,253.22

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44
$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61
$2,629,377.52
$2,734,552.62
$2,843,934.72
$2,957,692.11
$3,075,999.80
$3,199,039.79
$3,327,001.38
$3,460,081.44
$3,598,484.69
$3,742,424.08

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Discounted Initial
Project Investment

($34,805,887.40)

Profitability Index
(PI)
($39,000,000.00)
0.80
$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86
$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$2,211,209.91
$2,183,359.30
$2,153,312.60
$2,120,964.02
$2,086,203.53
$1,834,057.44
$1,791,630.02
$1,746,206.73
$1,698,112.62
$1,646,987.00
$2,110,500.20
6.272%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
IRR

nhruban:
Initial project investment
discounted would be the values
2000 through 2001, you wouldn't
discount the NWC investments
because those are accounted for
in your calculations below

Tax Rate: 35.00%

Discount Rate:

Survey Depreciation

$0
$0
$0
$0
$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$150,000
$150,000
$150,000
$150,000
$150,000
$170,000
$170,000
$170,000
$170,000
$170,000
$0

Total
Depreciation

$1,360,000
$1,360,000
$1,360,000
$1,360,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,510,000
$1,510,000
$1,510,000
$1,510,000
$1,510,000
$1,530,000
$1,530,000
$1,530,000
$1,530,000
$1,530,000
$1,360,000

EBIAT (NOPAT)
Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56
$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,113,690.39
$1,071,890.48
$1,026,743.38
$978,087.28
$925,753.89
$508,246.20
$444,187.21
$375,555.62
$302,852.56
$225,524.31
-$409,072.08

Tax at 35%

$1,512,000.00
$1,516,550.00
$1,520,282.40
$1,287,508.80
$1,064,713.13
$1,041,067.92
$1,041,033.08
$1,040,374.16
$1,038,927.82
$925,417.06
$896,355.37
$890,895.63
$884,469.94
$877,029.89
$389,791.64
$375,161.67
$359,360.18
$342,330.55
$324,013.86
$177,886.17
$155,465.52
$131,444.47
$105,998.40
$78,933.51
-$143,175.23

$2,808,000.00
$2,816,450.00
$2,823,381.60
$2,391,087.76
$1,977,324.38
$1,933,411.85
$1,933,347.15
$1,932,123.44
$1,929,437.37
$1,718,631.69
$1,664,659.97
$1,654,520.45
$1,642,587.02
$1,628,769.79
$723,898.75
$696,728.81
$667,383.20
$635,756.73
$601,740.03
$330,360.03
$288,721.69
$244,111.15
$196,854.17
$146,590.80
-$265,896.85

nhruban:
The salvage value here would be
higher than the 5MM in year 2017, we
can assume an increase in the amoun
of inflation (i.e. 3% per year) which
leads to a salvage value of $6,719,58

9%

Net Working
Capital

Capsize Scrap
Value

$15,000.00
$15,450.00
$15,913.50
$16,390.91
$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
$22,688.85
$23,369.51
$24,070.60
$24,792.71
$25,536.50
$26,302.59
$27,091.67
$27,904.42
$28,741.55
$29,603.80
-$1,016,397.05

nhruban:
The salvage value here would be
higher than the 5MM in year 2017, we
can assume an increase in the amount
of inflation (i.e. 3% per year) which
leads to a salvage value of $6,719,582

$0.0

Capsize Scrap
after Tax Value

$0.0

Operating Cash
Flows

PV of Operating Cash
Flows

$4,153,000.00
$3,206,877.99
$4,161,000.00
$2,947,757.30
$4,167,468.10
$2,708,568.32
$3,734,696.86
$2,226,877.71
$3,380,441.74
$1,849,217.40
$3,336,022.73
$1,674,237.32
$3,335,436.37
$1,535,727.56
$3,333,675.33
$1,408,180.49
$3,330,435.82
$1,290,653.29
$3,129,060.09
$1,112,489.52
$3,074,501.23
$1,002,836.65
$3,063,756.94
$916,818.43
$3,051,200.61
$837,670.64
$3,036,741.79
$764,863.43
$2,211,209.91
$510,951.30
$2,183,359.30
$462,858.50
$2,153,312.60
$418,797.06
$2,120,964.02
$378,445.50
$2,086,203.53
$341,507.48
$1,834,057.44
$275,441.88
$1,791,630.02
$246,853.27
$1,746,206.73
$220,729.16
$1,698,112.62
$196,926.44
$1,646,987.00
$175,227.08
nhruban:
$2,110,500.20
$206,001.30
Similar
to the 15 yrs with tax
scenario,
we would have to consider the tax
effects of the sale of the vessel (for the
with tax scenario).
The Book Value at this point would be
0, the proceeds from sale would be
$6,719,582 (see below AB72), which
leads to a tax liability of $2,351,854

ax scenario,
the tax
essel (for the

nt would be
would be
72), which
2,351,854

Total Discounted
Operating Cash

$26,916,515.02

Scenario (Case) 4 - Ocean Carriers Hon

Project NPV

25 year Capesize Carrier taxed at 0%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($34,805,887) + $35,117,302 =
NPV > 0, profitable undertaking
IRR

10.069%

Proceed with
Project

Step 1: Determine the PV of Initial

Purchase:

-$39,000,000.00

Age of Ship

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

Discount Rate

9.00%

Calendar Year Capsize Purchase

2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

PV Capsize
-$3,900,000.00
-$3,577,981.65
-$26,260,415.79

Actual PV Cost of Capsize:

-$33,738,397.44

CAPEX

-$300,000.00

-$350,000.00

-$750,000.00

-$850,000.00

Step 2: Determine PV of Operating &

Age of Ship
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27

Calendar Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15
$16,460
1.05
$16,650
1.05
$16,841
1.05
$17,035
1.05
$17,231
1.05
$17,429
1.00
$17,629
1.00
$17,832
1.00
$18,037
1.00
$18,245
1.00
$18,454
0.80
$18,667
0.80
$18,881
0.80
$19,098
0.80
$19,318
0.80
$19,540
0.75
$19,765
0.75
$19,992
0.75
$20,222
0.75
$20,455
0.75
$20,690
0.65

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714
$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762
$14,932
$15,104
$15,278
$15,454
$14,654
$14,823
$14,993
$15,166
$15,341
$13,448

e) 4 - Ocean Carriers Hong Kong Firm taxed at 0%

Nicole:
see comment on
previous tabs

$35,117,302 = $311,415 > 0

1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
-$778,983.71
-$802,353.22
-$826,423.82
-$851,216.53
-$876,753.03
-$903,055.62
-$930,147.29
-$958,051.70
-$986,793.26
-$1,016,397.05
$0.00

Change WC

Capsize Scrap
Value

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
-$22,688.85
-$23,369.51
-$24,070.60
-$24,792.71
-$25,536.50
-$26,302.59
-$27,091.67
-$27,904.42
-$28,741.55
-$29,603.80
$1,016,397.05

Determine PV of Operating & Terminal Cash Flows

$0.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
-$772,688.85
-$23,369.51
-$24,070.60
-$24,792.71
-$25,536.50
-$876,302.59
-$27,091.67
-$27,904.42
-$28,741.55
-$29,603.80
$0.00
$1,016,397.05

PV Investment
Cash Flow
-$3,900,000.00
-$3,577,981.65
-$26,681,255.79
-$11,582.75
-$10,945.17
-$10,342.68
-$9,773.36
-$173,345.65
-$8,727.01
-$8,246.62
-$7,792.68
-$7,363.73
-$131,395.54
-$6,575.35
-$6,213.41
-$5,871.38
-$5,548.19
-$178,547.67
-$4,954.19
-$4,681.48
-$4,423.79
-$4,180.27
-$131,604.62
-$3,732.73
-$3,527.26
-$3,333.10
-$3,149.62
$99,208.29

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$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
$14,932
$15,104
$15,278
$15,454
$14,654
$14,823
$14,993
$15,166
$15,341
$13,448

357
357
357
357
357
353
353
353
353
353
349
349
349
349
349
349
349
349
349
349
349
349
349
349
349

$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
$5,211,268
$5,271,296
$5,332,022
$5,393,446
$5,114,246
$5,173,227
$5,232,557
$5,292,934
$5,354,009
$4,693,352

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46
$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71
$7,203.77
$7,491.92
$7,791.60
$8,103.27
$8,427.40
$8,764.49
$9,115.07
$9,479.68
$9,858.86
$10,253.22

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44
$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61
$2,629,377.52
$2,734,552.62
$2,843,934.72
$2,957,692.11
$3,075,999.80
$3,199,039.79
$3,327,001.38
$3,460,081.44
$3,598,484.69
$3,742,424.08

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Discounted Initial
Project Investment

($34,805,887.40)

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
IRR

Profitability Index
(PI)
($39,000,000.00)
1.04
$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66
$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$2,601,001.54
$2,558,520.97
$2,512,672.78
$2,463,294.56
$2,410,217.39
$2,011,943.61
$1,947,095.54
$1,877,651.20
$1,804,111.01
$1,725,920.51
$1,967,324.97
10.069%

Tax Rate: 0.00%

Survey Depreciation

$0
$0
$0
$0
$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$150,000
$150,000
$150,000
$150,000
$150,000
$170,000
$170,000
$170,000
$170,000
$170,000
$0

Total
Depreciation

$1,360,000
$1,360,000
$1,360,000
$1,360,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,510,000
$1,510,000
$1,510,000
$1,510,000
$1,510,000
$1,530,000
$1,530,000
$1,530,000
$1,530,000
$1,530,000
$1,360,000

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56
$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,113,690.39
$1,071,890.48
$1,026,743.38
$978,087.28
$925,753.89
$508,246.20
$444,187.21
$375,555.62
$302,852.56
$225,524.31
-$409,072.08

Tax at 0%

$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56
$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,113,690.39
$1,071,890.48
$1,026,743.38
$978,087.28
$925,753.89
$508,246.20
$444,187.21
$375,555.62
$302,852.56
$225,524.31
-$409,072.08

9%
Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91
$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
$22,688.85
$23,369.51
$24,070.60
$24,792.71
$25,536.50
$26,302.59
$27,091.67
$27,904.42
$28,741.55
$29,603.80
-$1,016,397.05

Capsize Scrap
Value

$0.0

Capsize Scrap
after Tax Value

$0.0

Operating Cash
Flows

$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66
$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$2,601,001.54
$2,558,520.97
$2,512,672.78
$2,463,294.56
$2,410,217.39
$2,011,943.61
$1,947,095.54
$1,877,651.20
$1,804,111.01
$1,725,920.51
$1,967,324.97

PV of Operating Cash
Flows

$4,374,419.41
$4,022,119.56
$3,696,647.57
$2,994,577.14
$2,431,651.94
$2,196,714.20
$2,015,048.11
$1,847,645.78
$1,693,271.94
$1,441,507.42
$1,295,208.63
$1,183,415.80
$1,080,491.28
$985,760.74
$601,021.69
$542,390.43
$488,688.90
$439,527.84
$394,547.92
$302,157.13
$268,273.52
$237,344.39
$209,218.85
$183,625.01
$192,026.28

Total Discounted
Operating Cash

$35,117,301.49

Scenario (Case) 5 - Ocean Carriers US Firm taxed at

Project NPV

15 year Capesize Carrier taxed at 35%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($33,571,789) + $26,897,676 = ($6,674,113)< 0
NPV < 0, not considered a profitable undertaking
IRR

4.558%

Reject

Step 1: Determine the PV of Initial In

Purchase:

-$39,000,000.00

Age of Ship

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount Rate
Calendar Year Capsize Purchase
2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Actual PV Cost of Capsize:

8.00%
PV Capsize
-$3,900,000.00
-$3,611,111.11
-$26,748,971.19

CAPEX

-$300,000.00

-$350,000.00

-$34,260,082.30

Step 2: Determine PV of Operating & T

Age of Ship

Event Year
-2
-1
0
1
2
3
4

0
1
2
3
4
5
6

Calendar Year
2000
2001
2002
2003
2004
2005
2006

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714

5
6
7
8
9
10
11
12
13
14
15

7
8
9
10
11
12
13
14
15
16
17

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$16,460
$16,650
$16,841
$17,035
$17,231
$17,429
$17,629
$17,832
$18,037
$18,245
$18,454

1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

n Carriers US Firm taxed at 35%, modified Discount Rate of 8%

Nicole:
I like the approach you took,
to incorporate different
discount rates. It shows the
sensitivity of results to the
different discount rates

+ $26,897,676 = ($6,674,113)< 0

p 1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
$0.00

Change WC

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$756,294.86

Capsize Scrap
Value

$5,000,000.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$1,351,344.76
$5,756,294.86

PV Investment
Cash Flow
-$3,900,000.00
-$3,611,111.11
-$27,177,640.60
-$11,907.48
-$11,356.21
-$10,830.46
-$10,329.05
-$184,897.97
-$9,394.80
-$8,959.85
-$8,545.04
-$8,149.44
-$146,761.97
-$7,412.33
-$7,069.17
-$6,741.89
-$6,429.76
$1,555,747.78

: Determine PV of Operating & Terminal Cash Flows

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$20,000
$20,200
$20,400
$18,714

357
357
357
357

$7,140,000
$7,211,400
$7,282,800
$6,680,898

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

357
353
353
353
353
353
349
349
349
349
349

$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

$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71

$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Profitability Index
(PI)
($39,000,000.00)
0.79
$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86
$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$6,187,693.61
4.558%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

Discounted Initial
Project Investment

($33,571,789.36)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR

Tax Rate: 35.00%

Survey Depreciation

$0
$0
$0
$0

Total
Depreciation

$1,360,000
$1,360,000
$1,360,000
$1,360,000

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

Tax at 35%

$1,512,000.00
$1,516,550.00
$1,520,282.40
$1,287,508.80

$2,808,000.00
$2,816,450.00
$2,823,381.60
$2,391,087.76

$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$0

$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,360,000

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$1,064,713.13
$1,041,067.92
$1,041,033.08
$1,040,374.16
$1,038,927.82
$925,417.06
$896,355.37
$890,895.63
$884,469.94
$877,029.89
$442,291.64

$1,977,324.38
$1,933,411.85
$1,933,347.15
$1,932,123.44
$1,929,437.37
$1,718,631.69
$1,664,659.97
$1,654,520.45
$1,642,587.02
$1,628,769.79
$821,398.75

8%
Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91

Capsize Scrap
Value

Capsize Scrap
after Tax Value

Operating Cash
Flows

$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86

PV of Operating Cash
Flows

$3,296,785.30
$3,058,459.22
$2,836,308.76
$2,353,492.53

$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
-$756,294.86

$5,000,000.00

$3,250,000.00

$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$6,187,693.61

$1,972,455.29
$1,802,349.28
$1,668,548.60
$1,544,136.71
$1,428,366.84
$1,242,592.81
$1,130,487.72
$1,043,089.88
$961,865.68
$886,395.98
$1,672,341.46

Total Discounted
Operating Cash

$26,897,676.06

Scenario (Case) 6 - Ocean Carriers US Firm taxed at

Project NPV

15 year Capesize Carrier taxed at 35%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($32,876,974) + $23,126,033 = ($9,750,941)< 0
NPV < 0, not considered a profitable undertaking
IRR

4.558%

Reject

Step 1: Determine the PV of Initial In

Purchase:

-$39,000,000.00

Age of Ship

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount Rate
Calendar Year Capsize Purchase
2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Actual PV Cost of Capsize:

10.00%
PV Capsize
-$3,900,000.00
-$3,545,454.55
-$25,785,123.97

CAPEX

-$300,000.00

-$350,000.00

-$33,230,578.51

Step 2: Determine PV of Operating & T

Age of Ship

Event Year
-2
-1
0
1
2
3
4

0
1
2
3
4
5
6

Calendar Year
2000
2001
2002
2003
2004
2005
2006

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714

5
6
7
8
9
10
11
12
13
14
15

7
8
9
10
11
12
13
14
15
16
17

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$16,460
$16,650
$16,841
$17,035
$17,231
$17,429
$17,629
$17,832
$18,037
$18,245
$18,454

1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

n Carriers US Firm taxed at 35%, modified Discount Rate of 10%

+ $23,126,033 = ($9,750,941)< 0

p 1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
$0.00

Change WC

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$756,294.86

Capsize Scrap
Value

$5,000,000.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$989,223.34
$5,756,294.86

PV Investment
Cash Flow
-$3,900,000.00
-$3,545,454.55
-$26,198,347.11
-$11,269.72
-$10,552.56
-$9,881.03
-$9,252.24
-$162,610.90
-$8,112.15
-$7,595.92
-$7,112.54
-$6,659.93
-$117,756.90
-$5,839.27
-$5,467.68
-$5,119.74
-$4,793.94
$1,138,852.25

: Determine PV of Operating & Terminal Cash Flows

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$20,000
$20,200
$20,400
$18,714

357
357
357
357

$7,140,000
$7,211,400
$7,282,800
$6,680,898

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

357
353
353
353
353
353
349
349
349
349
349

$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

$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71

$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Profitability Index
(PI)
($39,000,000.00)
0.70
$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86
$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$6,187,693.61
4.558%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

Discounted Initial
Project Investment

($32,876,973.91)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR

Tax Rate: 35.00%

Survey Depreciation

$0
$0
$0
$0

Total
Depreciation

$1,360,000
$1,360,000
$1,360,000
$1,360,000

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

Tax at 35%

$1,512,000.00
$1,516,550.00
$1,520,282.40
$1,287,508.80

$2,808,000.00
$2,816,450.00
$2,823,381.60
$2,391,087.76

$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$0

$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,360,000

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$1,064,713.13
$1,041,067.92
$1,041,033.08
$1,040,374.16
$1,038,927.82
$925,417.06
$896,355.37
$890,895.63
$884,469.94
$877,029.89
$442,291.64

$1,977,324.38
$1,933,411.85
$1,933,347.15
$1,932,123.44
$1,929,437.37
$1,718,631.69
$1,664,659.97
$1,654,520.45
$1,642,587.02
$1,628,769.79
$821,398.75

10%
Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91

Capsize Scrap
Value

Capsize Scrap
after Tax Value

Operating Cash
Flows

$4,153,000.00
$4,161,000.00
$4,167,468.10
$3,734,696.86

PV of Operating Cash
Flows

$3,120,210.37
$2,842,018.99
$2,587,669.81
$2,108,139.01

$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
-$756,294.86

$5,000,000.00

$3,250,000.00

$3,380,441.74
$3,336,022.73
$3,335,436.37
$3,333,675.33
$3,330,435.82
$3,129,060.09
$3,074,501.23
$3,063,756.94
$3,051,200.61
$3,036,741.79
$6,187,693.61

$1,734,701.12
$1,556,279.23
$1,414,550.62
$1,285,276.15
$1,167,297.44
$997,014.98
$890,573.49
$806,782.96
$730,433.17
$660,883.49
$1,224,202.19

Total Discounted
Operating Cash

$23,126,033.02

Scenario (Case) 7 - Ocean Carriers Hong Kong Firm tax

Project NPV

15 year Capesize Carrier taxed at 0%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($33,571,789) + $35,818,369 = $2,246,580 > 0
NPV > 0, profitable undertaking
IRR

Proceed with
Project

9.198%

Step 1: Determine the PV of Initial I

Purchase:

-$39,000,000.00

Age of Ship

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount Rate
Calendar Year Capsize Purchase
2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Actual PV Cost of Capsize:

8.00%
PV Capsize
-$3,900,000.00
-$3,611,111.11
-$26,748,971.19

CAPEX

-$300,000.00

-$350,000.00

-$34,260,082.30

Step 2: Determine PV of Operating & T

Age of Ship

Event Year
-2
-1
0
1
2
3
4

0
1
2
3
4
5
6

Calendar Year
2000
2001
2002
2003
2004
2005
2006

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714

5
6
7
8
9
10
11
12
13
14
15

7
8
9
10
11
12
13
14
15
16
17

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$16,460
$16,650
$16,841
$17,035
$17,231
$17,429
$17,629
$17,832
$18,037
$18,245
$18,454

1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

arriers Hong Kong Firm taxed at 0%, modified Discount Rate of 8%

+ $35,818,369 = $2,246,580 > 0

p 1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
$0.00

Change WC

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$756,294.86

Capsize Scrap
Value

$5,000,000.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$1,351,344.76
$5,756,294.86

PV Investment
Cash Flow
-$3,900,000.00
-$3,611,111.11
-$27,177,640.60
-$11,907.48
-$11,356.21
-$10,830.46
-$10,329.05
-$184,897.97
-$9,394.80
-$8,959.85
-$8,545.04
-$8,149.44
-$146,761.97
-$7,412.33
-$7,069.17
-$6,741.89
-$6,429.76
$1,555,747.78

Determine PV of Operating & Terminal Cash Flows

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$20,000
$20,200
$20,400
$18,714

357
357
357
357

$7,140,000
$7,211,400
$7,282,800
$6,680,898

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

357
353
353
353
353
353
349
349
349
349
349

$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

$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71

$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Profitability Index
(PI)
($39,000,000.00)
1.05
$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66
$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$8,379,985.25
9.198%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

Discounted Initial
Project Investment

($33,571,789.36)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR

Tax Rate: 0.00%

Survey Depreciation

$0
$0
$0
$0

Total
Depreciation

$1,360,000
$1,360,000
$1,360,000
$1,360,000

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

Tax at 0%

$0.00
$0.00
$0.00
$0.00

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$0

$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,360,000

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$45,654,048.05

8%
Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91

Capsize Scrap
Value

Capsize Scrap
after Tax Value

Operating Cash
Flows

$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66

PV of Operating Cash
Flows

$4,497,059.65
$4,173,168.74
$3,870,987.42
$3,164,841.46

$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
-$756,294.86

$5,000,000.00

$5,000,000.00

$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$8,379,985.25

$2,593,705.17
$2,364,805.88
$2,189,324.32
$2,026,031.24
$1,873,945.17
$1,610,088.66
$1,460,075.73
$1,346,405.13
$1,240,687.49
$1,142,392.64
$2,264,849.83

Total Discounted
Operating Cash

$35,818,368.55

Scenario (Case) 8 - Ocean Carriers Hong Kong Firm tax

Project NPV

15 year Capesize Carrier taxed at 0%

Total NPV Cash Flow = Project Investment + Project Projected Cash Flows = ($32,876,974) + $30,832,810 = $2,044,164< 0
NPV < 0, not considered a profitable undertaking
IRR

9.198%

Reject

Step 1: Determine the PV of Initial I

Purchase:

-$39,000,000.00

Age of Ship

Event Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Discount Rate
Calendar Year Capsize Purchase
2000
-$3,900,000.00
2001
-$3,900,000.00
2002
-$31,200,000.00
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Actual PV Cost of Capsize:

10.00%
PV Capsize
-$3,900,000.00
-$3,545,454.55
-$25,785,123.97

CAPEX

-$300,000.00

-$350,000.00

-$33,230,578.51

Step 2: Determine PV of Operating & T

Age of Ship

Event Year
-2
-1
0
1
2
3
4

0
1
2
3
4
5
6

Calendar Year
2000
2001
2002
2003
2004
2005
2006

Avg Daily Charter Adj Factor Hire

Rate
Rate
$15,344
$14,747
$15,072
$15,403
1.15
$15,742
1.15
$16,088
1.15
$16,273
1.15

Adj Daily Hire

Rates

$17,713
$18,103
$18,501
$18,714

5
6
7
8
9
10
11
12
13
14
15

7
8
9
10
11
12
13
14
15
16
17

2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

$16,460
$16,650
$16,841
$17,035
$17,231
$17,429
$17,629
$17,832
$18,037
$18,245
$18,454

1.05
1.05
1.05
1.05
1.05
1.00
1.00
1.00
1.00
1.00
0.80

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

rriers Hong Kong Firm taxed at 0%, modified Discount Rate of 10%

+ $30,832,810 = $2,044,164< 0

p 1: Determine the PV of Initial Investment Outlay

NWCI

-$500,000.00
-$515,000.00
-$530,450.00
-$546,363.50
-$562,754.41
-$579,637.04
-$597,026.15
-$614,936.93
-$633,385.04
-$652,386.59
-$671,958.19
-$692,116.94
-$712,880.44
-$734,266.86
-$756,294.86
$0.00

Change WC

-$500,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$16,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$19,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$756,294.86

Capsize Scrap
Value

$5,000,000.00

PV of Capsize
Scrap Value

Investment Cash
Flow
-$3,900,000.00
-$3,900,000.00
-$31,700,000.00
-$15,000.00
-$15,450.00
-$15,913.50
-$16,390.91
-$316,882.63
-$17,389.11
-$17,910.78
-$18,448.11
-$19,001.55
-$369,571.60
-$20,158.75
-$20,763.51
-$21,386.41
-$22,028.01
$989,223.34
$5,756,294.86

PV Investment
Cash Flow
-$3,900,000.00
-$3,545,454.55
-$26,198,347.11
-$11,269.72
-$10,552.56
-$9,881.03
-$9,252.24
-$162,610.90
-$8,112.15
-$7,595.92
-$7,112.54
-$6,659.93
-$117,756.90
-$5,839.27
-$5,467.68
-$5,119.74
-$4,793.94
$1,138,852.25

Determine PV of Operating & Terminal Cash Flows

Expected Daily # of Operating

Yearly Gross
Hire Rate
Days
Operating Revenue

$20,000
$20,200
$20,400
$18,714

357
357
357
357

$7,140,000
$7,211,400
$7,282,800
$6,680,898

Daily Operating
Costs

$4,000.00
$4,160.00
$4,326.40
$4,499.46

Yearly Operating
Cost

$1,460,000.00
$1,518,400.00
$1,579,136.00
$1,642,301.44

Capsize
Depreciation

1,360,000
1,360,000
1,360,000
1,360,000

$17,283
$17,481
$17,682
$17,886
$18,092
$17,428
$17,628
$17,831
$18,036
$18,243
$14,762

357
353
353
353
353
353
349
349
349
349
349

$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

$4,679.43
$4,866.61
$5,061.28
$5,263.73
$5,474.28
$5,693.25
$5,920.98
$6,157.82
$6,404.13
$6,660.29
$6,926.71

$1,707,993.50
$1,776,313.24
$1,847,365.77
$1,921,260.40
$1,998,110.81
$2,078,035.25
$2,161,156.66
$2,247,602.92
$2,337,507.04
$2,431,007.32
$2,528,247.61

1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000
1,360,000

Profitability Index
(PI)
($39,000,000.00)
0.93
$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66
$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$8,379,985.25
9.198%

Determine Project IRR

(Initial Outlay / Operating Cash Flows)

Discounted Initial
Project Investment

($32,876,973.91)

0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
IRR

Tax Rate: 0.00%

Survey Depreciation

$0
$0
$0
$0

Total
Depreciation

$1,360,000
$1,360,000
$1,360,000
$1,360,000

Discount Rate:
EBIAT (NOPAT)

Net Income (EBIT)

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

Tax at 0%

$0.00
$0.00
$0.00
$0.00

$4,320,000.00
$4,333,000.00
$4,343,664.00
$3,678,596.56

$60,000
$60,000
$60,000
$60,000
$60,000
$70,000
$70,000
$70,000
$70,000
$70,000
$0

$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,420,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,430,000
$1,360,000

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

$3,042,037.50
$2,974,479.76
$2,974,380.23
$2,972,497.60
$2,968,365.19
$2,644,048.75
$2,561,015.34
$2,545,416.08
$2,527,056.96
$2,505,799.68
$1,263,690.39

$45,654,048.05

10%
Net Working
Capital

$15,000.00
$15,450.00
$15,913.50
$16,390.91

Capsize Scrap
Value

Capsize Scrap
after Tax Value

Operating Cash
Flows

$5,665,000.00
$5,677,550.00
$5,687,750.50
$5,022,205.66

PV of Operating Cash
Flows

$4,256,198.35
$3,877,843.04
$3,531,645.57
$2,834,904.16

$16,882.63
$17,389.11
$17,910.78
$18,448.11
$19,001.55
$19,571.60
$20,158.75
$20,763.51
$21,386.41
$22,028.01
-$756,294.86

$5,000,000.00

$5,000,000.00

$4,445,154.87
$4,377,090.65
$4,376,469.45
$4,374,049.49
$4,369,363.64
$4,054,477.16
$3,970,856.60
$3,954,652.57
$3,935,670.55
$3,913,771.67
$8,379,985.25

$2,281,067.31
$2,041,945.09
$1,856,050.27
$1,686,385.43
$1,531,435.30
$1,291,881.37
$1,150,215.71
$1,041,383.62
$942,168.24
$851,750.75
$1,657,935.41

Total Discounted
Operating Cash

$30,832,809.62

Table 1: Discount Rate (WACC) Scenario Analysis on a 15-year Capes

Discount Rate at 8%
Case: 15-year Capesize

Alternative (-1%) pt below b

NPV

Assumption 1:
Ocean Carriers is a U.S. Firm
subject to 35% Tax Rate

($6,674,113)

Assumption 2:
Ocean Carriers is a Hong Kong
Firm subject to a 0% Rate of Tax
on overseas profits and local
cargo uplift

$2,246,580

Table 2: Project Profitablity of 15-year vs 25-year Capesize

Project W
Case: Project Vessel Life
NPV
Ocean Carriers USA taxed at
35%
15-year Capesize ship
($8,320,250)
Base Case
25-year Capesize ship ($7,889,372)
Ocean Carriers Hong Kong
taxed at 0%
15-year Capesize ship

($37,966)

25-year Capesize ship

$311,415

nario Analysis on a 15-year Capesize ship

Discount Rate at 8%

Nicole:
This is a really nice summary of
results, for comments on the
numbers, please see previous
slides

Discount Rate at 9%

Alternative (-1%) pt below base

IRR

PI

4.56%

9.20%

Discount Rate at 10%

Base Case
Project
Status

Alternative (+1%) pt above ba

Project
Status

NPV

IRR

PI

0.79

($8,320,250)

4.56%

0.74

($9,750,941)

1.05

($37,966)

9.20%

0.98

($2,044,164)

ar vs 25-year Capesize
Legend
Accept

Project WACC 9%

IRR

PI

4.56%

0.74

6.27%

0.80

9.20%

0.98

10.07%

1.04

Project
Status

% NPV

% IRR

5.18%

37.54%

720.25%

9.45%

Reject

NPV

Discount Rate at 10%

Legend

Alternative (+1%) pt above base

Accept

IRR

PI

4.56%

0.70

9.20%

0.93

Project
Status

Reject

Should a "new" capsize vessel be undertaken based on current market conditions? Simply, not based on the firm's baseline as
should be identified and evaluated under a number of imposing conditions. In this case, an analysis was performed and based
techniques, alternative options have been identified as potential profitable options for investment. Based on the results of this a
commissioning the carrier for 25 years is the best investment option for the firm.

This case discussion involves an evaluation of Ocean Carriers, an ocean freight shipping company, capital budgeting strategy t
deadweight ton ship to met the demands of its potential customer and future fleet demands. Ms. Linn, VP of Finance for the fir
market conditions, profitability, and future impact of this undertaking. In her capacity, the VP needs to understand the firm's pot
acquire or not acquire a new build based on the prevailing factors. Notwithstanding, the investment requires a substantial outla
strong financial projections support to progress the acquisition in the CAPEX approval process.

Ms. Linn enlists the services of a consulting firm to provide industry forecasted operating rates based market conditions, world e
trends, etc. to assist in her financial analysis of the project. The consulting provided the following details in a short report.
Hire rates are strictly controlled by supply and demand driven by dry bulk goods needed globally. The ship building order (Exhib
shows for the 2001 to 2002 period, an estimated 96 new vessels potentially entering the market before delivery of the contract v
+/- 5% due to ships in service and flat imports of iron ore and coal may become problematic for the firms short-term outlook on
iron ore to hire rate is shown in the forecasted projection provided

Based on the consulting firms results, Ms. Linn attempts to address the following items in estimation of the investment cash flow
- Apply a discount rate of 9% to determine the PV of Project Investment
- Evaluate company tax related effects on the project based on company's shipping locations (Houston and Hong Kong)
- Explore, if the firm's current operating ship life policy is applicable

Ms. Linn determines that NPV, IRR, and PI techniques should be used to evaluate and select an investment option. The analys
books attached and summary results are provided in Table 1 and 2. The Table 1 evaluation is based on the company's standar
the 15-year operating usage mark under the taxing authorities in the US and Hong Kong. The results in Table 1 show that the b
in either country, therefore, options were explored at the 8% and 10% discount rates for alternative profitability selections. The
the 8% discount rate under the Hong Kong taxing requirements. Given that the only profitable option occurs at the 8% rate the
of debt and equity to achieve this rate.

Explanation of Results under Assumption 1: Under the base case, the NPV is a large negative value > $8MM, this is supported
half of the WACC of 9%. The NPV value is further supported with the PI (Profitability Index) which is below 1. Each metric prov
is not profitable under the current evaluation conditions.

Explanation of Results under Assumption 2: Under the base case, the NPV is marginally negative value > $38M, this is suppor
the WACC of 9%. The PI (Profitability Index) is narrowly below 1. This option is marginal and requires further optimization of th
discount rate is not a profitable option for investment. However, Hong Kong is a better option.

Based on the disappointing results obtained at the WACC rates, a secondary option proposed involved looking at extending the
firms standing 15-year period. An evaluation was performed the results are as outline in Table 2.

The current cash flow projections and the estimated 9% discount rate, this project is acceptable if the company allows the comm
Hong Kong. However, if conditions change or the cost of capital changes, then this recommendation requires reevaluation.

Options to explore to alleviate the policy to (work with international regulators to determine if all the preparation and cost is warr
The standard could be outdated. In the case, no supporting evidence has been provided which supports by options to explore:
- Perform a in-depth analysis on extending vessel usage life beyond 15 years
- Work with international regulators on
Based on the results shown previously, Linn should seek to further investigate the firms options. The alternatives results indica
strengthen the outlined recommendations includes the following items:
Understand future economy, trade patterns, long-term ocean fleet demand
Chartering vessels on a time charter one, three, or five-years versus spot market rate. Map-out strategies to incorporate bot
condition to maximize profits.
Additional fees for stand-back, mobilization, crew rates, etc. to offset unbillable maintenance (operating) costs
Ore market stability
Potential customers
Optimizing performance
Contingencies

Good Analysis: 97.5 points

see comments for feedback

Case Analysis

Nicole:
good summary