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presented by

Franko Kulaga Guergana Anguelova Moritz Broelz

Introduction Project Factors Methodology Results Sensitivity Analysis Recommendations Discussion

Ocean Carriers owns and operates Capesize vessels that carry iron ore worldwide. Round cape horn longer and riskier routes. Mainly chartered for 1-, 3-, or 5-year periods, occasional spot market charter.

January 2001: proposed lease of a ship for 3 years beginning in early 2003 Daily charter rate: $20,000 per day, with annual escalation of $200 per day No ship in fleet meets the requirements Commission a new capsize carrier? Option 1: Ocean carriers is US firm (35% tax) Option 2: Ocean carriers is HK firm (0% tax)

1.

2.

Calculate net cashflows for every year


Yearly Operating
Costs Growth = 1% + Inflation (3%) Net working Capital = Inflation

1. Actual cost of the new capsize vessel:


Capesize is bought in 3 installments discounted at 9% = $33,738,397.44 2.

IRR = NPV of 0 = Break-even WACC

This is the best case scenario (25 year no tax)! What if an important variable changes to an adverse condition?

Deviation from Base Case -30% -15% 0 15% 30% Range

NPV At Different Deviations From Base Operating Cost Avg. Daily Charter Numbers of days Growth Rate Growth Rate operating $ 2,955,603 $ (713,769) $ (14,475,679) $ 2,118,038 $ 235,847 $ (6,631,602) $ 1,212,475 $ 1,212,475 $ 1,212,475 $ 232,610 $ 2,216,939 N/A $ (828,474) $ 3,250,087 N/A $ 3,784,076 $ 3,963,856 $ 15,688,155

WACC $ $ $ $ $ $ 9,603,476 4,964,848 1,212,475 (1,844,225) (4,349,700) 13,953,176

Verify Consultant Firm Projections!

Caution:
Worldwide capesize fleet relatively new In market downturn -> excess capacity (supply)! What would happen to spot-charter rates?

Practical implications possibly influencing decision: Seek less expensive financing (BEP = IRR) Country Production Gaining a new customer: China 820 (2009
Who? How much business in the future?
Australia Brazil India Russia Ukraine United States South Africa Iran 470 (2009) 250 150 105 73 54 40 35

What about Iron Ore markets apart from Australia & India?

Canada
Sweden Venezuela Kazakhstan Mauritania Estimated iron ore production in million metric tons for 2006 according to U.S. Geological Survey - wikipedia.org Other countries Total world

33
24 20 15 11 43 1690

Importance of NPV?
Economic profits (NPV) are excess returns All projects earn zero excess returns in a longterm competitive equilibrium Does Ocean Carriers differ from the theoretical long run competitive equilibrium? 25 Years! Positive NPV illusionary!?

Can this decision be made with the provided information?

Any questions