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Final Ocean Carriers Case report.docx

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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
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    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 ship s’ 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, post-closure 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 China’s 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.
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