The Cost of The Capsized Vessel NPV Analysis and Ocean Carriers Discussion
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1) For the purposes of NPV analysis, what figure should be used for the cost of the capesize vessel described in this case? How did you compute this figure?
2) What are your thoughts about Ocean Carriers’ general policy of not operating ships over 15 years of age?
3) When Ocean Carriers is ready to liquidate its investment, how should the company choose between scrapping the vessel and selling it in the secondhand market? Does the decision depend on whether the firm operates the ship for 15 years versus 25 years?
4) Imagine that Ocean Carriers is a U.S. firm subject to a 35% tax rate and a 9% discount rate. The company plans to adhere to its policy of not operating ships over 15 years of age. The vessel can either be scrapped or sold in the secondhand market just before the third special survey in 2017. Additionally, net working capital will be fully recovered at the end of the project. Should the firm purchase the $39 million capesize vessel in order to accept the charterer’s proposed leasing contract? Why or why not?
5) Now, suppose Ocean Carriers is willing to operate this particular vessel for the duration of its useful life (25 years). If the firm chooses this alternative, then it will either scrap or sell the vessel just before the fifth special survey in 2027. The scrap value grows each year at the rate of inflation. Once again, net working capital will be fully recovered at the end of the project. Assuming a 35% tax rate and a 9% discount rate, should the company purchase the vessel in order to accept the proposed contract? Why or why not?
6) Finally, imagine Ocean Carriers is located in Hong Kong, where ship owners are exempt from taxes on their profits. Does this beneficial tax treatment affect your decision about whether the firm should purchase the vessel in order to accept the proposed contract? Assume the firm is willing to operate the ship for either 15 or 25 years – whichever is more profitable in present value terms.
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