Ocean Carriers

Ocean Carrierspresented byFranko KulagaGuergana AnguelovaMoritz Broelz

AgendaIntroductionProject FactorsMethodologyResultsSensitivity AnalysisRecommendationsDiscussionIntroductionOcean 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 2003Daily charter rate: $20,000 per day, with annual escalation of $200 per dayNo 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)

Project factorscustomers proposal

Methodology

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

1.2. Calculate net cashflows for every year

Results1. Actual cost of the new capsize vessel:Capesize is bought in 3 installments discounted at 9% = $33,738,397.44

IRR = NPV of 0 = Break-even WACC

2.

NPV At Different Deviations From BaseDeviation from Base CaseOperating Cost Growth RateAvg. Daily Charter Growth RateNumbers of days operatingWACC-30% $ 2,955,603 $ (713,769) $ (14,475,679) $ 9,603,476 -15% $ 2,118,038 $ 235,847 $ (6,631,602) $ 4,964,848 0 $ 1,212,475 $ 1,212,475 $ 1,212,475 $ 1,212,475 15% $ 232,610 $ 2,216,939 N/A $ (1,844,225)30% $ (828,474) $ 3,250,087 N/A $ (4,349,700)Range $ 3,784,076 $ 3,963,856 $ 15,688,155 $ 13,953,176 Sensitivity AnalysisThis is the best case scenario (25 year no tax)! What if an important variable changes to an adverse condition?

RecommendationsVerify Consultant Firm Projections!

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

RecommendationsPractical implications possibly influencing decision:Seek less expensive financing (BEP = IRR)Gaining a new customer:Who?How much business in the future?What about Iron Ore markets apart from Australia & India?

CountryProductionChina820 (2009Australia470 (2009)Brazil250India150Russia105Ukraine73United States54South Africa40Iran35Canada33Sweden24Venezuela20Kazakhstan15Mauritania11Other countries43Total world1690Estimated iron ore production in million metric tons for 2006 according to U.S. Geological Survey - wikipedia.orgRecommendationsImportance of NPV?Economic profits (NPV) are excess returnsAll projects earn zero excess returns in a long-term competitive equilibriumDoes Ocean Carriers differ from the theoretical long run competitive equilibrium? 25 Years!Positive NPV illusionary!?

Can this decision be made with the provided information?DiscussionAny questions