Case 1 - Ocean Carriers Case Questions Assumptions for the casc o The market is efficient (competing/market projects have an NPV of zero) o Ocean Carriers uses 29% discount rate o The statement that operating costs increase at a rate of 1% above inflation should be interpreted as "operating costs grow at a real rate of 1% Unless otherwise stated, all other values are in nominal terms Assutic the ship will operate for a total of 25 yeats & that Ocean Carrier will fiot sell it early 0 0 Tum in a 2-page memo answering the quantitative questions listed below. Provide any assumptions made and describe the steps you took as a group. Do not answer the qualitative questions in your memo. For questions 1-4, write out the work needed to solve the problem (do not attach a spreadsheet for these calculations). Por Questions 5 & 6, you can atrach a one page (for cach question) printed spreadsheet showing the timeline where each column represents a relevant field (cy, operating fevetik, depreciation, FCF, ctc.) and cach row represents corresponds to 1 year. 4. Quantitative Questions 1. What is the free cash flow for the first year that the ship is in operation (end of 2003)? 2. What is the change in NWC for the first and second years that the ship is operated? 3. What is the change in NWC for the last year and second to last year that the ship is opcratoxl? Show how the first survey, which occurs in 2007, affects the ICI's (on a timeline) over the period from 2007 to 2011. 5. Suppose that a C.S. firm is subject to a 35% taxation rate and assume that Ocean Carriers operates their ships for the entirety of the ship's uselul life. Find the NPV of the project. should the ship be purchased? 6. Now suppose that Ocean Carriers is located in Hong Kong, where ships are not required to pay any tax on profits made overscas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong, What is the value of the FCF for the first year the ship is in operation (end of 2003) Qualitative Questions View these as being good questions to think about, but not the types of questions which I expect you to discuss in class. These are the type of "soft information" questions that it is good to think about. 1. Do you expect daily spot hire tates to incrcase or decrcase next year? 2. What factors drive average daily hire rares? 3. Ilow would you characterize the long-term prospects of the capcsize dry bulk industry? 4. Suppose Occan Carriers does not operate ships over 15 years old. Instead they sell the ship to another titin after 15 years. Does this choice affect the valuation of the project? Note: This question can be solved by making a qualitative argument. 5. What do you think of the company's policy of not operating ships over 15 years old? Note: Again, think about this from a qualitative standpoint. Case 1 - Ocean Carriers Case Questions Assumptions for the casc o The market is efficient (competing/market projects have an NPV of zero) o Ocean Carriers uses 29% discount rate o The statement that operating costs increase at a rate of 1% above inflation should be interpreted as "operating costs grow at a real rate of 1% Unless otherwise stated, all other values are in nominal terms Assutic the ship will operate for a total of 25 yeats & that Ocean Carrier will fiot sell it early 0 0 Tum in a 2-page memo answering the quantitative questions listed below. Provide any assumptions made and describe the steps you took as a group. Do not answer the qualitative questions in your memo. For questions 1-4, write out the work needed to solve the problem (do not attach a spreadsheet for these calculations). Por Questions 5 & 6, you can atrach a one page (for cach question) printed spreadsheet showing the timeline where each column represents a relevant field (cy, operating fevetik, depreciation, FCF, ctc.) and cach row represents corresponds to 1 year. 4. Quantitative Questions 1. What is the free cash flow for the first year that the ship is in operation (end of 2003)? 2. What is the change in NWC for the first and second years that the ship is operated? 3. What is the change in NWC for the last year and second to last year that the ship is opcratoxl? Show how the first survey, which occurs in 2007, affects the ICI's (on a timeline) over the period from 2007 to 2011. 5. Suppose that a C.S. firm is subject to a 35% taxation rate and assume that Ocean Carriers operates their ships for the entirety of the ship's uselul life. Find the NPV of the project. should the ship be purchased? 6. Now suppose that Ocean Carriers is located in Hong Kong, where ships are not required to pay any tax on profits made overscas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong, What is the value of the FCF for the first year the ship is in operation (end of 2003) Qualitative Questions View these as being good questions to think about, but not the types of questions which I expect you to discuss in class. These are the type of "soft information" questions that it is good to think about. 1. Do you expect daily spot hire tates to incrcase or decrcase next year? 2. What factors drive average daily hire rares? 3. Ilow would you characterize the long-term prospects of the capcsize dry bulk industry? 4. Suppose Occan Carriers does not operate ships over 15 years old. Instead they sell the ship to another titin after 15 years. Does this choice affect the valuation of the project? Note: This question can be solved by making a qualitative argument. 5. What do you think of the company's policy of not operating ships over 15 years old? Note: Again, think about this from a qualitative standpoint