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Ocean Carriers Case and Assumptions

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The Charles H. Kellstadt Graduate School of Business DePaul University FIN 555: Financial Management

Thomas M Carroll Phone: 312.362.8826
Office: Loop Campus tcarroll@depaul.edu

Case Study Questions
Capital Budgeting In Practice
Ocean Carriers

These questions relate to the Ocean Carriers case in your course packet. You can find the data for this case on the course website in a spreadsheet named: Ocean Carriers Exhibits.xls.

This case provides the opportunity to make a capital budgeting decision by using discounted cash flow analysis to make an investment and corporate policy decision. Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year period beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future expected cash flows warrant the considerable investment in a new ship.

1. Do you expect daily spot hire rates to increase or decrease next year? Give the reasons for your choice. Which are the factors that drive average daily rates? What does this imply in terms of your cash flow projections?

Daily hire rates are determined by supply and demand, as well as the size, age, and efficiency of the ships in service. Due to a high number of vessels expected to be delivered in 2001, as well as the fact that imports for iron and coal were expected to remain stagnant over the next two years, we would expect the daily spot hire rate to decrease next year. In terms of cash flow projections for building the new charter, this would have no effect, as the charter will not be in service next year, and even when it is in service the first three years will be a time-charter at a fixed rate. It does mean though that company will earn less revenue…...

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