The case provides an opportunity to make a capital budgeting
decision. The key objective is to develop an understanding of how
discounted cash flow analysis can be used to make investment and
corporate policy decisions. The analysis should involve:
1. Determining the value and net present value of a real asset
2. Recognizing that present values are additive
3. Distinguishing between book value and market value
4. Identifying and forecasting incremental expected cash flows, including initial and
ongoing capital expenditures, investment in net working capital, and proceeds from asset
5. Understanding the tax consequences of depreciation and asset sales, and
6. Evaluating whether a policy of reselling or scrapping a vessel is most valuable.
Note: the objectives are NOT the questions.
One question to be answered:
Suppose Ocean Carriers uses a 9% discount rate. Should Ms Linn purchase the $39 capesize?
Conduct your study on two scenarios: First, assume that Ocean Carriers is a U.S. firm who is subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong.
Other Questions that can be discussed (OPTIONAL, NOT REQUIRED):
1. Do you expect daily spot hire rates to increase or decrease next year?
2. What factors drive average daily hire rate?
3. How would you characterize the long-term prospects of the capesize dry bulk industry?
4. What do you think of the company’s policy of not operating ships over 15 years old?
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