Mary Linn Evaluating A Proposed Lease of A Ship
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
Mary Linn Evaluating A Proposed Lease of A Ship
Question Description
In January 2001, Mary Linn, Vice President of Finance for Ocean Carriers, a shipping company with offices in New York and Hong Kong, was evaluating a proposed lease of a ship for a three-year period, beginning in early 2003. The customer was eager to finalize the contract to meet his own commitments and offered very attractive terms. No ship in Ocean Carrier’s current fleet met the customer’s requirements. Linn, therefore, had to decide whether Ocean Carriers should immediately commission a new capesize carrier that would be completed two years hence and could be leased to the customer.
Ocean Carriers Inc. owned and operated capesize dry bulk carriers that mainly carried iron ore worldwide. This type of vessel ranged in size from 80,000 deadweight tons to 210,000 deadweight tons of cargo carrying capacity. Capesize carriers were too large to transit the Panama Canal and therefore had to sail around Cape Horn to travel between the Atlantic and Pacific Oceans. In January 2001, there were 553 capesizes in service in the world.
Ocean Carriers’ vessels were mostly chartered on a “time charter” basis for a period such as one year, three years, or five years, although the spot charter market was used on occasion. The company that chartered the ship was called the “charterer.” The charterer paid Ocean Carriers a daily hire rate for the entire length of the contract, determined what cargo the vessel carried, and controlled where the vessel loaded and unloaded. The company, in turn, supplied a seaworthy vessel that complied with international regulations and manned the vessel with a fully qualified and certified crew.
Ship Operations
Operations also included ensuring adequate supplies and stores were onboard, supplying lubricating oils, scheduling repairs, conducting overall maintenance of the vessel, and placing all insurances for the vessel. For a new ship coming on line in early 2003, operating costs were expected to initially average $4,000 per day, and to increase annually at a rate of 1% above inflation. Charterers were not charged a daily rate for the time the vessel spent in maintenance and repair, although operating costs were still incurred. Initially, 8 days a year were scheduled for such work. The time allotted to maintenance and repairs increased to 12 days per year after five years of operation, and to 16 days a year for ships older than ten years.
The company had a policy of not operating vessels older than 15 years. Every five years, international regulations mandated that a special survey be undertaken to ensure seaworthiness as defined by international regulations. By the fifteenth year, the maintenance required to comply with the special surveys was very costly. Exhibit 1 shows the capital expenditures anticipated in preparation for the special surveys. These outlays were considered capital expenditures, which would each be depreciated on a straight-line basis over a 5-year period. To avoid the larger expenditures for older ships, the company planned to sell the vessel into the secondhand market, or “scrap” the vessel just before the third special survey. When scrapped, the vessel was demolished and its steel was sold to demolition yards. The company estimated the scrap value to be $5M at the end of the fifteenth year.
Supply of Capesizes
Daily hire rates were determined by supply and demand. The number of ships available equaled the number of vessels in service the previous year plus any new ships delivered minus any scrappings and sinkings. When the market demand for shipping capacity was high, owners would keep a vessel in operation as long as possible. Conversely, when market demand was low, scrapping rose.
Supply was also affected by the increases in size and efficiency the newer ships offered. As ships got bigger, faster, and more fuel efficient, fewer ships were needed to carry the same amount of cargo. Moreover, there had been very few scrappings in recent years, and most of the capacity of the worldwide fleet of capesizes was fairly young. Exhibit 2 shows the capesize fleet by age category as of December 2000. Exhibit 3 shows the number of new capesize vessels by expected delivery date.
Exhibit 2 Capesize fleet by age category as of December 2000
Estimates of future orders for vessels were not entirely reliable, especially projections spanning more than two or three years in the future. If sentiment was optimistic on market conditions, more vessels would be added to the order book. If the market outlook was poor, then vessels would be cancelled or converted to other types of vessels.
A capesize took approximately 10 months to build, but contracts were signed to secure a berth place approximately two years before delivery and over one year before steel cutting for the vessel. “Delivery” referred to when the vessel was complete and delivered from the shipyard to the owner.
Market conditions
The demand for dry bulk capesizes was determined by the world economy, especially its basic industries. Over 85% of the cargo carried by capesizes was iron ore and coal. Production and demand for these products increased in a strong economy. Changes in trade patterns also affected the demand for capesizes. For example, if a Western European country decided to switch its supply of iron ore from the United States to Australia, the demand for capesizes would increase since the distance between Europe and Australia is greater than the distance between Western Europe and the United States.
Spot charter rates tended to fluctuate more widely than time charter rates, i.e., the highs were higher and the lows were lower in the spot market. Therefore, when the market was high, ship owners sought time charters to lock in the high rates for as long a period as possible while the charterers preferred to trade in the spot market to avoid having to pay high daily rates any longer than necessary.
Because Ocean Carriers’ vessels were relatively new and a bit larger than the industry average, they earned a premium to the market. For example, new ships generally earned a 15% premium in daily hire rates relative to the industry-wide average, while ships over 25 years old typically received a 35% discount from the industry average. Exhibit 4 shows average adjustments to daily hire rates for 3-year time charters based on the age of the ship.
The average prevailing spot market rate at the time was $22,000 per day.1 With Australian production in iron ore expected to be strong and Indian iron ore exports expected to take off in the next few years, Linn took an optimistic view of the long-term market demand for capesizes. However, she also considered that 63 new vessels were scheduled for delivery in 2001 and that imports of iron ore and coal would probably remain stagnant over the next two years. Linn therefore anticipated that spot rates would fall in 2001 and 2002. In 2003, however, Linn was aware that Australian and Indian ore exports would begin, and that these new supplies would significantly increase trading volumes. Demand for capesizes would likely increase with these higher trading volumes, possibly boosting prices. Exhibit 5 provides data on some demand drivers, fleet size, and average daily hire rates over time.
Linn enlisted the services of a shipping-industry consulting firm to help her forecast daily hire rates for a new capesize. Worldwide iron ore vessel shipments and charter rates had been very strongly associated historically. The consulting group felt that this relation would continue to hold in the future, and based its forecast of charter rates off of long-term forecasts for worldwide iron ore vessel shipments. The long-term forecast for worldwide iron ore vessel shipments was for 2% annual growth during 2002 to 2005, and then dropping to 1.5% thereafter. Exhibit 6 shows the forecast of daily hire rates that was prepared for Linn.
Newbuilding
The charterer currently in negotiations with Ocean Carriers for a three-year time charter starting in 2003 had offered a rate of $20,000 per day with an annual escalation of $200 per day. The expected rate of inflation was 3%.
The vessels in Ocean Carriers’ current fleet could not be committed to a time charter beginning in 2003 because the ships were either already leased during that period or were too small to meet the customer’s needs. Moreover, there were no sufficiently large capsizes available in the second-hand market. Ocean Carriers had to decide immediately if it should commission a new 180,000 deadweight ton ship for delivery in early 2003. The ship would cost $39 million, with 10% of the purchase price payable immediately and 10% due in a year’s time. The balance would be due on delivery. A new ship would be depreciated on a straight-line basis over 25 years. In addition, Linn expected to make a $500,000 initial investment in net working capital, which she anticipated would grow with inflation.
Linn was also confident that the charterer would honor his proposed contract with Ocean Carriers if the company agreed to the terms. While there is always a risk that the charterer would stop paying before the end of the contract or terminate the contract early, Linn considered that the risk was small. Ocean Carriers had long established relationships with its charterers and only contracted with reputable charterers.
The proposed contract, though, was only for three years, and it was Linn’s responsibility to decide if future market conditions warranted the considerable investment in a new ship.
Ocean Carriers uses a 9% discount rate.
Do you expect daily spot hire rates to increase or decrease next year?
What factors drive average daily hire rates?
How would you characterize the long-term prospects of the capesize dry bulk industry?
Should Ms. Linn purchase the $39M capesize? Make two different assumptions. First, assume that Ocean Carriers is a U.S. firm 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.
What do you think of the company’s policy of not operating ships over 15 years old?
Create and submit an Excel model your team used for FCF and NPV calculations. Grading will be based on a) good organization of spreadsheet layout and b) correct formula for every calculated cell.
RUBRIC
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. 5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors 10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper. GET THIS PROJECT NOW BY CLICKING ON THIS LINK TO PLACE THE ORDER
CLICK ON THE LINK HERE: https://www.perfectacademic.com/orders/ordernow
Also, you can place the order at www.collegepaper.us/orders/ordernow / www.phdwriters.us/orders/ordernow
Do You Have Any Other Essay/Assignment/Class Project/Homework Related to this? Click Here Now [CLICK ME]and Have It Done by Our PhD Qualified Writers!!