Executive Summary

Ocean Carriers Inc. is a company specializing in the dry bulk carrier industry, one that is made
up of 553 capesize ships (January 2001) and transports 85% of its cargo as iron ore and coal. The
industry as whole is significantly affected by the state of the world economy. During years of
economic expansion and strong growth, demand for capesizes increases and their production
increases as well. In addition to this, changes in the patterns of global trade can affect capesize
demand as such that when a new, larger source of coal is discovered, capesize production would
most likely increase as new trade routes open up.
Mary Linn, Ocean Carriers VP of Finance, has recently taken an optimistic stance towards the
long-term demand of capesizes because of high expectations for sustained production of
Australian iron ore and the likelihood of Indian iron ore exports to take off in the near term.
With offices in both New York and Hong Kong, Ocean Carriers seems poised to take advantage
of a recently proposed lease of a capesize ship for a three-year charter to begin in 2003. Although
the firms fleet does not include a vessel of the size requested by their eager customer, Ms. Linn
sees this as an opportunity to secure a very profitable contract as long as the company is strategic
in its execution.
Based on our evaluation of the potential purchase and lease of a new 180,000 deadweight ton
capesize costing $39 million, we believe that Ocean Carriers should go ahead with the project as
long as the ship is commissioned and based out of the firms Hong Kong headquarters. If Ms.
Linn and her company can accomplish this, the project will return a positive NPV of nearly $3
million and an IRR of 10.61%, higher than Ocean Carriers cost of capital.
Questions and Analysis
1. Do you expect daily spot hire rates to increase or decrease next year?
Daily hire rates are expected to decrease. Daily spot hire rates are strongly associated with iron
ore vessel shipments. Iron ore shipments are expected to decrease from 440 to 436 in 2001
according to Exhibit 4.

2. What factors drive average daily hire rates?

The demand for capesizes is what drives the daily hire rates. The daily hire rate is highly
correlated with iron ore-vessel shipments. Other factors are the world economy, the fleet size of
capesizes, and trading patterns. Another factor is the premium on the ship.

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3. How would you characterize the long-term prospects of the capesize dry bulk industry?
Exhibit 5 shows that iron ore shipments are expected to grow 2% between 2002 and 2005 and
1.5% after 2007 until 2027. This growth in shipments should drive the average daily charter
rates up. This stable growth looks pretty good for the long term.

4. Should Ms. Linn purchase the $39 million capesize? [Estimate the annual cash flows for
the project over the expected life.] Make two different assumptions. First, assume that
Ocean Carriers is a US 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 made on cargo
uplifted from Hong Kong.
According to the financial projections made in Exhibits 6 and 7, Ocean Carriers Finance VP
Mary Linn would have two very different decisions to make based on the two assumptions given.
If Ocean Carriers was a US firm subject to 35% taxation on profits, then the $39 million capesize
ship project would have to be foregone because of its NPV of ($5,149,526) and its IRR of
6.20%, which is quite a bit less than the discount rate of 9%. On the other hand, if Ocean
Carriers was based in Hong Kong and paid no taxes on its profits, the project would certainly
create value for the company and should be undertaken. In the latter scenario, the projects NPV
would be a comfortable $2,919,732 and the IRR, 10.61%, would be higher than the cost of
capital.
Our conclusion would be for Ocean Carriers to purchase the $39 million capesize ship from its
offices in Hong Kong for the sake of avoiding unnecessary taxation. If the customer to be
serviced is located in either India or Australia, then the ship would be utilized in an area in
reasonable proximity to Ocean Carriers Hong Kong headquarters.
5. What do you think of the companys policy of not operating ships over 15 years old?
We believe that this policy is a logical one because by the time a ship is 15+ years old, the
maintenance costs required to comply with the special surveys has more than doubled, from
$300,000 initially to $750,000 at the 15 year mark (Refer to Exhibit 1). In the following years,
the growth rate of these costs decreases significantly, but they coincide with a growing rate of
decrease in the daily hire rate adjustment factor, shown in Exhibit 2. This declining adjustment
factor is reflective of falling rates of return per day in any given year that a ship is operational.
Therefore, we conclude that it is more beneficial to Ocean Carriers to operate ships only up until
the point where daily hire rates equal between 0.80 and 1.00 and then to scrap the ships in the
15th year before incurring further capital expenditures related to preparation for the special
surveys.
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