ACTION LEARNING

PROJECT
OCEAN CARRIERS
B y, C L A S S 2 – T E A M 2
M. SAMEER KUMAR
S A N J AY D AV E
P R A S H A N T S R I VA S TAVA
RAVI DUSAD
Executive Summary
• Ocean Carriers Inc. is a company which owns and operates capesize dry bulk
carriers across the world for transportation of iron ore.
• During January 2011, one charterer has approached Mary Linn who is the Vice
President of Finance for Ocean Carriers with desirable terms.
• But as there is no ship available with Ocean Carriers to meet the requirements of
the customer, Mary Linn has to take a call whether Ocean Carriers need to procure
new capesize carrier in two years, i.e., by 2003, precisely from the period where
our customer requires to fulfil his requirements.

2
Summary of Facts
• In case if a new ship is coming during 2003, operating costs are estimated at an
average of $ 4,000 per day with an annual increase at the rate of 1% over inflation.
• During the first five years, eight days a year were scheduled for maintenance and
repair works. And after that, the time allotted for maintenance increased to
twelve days per year after five years and then they are set to sixteen days per year
in case if the ships are older than ten years.
• Ocean Carriers does not operate their vessels if they are older than 15 years as the
maintenance cost for continuing its seaworthiness is enormous.
• Maintenance cost outlays included in capital expenditure, and they get
depreciated on a straight line over five years.
• The company estimates an amount of $ 5M as scrap value after fifteen years.

3
• As per the shipping industry consulting firm hired by Mary Linn, the long term
forecast for iron ore shipments across the world will have 2% annual growth from
2002 to 2005 and then dropping to 1.5%.
• The charterer who needs to the carrier has offered Ocean Carriers to take the
vessel for three-year time charter from 2003 with a price of $ 20,000 per day
including with an annual escalation of $ 200 per day. And the estimated rate of
inflation was 3%.
• Ocean Carriers is planning to commission 180,000 deadweight ton ship by the
beginning of 2003.
• It would cost $ 39 million for purchasing a new vessel with 10% of the purchase
price payable immediately, and the next 10% would be due in one year.

4
CASE QUESTIONS
What are the key financial issues involved with Mary
Linn’s decision?
• Capesize carrier vessels can be taken on hire either on time charter or spot
charter. A time charter is nothing but fixing the hire rate of the ship for a specific
duration such as one year, three years or five years irrespective of the fluctuations
between supply and demand. And spot charters rates are fixed based on the
market demand conditions.
• Ocean Carriers has offices in both New York and Hong Kong. And as per the laws in
the US, firms are subjected to 35% taxation, whereas in Hong Kong, carriers are
not required to pay any tax on profits which made overseas. Therefore, Mary Linn
should also take a call regarding the location in which the newly planned vessel
need to be registered.
• As per the company policy, Ocean Carriers does not operate vessels for more than
15 years owing to high maintenance cost for continuing the seaworthiness as per
international regulations. And this is resulting in a significant capital loss, and also
the scrap value is far from the book value of the ship.
6
What alternative investments should be
considered by Mary Linn in her analysis?
• Taxation policies on the profit earned get changed from country to country. And
for Ocean Carriers which has offices in New York and Hong Kong has taxation of 35
% and 0 % respectively. Therefore, it is very critical to consider both the tax rates
and their impact on NPV.
• In the present scenario, Ocean Carriers have a policy basing on which it runs any
capesize carrier for 15 years only even though it can extend by another ten years.
And the impact in the cost of capital due to the period for which vessel used
should be adequately compared for taking conclusion in getting higher positive
NPV.

7
Would you recommend that she commission the
production of a new vessel? Why or why not?
• We would recommend Mary Linn to commission the production of a new capesize
carrier vessel but with slight changes in their policies. First of all, as per table 1, we
can conclude that for Ocean Carrier it would be very profitable if the new vessel
registered in Hong Kong as headquarters. Because in case if the ship based in the
USA, the impact on NPV would be substantial due to 35% taxation ($ 50,08,627).
On the other hand, if the same vessel registered in Hong Kong due to no taxes on
profits earned, there would a substantial positive impact on the NPV ($
81,18,347). Therefore, as both NPV is positive in both cases of the carrier
registered in Hong Kong and the USA, we recommend Mary Linn to go ahead with
commissioning of the new capesize carrier.

8
• Secondly, we can assess that the policy of Ocean Carriers for not operating vessels
which are older than 15 years is resulting in a substantial loss in the capital. In
case if the carrier used for the entire life, then both NPV would benefit positively
both in the scenarios of Hong Kong and New York. If we consider that the ship is
used for the entire life of 25 years with Hong Kong as a base, then the NPV $
98,51,731. And in case if the vessel is used for the whole life of 25 years with the
USA as headquarter, then the NPV be $ 71,94,264.
• Overall it can be concluded that due to the absence of taxation in Hong Kong it
would be wise to choose it as headquarter and also to use the vessel for the entire
life of 25 years for avoiding any substantial loss in the capital.

9
References
• GlobalNxt University Study Material
• Ross, S. A., Wester field, R., Jaffe, J. F., & Jordan, B. D. (2019). Corporate finance.
New York: McGraw-Hill Education.
• Brigham, E. F., & Houston, J. F. (2019). Fundamentals of financial management.
Boston, MA, USA: Cengage.

10
THANK YOU
CLASS 2 – TEAM 2