1. Piiru0
2001
Rodney Piiru
OceanCarriers
2/23/2015
Ocean Carriers Case Report

2. Piiru1
Table of Content
Table of
Contents.....................................................................................................................................1
Company Report and
Assumptions...............................................................................................................................2-3
Proposals and
Recommendations......................................................................................................................4-8

3. Piiru2
Introduction
Problem Statement: Ocean Carriers must use Net Present Value (NPV) analysis to decide
whether or not to accept a ship building project, which will cost $39 million.
Recommendation: The tax rate Ocean Carriers is currently paying is way too high to except this
project. Ocean Carriers needs to take advantage of their presence in Hong Kong to benefit from
the 0 tax rate. They also need to find a way to extend the life of their ships to take advantage of
cash flows that could be received past 15 years.

4. Piiru3
Assumptions
Ocean Carriers has offices in both Hong Kong, China and the United States, but the shipping
company is headquartered in the United States; so, I used a 35% corporate tax for my baseline
case calculations. This I a major difference from the corporate tax rate of 0 in Hong Kong.
Ocean Carriers has a policy of not operating ships older than 15 years; so, in the base case the
life of the ship is 15 years and it will be scrapped for $5 million in the fifteenth year.
I assumed a steady inflation rate of 3% throughout the life of the project. Ocean Carriers is
expected to grow at 2% from 2002 to 2004, then growth is expected to fall to 1.5% and stay
steady forever.
For this project, I did not calculate a variable cost rate (v), working capital rate (w) or fixed
costs. There are no fixed costs. Variable costs are the operating costs of $4000 per day. These
operating costs will increase at a rate of 1% above inflation (4%), annually, for the life of the
ship. In 2001, there will be a net working capital injection of $500,000, which will grow
annually at the rate of inflation.
I used two types of capital expenditure (capex) in my calculations. For expansionary capex, I
used the cost of building the ship ($39 million). 10% of the cost is due in 2001, another 10% is
due in 2002, and the remaining balance is due in 2003. For capex replacement, Ocean Carriers
will invest money into the ship every five years beginning in 2007 to prepare for the mandated
special surveys.
I discounted the cash flows from 2003 to 2005 at a 6% interest rate. In contrast, the cash flows
after 2005 were discounted at a weighted average cost of capital (WACC) of 9% because these
cash flows are more risky; thus, require a higher rate of return.
In order to accept this project NPV must be positive and the internal rate of return should be
greater than the WACC (9%). The NPV takes priority over the IRR.

5. Piiru4
Analysis
Baseline Case
As you can see in table 1, if Ocean Carriers does not make any changes, this project will produce
a negative NPV and an IRR lower than the WACC (9%). This project does not generate enough
cash flows to compensate for the $39 initial investment. This means Ocean Carriers will have to
make some changes in order to accept this project.
Table 1a
NPV (9,467.93)
IRR 3.961%
Interest Rate 6% (2003-2005); 9% (2006-2017)
Initial Investment 39,000
2001 (4,150.94)
2002 (3,484.34)
2003 (22,650.79)
2004 2,997.02
2005 2,753.75
2006 2,268.32
2007 1,711.63
2008 1,698.57
2009 1,558.04
2010 1,428.64
2011 1,309.42
2012 1,004.02
2013 1,017.48
2014 930.25
2015 849.99
2016 776.16
2017 514.84
NPV (9,467.93)
NPV for New Vessel
Net Operating Cash Flows (taken from Valuation)
Table 1

6. Piiru5
Proposal 1: Move Headquarters to Hong Kong
Currently, the corporate tax rate in Hong Kong is 0. This is much lower than the corporate tax
rate in the United States. I propose that Ocean Carriers moves headquarters from the United
Sates to Hong Kong in order to benefit from not paying taxes on income. As you can see in table
2, moving headquarters to Hong Kong will generate a positive NPV and an IRR greater than the
WACC (9%) for this project.
Table 2a
NPV 2,501.31
IRR 11.891%
Interest Rate 6% (2003-2005); 9% (2006-2017)
Initial Investment 39,000
2001 -4,150.94
2002 -3,484.34
2003 -21,011.01
2004 4,398.28
2005 4,055.55
2006 3,337.02
2007 2,594.28
2008 2,508.47
2009 2,312.50
2010 2,131.46
2011 1,964.07
2012 1,575.45
2013 1,541.73
2014 1,418.63
2015 1,304.92
2016 1,199.90
2017 805.34
NPV 2,501.31
NPV for New Vessel
Net Operating Cash Flows (taken from Valuation)
Table 2

7. Piiru6
Proposal 2: Extend Life of the Ship to 25 Years
Currently, Ocean Carriers does not operate ships older than 15 years old. I propose that Ocean
Carriers extend the life of this ship from 15 years to 25 years. Unfortunately, this proposal does
not generate a positive NPV for this project. In addition the IRR is lower than the WACC. As
you can see in table 3b, the vessel loses a lot of value very late in the life of the boat. In this
case, the salvage value net of taxes is significantly low, since the book value is zero.
Table 3a
NPV - 6,922.84
IRR 3.771%
Interest Rate 6% (2003-2005); 9% (2006-2027)
Initial Investment 39,000
2001 -4,150.94
2002 -3,484.34
2003 -22,650.79
2004 2,997.02
2005 2,753.75
2006 2,268.32
2007 1,711.63
2008 1,698.57
2009 1,558.04
2010 1,428.64
2011 1,309.42
2012 1,004.02
2013 1,017.48
2014 930.25
2015 849.99
2016 776.16
2017 341.53
2018 466.42
2019 422.06
2020 381.44
2021 344.25
2022 149.25
2023 248.19
2024 221.95
2025 198.04
2026 176.25
2027 110.56
NPV (6,922.84)
NPV for New Vessel
Net Operating Cash Flows (taken from Valuation)
Table 3

8. Piiru7
Proposal 3: Move Headquarters to Hong Kong and Extend the Life of the Ship to 25 Years
In my final proposal, I suggest that Ocean Carriers combine my first two proposals. As I
mentioned before, paying no taxes produces a positive NPV and an IRR greater than the WACC.
In addition, extending the life of the ship will increase Proposal 1’s NPV from $2.5 million to
about $6.95 million.
Table 4a
NPV 6,948.54
IRR 11.804%
Interest Rate 6% (2003-2005); 9% (2006-2027)
Initial Investment 39,000
2001 -4,150.94
2002 -3,484.34
2003 -21,011.01
2004 4,398.28
2005 4,055.55
2006 3,337.02
2007 2,594.28
2008 2,508.47
2009 2,312.50
2010 2,131.46
2011 1,964.07
2012 1,575.45
2013 1,541.73
2014 1,418.63
2015 1,304.92
2016 1,199.90
2017 632.03
2018 737.34
2019 674.69
2020 617.00
2021 563.88
2022 336.07
2023 422.43
2024 384.43
2025 349.56
2026 317.53
2027 217.60
NPV 6,948.54
NPV for New Vessel
Net Operating Cash Flows (taken from Valuation)
Table 4

9. Piiru8
Conclusion
Ocean Carriers should accept this project, but the firm must make changes before accepting it. I
recommend that Ocean Carriers move headquarters to Hong Kong and extend the life of the ship
to at least 25 years. Since Ocean Carriers has offices in Hong Kong already, moving
headquarters there will not be very difficult or expensive. Paying the very high tax rate of 35% is
hurting the shipping company very much financially. If the firm decides to stay in the United
States, it will not be able to accept this project. Moving headquarters to Hong Kong alone will
allow them to receive a positive cash flow totaling approximately $2.5 million over the course of
15 years.
Secondly, Ocean Carriers should also extend the life of their ships to 25 years. At this time, they
are missing out on another 10 years of positive cash flows. In this case, Ocean Carriers could
receive approximately an additional $4.5 million by extending the life of the ship to 25 years.
Even though maintenance fees of $750,000 in 2017 and $850,000 in 2022 are very costly, the 0
tax rate increases the cash flows received after 15 years. In Hong Kong, the value of the vessel
increases over the course 25 years. As a result, extending the ship’s life by 10 years becomes a
worthwhile investment.