Entire Annual Gross sales Essay

Ocean Carriers Inc. was approached in January of 2001 with a contract proposal for the leasing of one of their ships for a term of 3 old ages get downing in 2003. Ocean Carriers presently has no ship to suit the client. To committee the building of a new vas would take 2 old ages from start to completion. The mean rate in the topographic point market is $ 22. 000 per twenty-four hours. Ocean Carriers deployed a younger fleet than mean bearers and by and large earned a 15 % premium over the mean day-to-day rate puting them in place to capitalise in strong economic systems. However. the industry is volatile and suseptable to extremes both low and high. Many ship proprietors sought to subscribe contracts with clip charters in order to screen themselves from the swings in the market. The age of the vas is another cardinal variable in the rate an proprietor can demand. Younger ships. as mentioned before. by and large take in 15 % higher rates than the industry norm. However. the older ships. approximately 25 old ages or over. demanded a 35 % price reduction off of the industry norm. Location is besides a cardinal factor in finding the demand for dry majority capsizes. The distance between the US and the EU is comparatively short necessitating a smaller fleet of ships.

Whereas. an upturn in demand in the Asian Pacific would necessitate a greater fleet of capsizes in order to suit the clip required to transport such distances. Ocean Carriers had to concern themselves particularly closely on the planetary economic system because demand for dry majority capsizes is determined by market demand. Over 85 % of all lading is iron ore and coal and demand typically rises and falls with these two trade goods. This besides informs that the markets for Fe and coal to a great extent act upon the capacity for industry growing. Ocean Carriers has 63 new vass scheduled for deployment in 2001 and dead economic growing predicted for the following 2 old ages with important growing projected for the 3rd twelvemonth. This is due to the growing in the Australian and Indian markets. In order to do a recommendation to Mary Linn as to whether Ocean Carriers. Inc. should buy a new ship we must first expression at the cost and net present value of the ship. In order to make this we should utilize the expected day-to-day hire rates given in the instance survey to cipher expected costs and grosss for the life-time of this vas.

The expected day-to-day hire rate is the most precise measuring to find future hard currency flows for the company. By utilizing the one-year operating yearss over the life of the new vas we were able to find the one-year day-to-day hire gross. Assuming long-run demand is equal ; a full 25-year runing life of the ship would finally turn out to be profitable for the company ( Appendix A ) . However. if the life of the ship is reduced to 15 old ages ( as was company policy ) and later sold for bit. the undertaking would ensue in a loss for the company even when including the $ 5 million salvage value of the bit ( Appendix B ) . The day-to-day operating cost for the vas was provided for twelvemonth 1 at $ 4. 000. For the staying old ages of the ship. increase the operating costs at 1 % over the rising prices rate of 3 % ( or 4 % entire ) .

Determining operating costs by utilizing 365 yearss per twelvemonth leads to one-year operating costs of $ 1. 460. 000 in twelvemonth 1 ; $ 1. 518. 400 in twelvemonth 2 ; $ 1. 579. 136 in twelvemonth 3 and so on. The analysis includes a down payment of $ 3. 900. 000 in old ages 0 and 1 ; followed by the staying $ 31. 200. 000 of the cost in twelvemonth 2. A $ 500. 000 investing in working capital was infused. which was expected to turn with rising prices over the life of the ship ( 3 % ) . Entire net nowadays value ( NPV ) of the annual hard currency flow was determined for both a 25-year operating life-time. every bit good as a 15-year operating life-time with a $ 5 million bit value. It was determined that for this undertaking to be profitable. the ship would hold to stay in operations until 2026 before it returned a positive NPV figure. If operated for the full 25 old ages. entire NPV of $ 368. 557 is forecasted. However. if the ship is operated for 15 old ages and so scrapped. a negative NPV of – $ 1. 252. 916 would ensue. A. Grosss

Calculations of expected one-year gross for Ocean Carriers: = Expected day-to-day hire rate * ( 365 days- scheduled yearss for care ) Age of Ship | Calendar twelvemonth | Expected Daily Hire Rate ( from Exhibit 6 ) | Minus scheduled yearss for care ( from p. 1 ) | Entire Annual Gross saless

1 | 2003 | 20. 000 | 8 | $ 7. 140. 000. 00 |
2 | 2004 | 20. 200 | 8 | $ 7. 211. 400. 00 |
3 | 2005 | 20. 400 | 8 | $ 7. 282. 800. 00 |
4 | 2006 | 18. 714 | 8 | $ 6. 680. 898. 00 |
5 | 2007 | 17. 283 | 8 | $ 6. 170. 031. 00 |
6 | 2008 | 17. 481 | 12 | $ 6. 170. 793. 00 |
7 | 2009 | 17. 682 | 12 | $ 6. 241. 746. 00 |
8 | 2010 | 17. 886 | 12 | $ 6. 313. 758. 00 |
9 | 2011 | 18. 092 | 12 | $ 6. 386. 476. 00 |
10 | 2012 | 17. 428 | 12 | $ 6. 152. 084. 00 |
11 | 2013 | 17. 628 | 16 | $ 6. 152. 172. 00 |
12 | 2014 | 17. 831 | 16 | $ 6. 223. 019. 00 |
13 | 2015 | 18. 036 | 16 | $ 6. 294. 564. 00 |
14 | 2016 | 18. 243 | 16 | $ 6. 366. 807. 00 |
15 | 2017 | 14. 762 | 16 | $ 5. 151. 938. 00 |
16 | 2018 | 14. 932 | 16 | $ 5. 211. 268. 00 |
17 | 2019 | 15. 104 | 16 | $ 5. 271. 296. 00 |
18 | 2020 | 15. 278 | 16 | $ 5. 332. 022. 00 |
19 | 2021 | 15. 454 | 16 | $ 5. 393. 446. 00 |
20 | 2022 | 14. 654 | 16 | $ 5. 114. 246. 00 |
21 | 2023 | 14. 823 | 16 | $ 5. 173. 227. 00 |
22 | 2024 | 14. 993 | 16 | $ 5. 232. 557. 00 |
23 | 2025 | 15. 166 | 16 | $ 5. 292. 934. 00 |
24 | 2026 | 15. 341 | 16 | $ 5. 354. 009. 00 |
25 | 2027 | 13. 448 | 16 | $ 4. 693. 352. 00 |























B. Operating Expenses:
=Expected rate of rising prices ( 4. 000 ) ten ( 1+0. 04 ) Nitrogen
Year ( N ) | Expected rate of rising prices ( 1 % above rising prices ) | Inflation * yearss |
2003 | 4000. 00 | $ 1. 460. 000. 00 |
2004 | 4160. 00 | $ 1. 518. 400. 00 |
2005 | 4326. 40 | $ 1. 579. 136. 00 |
2006 | 4499. 46 | $ 1. 642. 301. 44 |
2007 | 4679. 43 | $ 1. 707. 993. 50 |
2008 | 4866. 61 | $ 1. 776. 313. 24 |
2009 | 5061. 28 | $ 1. 847. 365. 77 |
2010 | 5263. 73 | $ 1. 921. 260. 40 |
2011 | 5474. 28 | $ 1. 998. 110. 81 |
2012 | 5693. 25 | $ 2. 078. 035. 25 |
2013 | 5920. 98 | $ 2. 161. 156. 66 |
2014 | 6157. 82 | $ 2. 247. 602. 92 |
2015 | 6404. 13 | $ 2. 337. 507. 04 |
2016 | 6660. 29 | $ 2. 431. 007. 32 |
2017 | 6926. 71 | $ 2. 528. 247. 61 |
2018 | 7203. 77 | $ 2. 629. 377. 52 |
2019 | 7491. 92 | $ 2. 734. 552. 62 |
2020 | 7791. 60 | $ 2. 843. 934. 72 |
2021 | 8103. 27 | $ 2. 957. 692. 11 |
2022 | 8427. 40 | $ 3. 075. 999. 80 |
2023 | 8764. 49 | $ 3. 199. 039. 79 |
2024 | 9115. 07 | $ 3. 327. 001. 38 |
2025 | 9479. 68 | $ 3. 460. 081. 44 |
2026 | 9858. 86 | $ 3. 598. 484. 69 |
2027 | 10253. 22 | $ 3. 742. 424. 08 |


























C. EBIT= Revenue – Operating Expense- Depreciation ( Ship ) – Depreciation ( Survey ) D. Taxes ( Assume 35 % )
E. EBIAT= Revenue– Operating Expense- Depreciation ( Ship ) – Depreciation ( Survey ) – Tax F. Depreciation
Exhibit 1 shows the capital outgo projected for particular studies. These would be depreciated on a straight-line footing over a 5-year period. NPV ( for 25yrs ) = -1. 209. 977 ( See Appendix C ) Note that the Company had a policy of non runing vass older than 15 old ages. To avoid the big outgo for older ships. the company planned to sell the vas into the 2nd manus market. or trash the vas merely before the 3rd particular study. Therefore. NPV was calculated for 15 old ages.

NPV ( for 15yrs ) = -3. 796. 000 ( See excel spreadsheet for computations ) Assuming 3 % rising prices. 35 % US revenue enhancement rate. and a 9 % price reduction rate. hard currency flow projections for Ocean Carriers were calculated for different timeframe proposed contracts. After these were calculated. the price reduction rate was applied to happen the net nowadays values ( NPV ) for 25 and 15 old ages. Ships would give a net present value of -3. 796. 00 for the 15 twelvemonth timeframe reasoning with scraping of the bearer at the terminal of the 15th twelvemonth. On the other manus. a 25 twelvemonth contract would give a net present value of -1. 209. 977. In general. both scenarios produced a negative NPV and hence would non be recommended.

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