Do You Expect the Daily Sport Hire Rates to Increase or Decrease Next Year?

Do you expect the daily sport hire rates to increase or decrease next year?

Spot Charter rates fluctuated based on market conditions. When the market demand for dry bulk capsizes is high, carriers can demand higher spot charter rates. When market demand is low, carriers accept lower spot charter rates. Due to 63 new vessels scheduled for commission and imports of iron ore and coal projected to be stagnant, spot rate were anticipated to fall over the next two years.

What factors drive average daily hire rates?

In addition to market demand in basic industries like iron ore, changes in trade patterns, age of vessels and number of newer vessels available in the market are all factors that drive the daily hire rates.

How would you characterize the long-terms prospects of the capsize dry bulk industry?

The long-term the dry bulk industry is expected to grow. Prospects for growth from 1994 - 2000 on average are a + 2.3 %. The projections on exhibit 6 trend toward +1.5% y/y increase, which are in-line with data from previous years. In addition, over 85% of the cargo carried by capsizes is iron ore and coals. Given that India and Australian production in iron ore is expected to be strong, exports are expected to increase in the years immediately following y2000. Therefore, we should expect the same positive forecast/prospects of demand of vessel service over the long-term.

Evaluate the cost of the new capsize and forecast the expected cash flows.

The attached spreadsheet shows the year by year, line by line costs and expected cash flows. While Ocean Carriers has been offered a contract that only guarantees 3 years, the costs and cash flows were calculated based on the assumption that the ship would be under contract for the full 15 year life of the ship.

Should Ms. Linn purchase the $39M capsize? Make 2 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 form paying any tax on profits made on cargo uplifted from Hong Kong.

The attached spreadsheet shows the year by year, discounted cash flows and total NPV of the project. The table below shows a summary of the data:

Location NPV Payback Period

US 2.05 15 years

Hong Kong (1.29) N/A

Based on the above table, it is not recommended that Ms. Linn proceed with the purchase if Ocean Carriers is a US firm subject to the 35% tax rate. Currently there is only 3 years of guaranteed revenue for the ship and while it