Finance Case

1. Do you expect daily spot rates to increase or decrease next year? Provide adequate justification for your argument.

Spot rates fluctuate with our market conditions. The supply of Australian and Indian iron ore is expected to increase in the long-run, so this would help to facilitate the increase in demand. In the present global economy, there are increasing demands for shipment of these raw materials. Daily hire rates are also the cause for higher spot rates, and the demand for iron/ore shipments is what drive the hire rates. We found that although the long term spot rate looks to remain strong, the short term forecast shows that spot rates will drop in the next year. As shown in Exhibit 3, the number of vessels in 2001 is 63, in addition it is expected that imports of iron ore and coal will remain still over the next couple years. Over the long run there will be increasing growth production in ore and coal, increasing trade volume as well as spot rate. However, the short-run forecast for next year's spot rate is not promising.

2. How would you characterize the long-term prospects of the capesize dry bulk industry? Justify your arguments.

We would characterize the long-term prospects of the capsize industry through supply and demand. Supply is determined by the demand for ships and the formula that we found to be the most accurate is: # of ships= new ships+ previous year ships- scrapping and sinking ships. In the long-run, demand should be increasing because there is expected to be higher trading volume (because of the availability of Australian and Indian ore exports, as mentioned in the case pg.4). However, even though Australian and Indian ore production is expected to be strong in the upcoming years, allowing exports to take off, the supply of ships is likely to decrease in the future because of the technological innovations and advancements in different transportation methods. Looking at Exhibit 5, the shipment of iron ore increases each year for the 25 year period which is an indication that it will be able to facilitate the demand

Number of dry bulk ship orders for each year can be found by looking at Exhibit 3

* 2001  63 ships

* 2002  33

* 2003  21

The case mentions that after 15 years the scrap value will be $5 million

* Can also refer to Exhibit 2 to get a more accurate value for the scrap cost

* Since it is long term maybe look at the dry bulk industry from a period of 25 years so therefore the scrap costs would be $2 million

I'm not sure how to set-up 3,4,5 but I'm pretty sure you need to find the NPV for each question.