Ocean Carriers

Nicole Walach

June 5, 2012

Cases in Finance

OCEAN CARRIERS

This case is about the shipping company Ocean Carriers Inc. and the decision facing their Vice President of Finance, Mary Linn, on whether or not to commission a new capsize carrier in order to meet an eager customers proposed lease of a ship in 2003. The current vessels in Ocean Carrier's fleet could not be committed to a time charter beginning in 2003 because the ships are either already leased during this period or to small to meet the customers needs. After evaluating the actual cost of the capsize vessel as well as the profitability of the proposed project for both 15 and 25 years, I would recommend not commissioning the new capsize carrier.

The cost of commissioning a new 180,000 deadweight ton ship for delivery in early 2003 would cost $39 million, with 10%, $3.9 million, being payable immediately in 2001 and another 10% due in 2002. The remaining balance of $31.2 million would be due on delivery. The ship would be depreciated on a straight-line basis over 25 years starting in 2003, at $1.56 million per year. To determine the actual cost of the project, I discounted the $39 million total charge spread over the three installments at 9%, which adjusted equaled $33,738,397.44.

Currently, Ocean Carriers policy does not permit operating ships older than 15 years. The older ships are either sold in a secondhand market or scrapped by selling its steel to demolition yards with an estimated scrap value of $5 million at the end of the fifteenth year, and thereafter growing with inflation, which is estimated at about 3% until year 25 when it will be $6.72 million.

Mary Linn anticipates that the initial investment in net working capital of $500,000 in 2003 would also grow with the 3% inflation. In addition, to ensure seaworthiness and comply with international regulations, every five years a special, and equally expensive survey of the vessel is required. If we were operating the ship for 15 years, the capital expenditures associated in preparation for the two surveys over the life of the ship would cost $300,000 in 2007 and $350,000 in 2012. After being depreciated on a straight-line basis over a 5-year period, the costs incurred would be $0 between years 2003-2006; $60,000 per year between 2007-2011; and $70,000 per year between 2012-2016.

Operating costs for the new ship are expected to initially average $4,000 per day totaling 1.46 million in the first year, and growing annually at 4%, which is 1% above inflation. In addition, the ship requires 8 days of maintenance and repair time during the first 5 years, then 12 days per year between years 5-10, and finally 16 days after 10 years. During this time the charterers are not charged