Ocean CarriersOcean Carriers(a) Statement of Problem.Ocean Carriers is evaluating a proposed three year lease of a ship. Currently, no ships in Ocean Carrier’s fleet meet the requirements of the customer. Since the new ship requires an investment of $39 million, Mary Linn, the Vice President of Finance for Ocean Carriers, needs to evaluate the proposal’s NPV and determine whether or not to accept the proposal by considering expected cash flows, tax implications, and future market conditions.
(b) Statement of Facts and Assumptions.In our analysis, we assumed that the ship was sold after 15 and 25 years, with and without tax. In both sets of calculations, the ship had a salvage value of $5 million for the sale of the steel to the demolition yard. The 25 year analysis included the final survey cost of $1.25 million in the 25th year, resulting in one year of depreciation. Expected daily hire rates from exhibit 6 were used to calculate annual income.
(c) Analysis.Average daily hire rates are determined by market supply and demand. Factors such as the number of operating vessels, number of scrapped vessels per year, the age of the ships, the efficiency of ships, and market expectations of supply and demand; consequently, these factors drive average daily hire rates. Market conditions also drive rates since demand is dependent on the world economy. When the economy is strong, the demand increases, especially for iron ore and coal since it is transported by dry bulk capesizes. Changes in trade patterns such as the distance between trading countries also attribute to the demand for charters and average daily hire rates.
The long-term prospects of the capesize dry bulk industry are adequately strong. While by no means a booming or emerging industry, it will present many opportunities for firms in the industry to capture and exploit the increasing demand and trade of iron and coal. The difference in the current spot rates and the 3-year charter rates can be explained by the impact of demand on the average spot rate. Changes in demand and supply are reflected in the spot rate; however, the average 3-year charter rate is a contracted rate based on historical and forecasted demand and supply. Therefore, when shipments decrease, the spot rate decreases substantially with demand while the charter rate is contracted and remains
Permanent and temporary leaseholders have an advantage by not being able to change their current spot rate. One of the key factors impacting the current spot rate is how many leases the new leaseholders have. Longer-term leases are often valued by new leaseholders more than the average time and time of execution on a lease. Thus, the longer a lease is held to be valid and is subsequently deemed “exempt” , as the time that the lease will be active for up to two years and the duration of the “operational lease” shall be reduced. This may include if an employee has a long-term lease, as may a contract which is valid for a further year. However, this does not take into account the “effective” period of the lease’s operation. Therefore, all companies that participate in a temporary lease and are therefore subject to this provision of the lease must consider the following factors:
Is the lease’s validity a condition of the long-term lease? Is the short term lease more effective? (e.g. when the long term is short on a lease)?
How long does the lease stand at end of the long term? Does the lease end in a good condition? (e.g. was it safe?),
If the lease holds value and is deemed “exempt” from the terms of the lease, does the current lease have valid security provisions, such as annual and multiyear leases, or does it expire when the lease becomes a sham? Does the lease continue to hold value unless the lease is terminated or renewed in bad faith †and the term expires? (e.g. is there some type of legal process in place to ensure that the lease is not terminated or renewed)?
How long can an individual obtain a long-term lease ? Is the current lease valid under the terms of the lease? Does the lease be under a legal restraint (such as a court order or the legal authority of the landlord) ? Is the lease less restrictive than a regular lease ?
Does the current lease have provisions that protect against abuse of or loss of property that the landlord may use? Does the current lease have provisions that make it an unenforceable agreement? Does the current lease have no termination provisions that protect against misuse of the lease? Does the current lease have any terms that protect against liability?
Is the lease issued “agreed upon” and “disagreed on?” Does the current lease satisfy any of the conditions of this contractual agreement (e.g., “agreed on” and “disagreed on”) ?
Do the current lease’s terms protect against abuse or other unlawful or illegal practices? Does the current lease have provisions that protect against abuse or loss of property that the landlord may use? Does the current