Case Background··························3 Dilemma································3 Scenarios under different tax rates and years ····························3 Alternative································5 Decision summary··························5 Appendix
Ocean Carrier Case Study * Case Background
Mary Linn of Ocean Carriers is evaluating the purchase of a new capesize carrier for a 3-year lease proposed by a motivated customer. The leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s needs. In addition, the proposed contract with the customer is only for three years. Therefore, after three years, the …show more content…
Under this scenario, the vessel is sold after 15 years of use for a net salvage value of $466,377.64. The resulting NPV is $1,339,629.17.
The final scenario is that where the company pays no taxes and uses the ship for 25 years. The parameters are positive enough to result in a NPV of $3,780,965.33.
Clearly, operating the ship for a longer period of time, with no income tax, makes it a positive investment. As time lapses, the discounted earnings outweigh the discounted costs. Moreover, the absence of income taxes saves the company a substantial amount of money. Based on the NPV analysis considering multiple assumptions, Ocean Carriers should construct a new carrier with no corporate tax and chartering the ship for its entire 25 year life. If Ocean Carriers chooses to adhere to their policy of selling ships at market value after 15 years, they will incur a net loss on the investment. * Alternative: Sell it for scrap or sell it on the second hand market?
This case doesn’t provide sufficient information to predict the price of the capesize carrier for second hand market; however, we can calculate the prices which make the NPV equal to 0 under different scenarios for decision making. There are two criteria; criterion one is comparing the real second hand market price with the price when NPV equal to zero; criterion two is comparing the real second hand market price with scrap