Ocean Carriers Analysis Essay Example

cost of ship in PV terms, discounted at 6% (r-g), is $35. 5 million. Please see capital budget for details. The book value of the ship is $39 million, which equals the purchase price. 3) If the plan is to scrap the carrier after 15 years of use, Ms. Linn should not take the project. The project has a negative net present value after 15 years. The free cash flow is used to determine whether or not to do the project because it is a better representation of the effects of a project on the amount of cash a firm has available.

With free cash flow analysis, we removed non-cash charges such as depreciation. 4) Net Present Value is optimal at year 30. If the policy changes the company should purchase the ship and scrap it after 30 years. 5) Ms. Linn would be able to sell the ship for its book value at 15 years, which is $15,600,000. Assumptions 1. We assume that we can go to market and get a new yearly contract at the forecasted market rate. 2. We have assumed the scrap value is still $5,000,000 after 30 years. 3. After-Tax Salvage Value Calculation: i.

We assume that Ocean Carriers will receive a tax benefit for the scrapping of the ship in year 15, because they will be scrapping for a cost less than the current book value. The tax benefit is $8,710,000. ii. We assume that Ocean Carriers will receive a tax penalty for the scrapping of the ship in year 30, because the ship would have been fully depreciated by year 25. At year 30 the book value will be $0.

The tax penalty at a 35% tax rate is $1,750,000. 4. We assume that the number of operating days remains 349 from years 16 to 30. 5. We assume that the expected daily hire rate will remain constant from year 2027 to 2032.