Assignment1_OceanCarriers

Assignment1OceanCarriersMScEcon2014SpringRC.LI(SID:********)IShouldMsLinnpurchasethe$39Mcapsize?Maketwodifferentassumptions.First,assumethatOceanCarriersisaU.S.firmsubjecttoa35%statutory(andeffective)marginaltaxrate.Second,assumethatOceanCarriersisdomiciledinHongKongfortaxpurposes,whereshipownersarenotrequiredtopayanytaxonprofitsmadeoverseasandarealsoexemptedfrompayinganytaxonprofitmadeoncargoupliftedfromHongKong,i.e.,assumeazerotaxrate.Assumptions:1Useconstantdiscountrateof9%.2Newshipsdepreciateonastraight-linebasisover25yearswithasalvagevalueofzero.3Themarketvalueoftheshipinthesecond-handmarketisthesametobookvalueincludingcapitalexpenditureformaintenance.4Aftertheyear2005,thenewshipwouldcontinueoperateatE[DailyHireRate]adjusted.5Operationcostisinitially4,000perday,andgrowsattherate4%.6NetWorkingCapitalisinitially500,000andgrowswithinflation.7Scrapvalueat2017is$5M,andadjustedbyinflationratewhenscrappinginotheryears.8Thereisnodefaultrisk.9Thereisnosideeffectsuchaserosionandsynergy.10Whenscrappingtheshipatspecialsurveyyear,thefirmdoesnotspendmoneyonmaintenance.Atyear2027thefirmdoesnotsellitinsecond-handmarketandonlyscrapit.11ThefirmwouldrecoverNetWorkingCapitalbeforesellingorscrappingtheship.12Calculateoneyearas365days.1.1AssumethatthefirmisaU.S.firmsubjecttoa35%marginaltaxrateandscraptheshipafter15years’operation.TheNetPresentValueis$-11.59M.Sorejecttheproject.1.2AssumethatthefirmisaU.S.firmsubjecttoa35%marginaltaxrateandselltheshipinthesecond-handmarketafter15years’operation.TheNetPresentValueis$-10M.Sorejecttheproject.1.3AssumethatthefirmisdomiciledinHongKongenjoyingazerotaxrateandscraptheshipafter15years’operation.BaseParameters&AssumptionsAcquisitionCostofShip39($M)AnnualDepreciationRate4.00%Straight-lineamortizationover25yearsTaxRate35%ExpectedInflationRate3.00%DiscountRate9.00%1)ifoperateshipsover15years(donotselltheshipuntilscrappingitatyear25)AgeofShipEventYearCalenderYearE[IronOreShipments]E[DailyCharterRate]AdjustmentFactorE[DailyHireRate]DailyOperatingCostDaysHired(peryear)Revenue($M)OperatingCosts($M)Depreciation($M)TaxableIncome($M)TaxPaid($M)After-TaxIncome($M)OperatingCashFlow($M)CapitalExpenditures(CAPEX)($M)ChangeinNetWorkingCapital(DNWC)($M)AssetSales(aftertax)($M)FreeCashFlow(FCF)($M)PVFactor:1/(1+r)tPVofCashFlow(PV[CF])($M)NetWorkingCapital($M)BookValue($M)ScrapValue($M)0200040015,3440.000.000.000.000.000.000.000.000.003.900.000.00(3.90)1.00(3.90)0.001200143614,7470.000.000.000.000.000.000.000.000.003.900.000.00(3.90)0.92(3.58)0.0022002444.7215,0720.000.000.000.000.000.000.000.000.0031.200.500.00(31.70)0.84(26.68)0.5039.00132003453.6115,4031.1520,0004,0003577.141.461.565.681.993.693.690.000.0150.003.680.772.840.5237.443.31242004462.6915,7421.1520,2004,1603577.211.521.565.691.993.703.700.000.01550.003.690.712.610.5335.883.40352005471.9416,0881.1520,4004,3263577.281.581.565.702.003.713.710.000.01590.003.690.652.400.5534.323.51462006479.0216,2731.1518,7144,4993576.681.641.565.041.763.283.280.000.01640.003.260.601.940.5632.763.61572007486.216,4601.0517,2834,6793576.171.711.564.461.562.902.900.300.01690.002.580.551.410.5831.503.72682008493.516,6501.0517,4834,8673536.171.781.624.401.542.862.860.000.01740.002.840.501.420.6029.883.83792009500.916,8411.0517,6835,0613536.241.851.624.391.542.862.860.000.01790.002.840.461.310.6128.263.958102010508.4117,0351.0517,8875,2643536.311.921.624.391.542.862.860.000.01840.002.840.421.200.6326.644.079112011516.0417,2311.0518,0935,4743536.392.001.624.391.542.852.850.000.0190.002.830.391.100.6525.024.1910122012523.7817,4291.0017,4295,6933536.152.081.624.071.432.652.650.350.01960.002.280.360.810.6723.754.3111132013531.6417,6291.0017,6295,9213496.152.161.633.991.402.592.590.000.02020.002.570.330.840.6922.124.4412142014539.6117,8321.0017,8326,1583496.222.251.633.981.392.582.580.000.02080.002.560.300.770.7120.494.5813152015547.7118,0371.0018,0376,4043496.292.341.633.961.392.572.570.000.02140.002.550.270.700.7318.864.7114162016555.9218,2451.0018,2456,6603496.372.431.633.941.382.562.560.000.0220.002.540.250.640.7617.234.8515172017564.2618,4540.8014,7636,9273495.152.531.632.620.921.711.71(8.71)(0.76)8.7111.170.232.580.0015.605.00NPV(11.59)BaseParameters&AssumptionsAcquisitionCostofShip39($M)AnnualDepreciationRate4.00%Straight-lineamortizationover25yearsTaxRate35%ExpectedInflationRate3.00%DiscountRate9.00%1)ifoperateshipsover15years(donotselltheshipuntilscrappingitatyear25)AgeofShipEventYearCalenderYearE[IronOreShipments]E[DailyCharterRate]AdjustmentFactorE[DailyHireRate]DailyOperatingCostDaysHired(peryear)Revenue($M)OperatingCosts($M)Depreciation($M)TaxableIncome($M)TaxPaid($M)After-TaxIncome($M)OperatingCashFlow($M)CapitalExpenditures(CAPEX)($M)ChangeinNetWorkingCapital(DNWC)($M)AssetSales(aftertax)($M)FreeCashFlow(FCF)($M)PVFactor:1/(1+r)tPVofCashFlow(PV[CF])($M)NetWorkingCapital($M)BookValue($M)ScrapValue($M)0200040015,3440.000.000.000.000.000.000.000.000.003.900.000.00(3.90)1.00(3.90)0.001200143614,7470.000.000.000.000.000.000.000.000.003.900.000.00(3.90)0.92(3.58)