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Ocean's Carrier

In: Business and Management

Submitted By masarabia
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5. What should we do?

A decision has to be made on the possible construction of a new ship to meet the demands of a charterer, which wants a contract of only 3 years.
Based on the calculation of the cost of construction against the value of the contract, it is recommended that Ocean carriers should not go ahead with the construction.
However, if a strategic alliance can be created with another carrier to lease their vessels, Ocean Carriers should accept the contract.

What does Mary Linn has to consider?

1. Evaluation of the amount of expected returns over the life of the present contract.
2. Evaluation of the value of the cash injection into the project.

Expected Returns:

Considering that the ship was specifically constructed for this contract, the expected return for this case will be made over the contract. Without this contract the cash could have been used for other opportunities instead (opportunity cost). And after this contract there is no guarantee of new contracts at the same value, so this has to be taken as a risk premium.

1. Is it worth the construction of a new vessel?

During the first 3 years the vessel needs 8 days a year of maintenance and repairs.

Number of days available for lease a year = 365 – 8 = 357 Return over 3 years contract. Note that the contract takes place 2 years from the present. Using the expected rate of inflation of 3% and that does not change over the 3 years.

Year 1 = 20,000 x 357 = 7.140,000
PV(1) 3 = 6,534,111.45
Year 2 = 20,200 x 357 = 7.282,800
PV(2) 3 = 6,407,253.50
Year 3 = 20,400 x 357 = 7.282,800
PV(3)3 = 6,282,207.25

PV of contract = 6,534,111.45 + 6,407,253.50 + 6,282,207.25 = $19.223,554.20

This is the value of gross profit and the operations costs need to be calculated. The operating cost increase at 1% above inflation, or 4% each year.

Year 1 = 4000 x 365 = 1,460,000…...

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