1) Do you expect daily spot hire rates to increase or decrease next year?
According to the Case description, Exhibit 3 showed order booking and delivery schedule for bulk capsizes for coming years from 2001 to 2004. It was larger than the number of current fleet size in Exhibit 2. Thus, the spot hire rates would likely to decrease since capsizes are available.
2) What factors drive average daily hire rates?
Daily hire rate were determined by the supply and the demand. From Exhibit 2, the existing capsizes carriers in terms of the sum of the loading ability. Factors of supply such as age and size of vessel, cost of repair and maintenance as well as demand factor such as market condition would affect daily rates.
3) How would you characterize the long-term prospects of the capsize dry bulk industry?
According to Case description, availability of fleet in the market and availability of transports good drives average daily hire rates. The daily hire rates would increase if ore exports from Australia and India starts in coming years. This would bring huge business trade. In absence of a new business, the average daily rates will decrease because of increasing number of fleet (demand is decreasing).
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There are about 2 million tons of capsize with age over 24 years. We will hope that these old vessels would be soon scrapped and this would reduce the supply of the capsize vessels. However, those old vessels were not a significant part of the total existing vessels. So we probably will not see a result that an obviously decreasing in supply because of the scraping of old vessels. In Exhibit3, the current order of new capsize vessels delivered in the coming 4 years. There will be a large supply of new capsize vessels from 2001 to 2003. This will increase the supply of capsize vessel in the future.
4) Evaluate the cost of the new capsize and forecast the expected cash flows.
See OceanCariers4.xls
5) Should Ms Linn purchase the $39m capsize? Make 2 different assumptions. First, assume that Ocean Carriers is a US firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are notrequired to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong.
See OceanCarrier5.xls
6) What do you think of the company’s policy of not operating ships over 15 years old?
This is a low-risk policy of company; this policy will save the company from uncertainty. At the same time, it will be not able to take advantage of returns on investment of vessels in the next years. This policy will not give a favorable outlook for investment.
