Assignment1_OceanCarriers - Assignment 1 Ocean Carriers...

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Assignment 1 Ocean Carriers MScEcon 2014 Spring RC. LI (SID: ********) I Should Ms Linn purchase the $39M capsize? Make two different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to a 35% statutory (and effective) marginal tax rate. Second, assume that Ocean Carriers is domiciled in Hong Kong for tax purposes, where ship owners are not required 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, i.e., assume a zero tax rate. Assumptions: 1 Use constant discount rate of 9%. 2 New ships depreciate on a straight-line basis over 25 years with a salvage value of zero. 3 The market value of the ship in the second-hand market is the same to book value including capital expenditure for maintenance. 4 After the year 2005, the new ship would continue operate at E[Daily Hire Rate] adjusted. 5 Operation cost is initially 4,000 per day, and grows at the rate 4%. 6 Net Working Capital is initially 500,000 and grows with inflation. 7 Scrap value at 2017 is $5M, and adjusted by inflation rate when scrapping in other years. 8 There is no default risk. 9 There is no side effect such as erosion and synergy. 10 When scrapping the ship at special survey year, the firm does not spend money on maintenance. At year 2027 the firm does not sell it in second-hand market and only scrap it. 11 The firm would recover Net Working Capital before selling or scrapping the ship. 12 Calculate one year as 365 days.
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1.1 Assume that the firm is a U.S. firm subject to a 35% marginal tax rate and scrap the ship after 15 years operation. The Net Present Value is $-11.59M. So reject the project. 1.2 Assume that the firm is a U.S. firm subject to a 35% marginal tax rate and sell the ship in the second-hand market after 15 years operation. The Net Present Value is $-10M. So reject the project. 1.3 Assume that the firm is domiciled in Hong Kong enjoying a zero tax rate and scrap the ship after 15 years operation. Base Parameters & Assumptions Acquisition Cost of Ship 39 ($M) Annual Depreciation Rate 4.00% Straight-line amortization over 25 years Tax Rate 35% Expected Inflation Rate 3.00% Discount Rate 9.00% 1)if operate ships over 15 years(do not sell the ship until scrapping it at year25) Age of Ship Event Year Calender Year E[Iron Ore Shipments] E[Daily Charter Rate] Adjustment Factor E[Daily Hire Rate] Daily Operating Cost Days Hired (per year) Revenue ($M) Operating Costs ($M) Depreciation($M) Taxable Income($M) Tax Paid($M) After-Tax Income($M) Operating Cash Flow($M) Capital Expenditures (CAPEX)($M) Change in Net Working Capital ( D NWC)($M) Asset Sales (after tax)($M) Free Cash Flow (FCF)($M) PV Factor: 1/(1+r) t PV of Cash Flow (PV[CF])($M) Net Working Capital($M) Book Value ($M) Scrap Value ($M) 0 2000 400 15,344 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.90 0.00 0.00 (3.90) 1.00 (3.90) 0.00 1 2001 436 14,747 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.90 0.00 0.00 (3.90) 0.92 (3.58) 0.00 2 2002 444.72 15,072 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 31.20 0.50 0.00 (31.70) 0.84 (26.68) 0.50 39.00 1 3 2003 453.61 15,403 1.15 20,000 4,000 357 7.14 1.46 1.56 5.68 1.99 3.69 3.69 0.00 0.015 0.00 3.68 0.77 2.84 0.52 37.44 3.31 2 4 2004 462.69 15,742 1.15 20,200 4,160 357 7.21 1.52 1.56 5.69 1.99 3.70 3.70 0.00 0.0155 0.00 3.69 0.71 2.61 0.53 35.88 3.40 3 5 2005 471.94 16,088 1.15 20,400 4,326 357 7.28 1.58 1.56 5.70 2.00 3.71 3.71 0.00 0.0159 0.00 3.69 0.65 2.40 0.55 34.32 3.51 4 6 2006 479.02 16,273 1.15 18,714 4,499 357 6.68 1.64 1.56 5.04 1.76 3.28 3.28 0.00 0.0164 0.00 3.26 0.60 1.94 0.56 32.76 3.61 5 7 2007 486.2 16,460 1.05 17,283 4,679 357 6.17 1.71 1.56 4.46 1.56 2.90 2.90 0.30 0.0169 0.00 2.58 0.55 1.41 0.58 31.50
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