Ocean_Carriers

GF6001 Homework 04 Ocean Carriers 1) Decrease. Though there is an optimistic view of long term demand for capsizes. In 2001 and 2002, imports of iron ore and coal would remain stagnant. As a consequence, the demand for capsizes will also drop since there is a positive correlation between the imports and expected demand of the capesizes. Thus, the spot rates are expected to fall in the same period. 2) The daily hire rates depend on the supply and demand for such services. Supply is affected by the number of vessels available and by the increase in size and efficiency of the newer ships. The demand is driven by factors such as trading volume (exports) and transporting distance. 3) The long term prospects of capsize industry is considered from demand and supply sides: On the demand side, Shipping iron ore and coal makes 85% of the capsize vessels demand. After 2003, Australian and Indian ore exports would begin to increase the trading volume and remain strong in the long run. The demand of capsizes would increase since then and boost the prices. On the supply side, The future supply of the capsize vessels = the sum of current vessels - the vessels that will be scraped + new ships delivered.The old vessels with age over 24 years will be scrapped. This will reduce the supply. However, these vessels are only of a small portion of the vessels in the market. Thus the reduction in supply, due to the scraping, is large.The number of new ships to be delivered is shown in decrease from 2001 to 2004. This could become the main source of supply reduction. Therefore, the supply is expected to decline at least in the next four years and we expect adjustment according to demand afterwards. In summary, a strong demand in the long run and a forecasted low supply in the short run will boost the price. The long term prospects of capsize industry is positive. 4) For the USA case, Ms. Linn should not make the investment on the ship. The net present value of the investment is $-5,415,802 today. This is because of the diminishing marginal return over 15 years as result of high ship operations, depreciation and maintenance. In the final year, these expenses make up 80% of her revenue before taxes. Additionally, the $5 million received from scrapping the ship 15 years in the future is only worth $3 million today. For the Hong Kong Case, the NPV is $1,719,019. This is positive which means this project can be accepted if no other options. 5) The policy is primarily carried out to avoid the increased cost of special survey. However, scrapping the ship at the 15th year leads to a loss of $6,890,000 since the book value at that time is much higher than the scrapping value. This loss compared to the cost of $750,000, $850,000, $1,250,000 in year 2017, 2022, 2027. If the firm scraps the ship after 25 years the NPV of the investment is higher than the NPV when scraping the ship after 15 years. The comparison of cash flows and NPVs is as follows.