You are required to be prepare a report on the Ocean Carriers case study.
This case provides an opportunity to practice project appraisal. The focus is on estimating cash flows associated with a long-term investment project. Ultimately, your analysis should help inform Linn's decision with respect to commissioning a new vessel.
To achieve your ultimate position, answer the following questions:
1. Based on the forecasted daily hire rates provided in the last exhibit of the case and on other case facts, what are the cash flows associated with the project over its life?
2. What is the NPV of the project assuming that Ocean Carriers does not pay tax?
3. What is the NPV of the project assuming that Ocean Carriers pays tax at 35%? (for 1-3 assume that the vessel is operated for its full useful life, i.e. not scrapped after 15 years)
4. What do you think of the firm's policy of not operating vessels more than 15 years old?
5. Are there any risk factors that could potentially affect the NPV of this project and hence should be taken into account? Briefly discuss
Use a discount rate of 9% throughout your analysis. Make other assumptions as required.