Capesize Dry Bulk Industry

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Alternatives

In order to evaluate the policy of not operating vessels older than 15 years, we extended the time span from 15 years to 25 years (thought to be the longest time for a seaworthy vessel) and changed the discount rate by 1% above and below.

Using the same calculation process, we analyzed 12 different scenarios from which we found that the investment would yield a negative NPV if the company subjects to 35% taxation and the company could yield a positive NPV only under certain circumstance such as low taxation or low discount rate. If the company operated the capsize for less than 15 years, there was no way to make a positive NPV. Several factors were thought to be related to the results according to the data showed in appendix. Firstly, the company dispose its vessel at a low price. After 15 years of operating, the capesize had an estimated scrap value of $5M, however it still had a book value of $15,600,000. There was a huge gap up to $10,600,000. It was unreasonable to scrap it for the sake of special surveys which add up to a value of $2,850,000. The discounted earnings outweigh the discounted costs obviously. Secondly, taxation and discount rate were two key factors when it came to evaluating the investment. Considering the given scenario of 9% discount rate, the NPV can be positive only when the taxation is below 1%, whereas the NPV can be positive with the taxation beyond 10% if the discount rate is 8%. Finally, there was no perfect project. Even the 25-year-mode had a positive NPV, it was still questionable. The EBIT dropped heavily after 15 years’ operation: It would drop from 2,317,382 in year 2016 to 993,690 in year 2017, given discount rate equals to 9%. Even worse, it would lose money at the 25th year.

Conclusions

According to our analysis, we give our conclusion as follows. First, predication of daily hire rate was of great importance to our analysis. As EBIT of the company varies a lot with daily hire rate, a much more precise predication will help us better pin down future cash flows. Second, whether or not accept the investing project depends on the supposed operating duration of the ship. Assuming the company disposes its vessel at the end of 15th year and the discount rate is 9%, the NPV of 0 taxation is better than that of 35% taxation. However, we still reject this proposal because both of the NPVs were negative and the IRR is lower than the discount rate. Once the operation time extends to 25 years, both of the NPVs under two different tax rates would get higher value. We recommend the company to operate in 0 taxation since it yielded a positive NPV. Further, other than operating duration, we found that discount rate and taxation had great influence on NPV. For example, suppose the company operates the vessel for 15 years in Hong Kong, 1% change in discount rate, from 9% to 8%, will increase its NPV from $-939,585 to $1,156,263. The effect of 1% tax rate increasing will result in a NPV reduction of $211,964, given discount rate equals to 9%.

In sum, according to our previous analyses, we recommend the company to

- Extent its capesize operating, to

- Lower its cost of capital

- Avoid high taxation legally.

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Appendix:

Exhibit 1[pic 1]

Notes:

- 15 operating years and 9% discount rate and 35% tax rate

- O-year is operating year considering leap year

- Scrap does not need to pay tax, in total 27 years, scrap is considered as 0

- As conditions gave, special survey is paid

- FCF considers special survey, which is paid right at once in a year

Exhibit 2[pic 2]

Notes:

• 25 operating years and 9% discount rate and 35% tax rate

[pic 3]

Exhibit 3

Exhibit 4 Forecasted Daily Time Charter Rates for New Capesize Vessel[pic 4]