Ocean Carriers

Harvard Business School Case 202-029

Case Software 202-702

Copyright 2001 by the President and Fellows of Harvard College

This case was prepared as the basis for class discussion rather than to
illustrate either effective or ineffective handling of an administrative situation.
Exhibit 1 Capital Expenditures Anticipated in Preparation for Special Surveys

2007 2012 2017 2022 2027

300,000 350,000 750,000 850,000 1,250,000

Exhibit 3 Current order book for dry bulk capesizes by delivery date

2001 2002 2003 2004

Number of vessels 63 33 21 9
Exhibit 4 Daily Hire Rate Adjustment Factor for Dry Bulk Capesizes Based on Age of Vessel

Over 24 years 20 to 24 years 15 to 19 years 10 to 14 years 5 to 9 years Under 5 years

0.65 0.75 0.8 1 1.05 1.15

Exhibit 5 Worldwide Iron Ore Vessel Shipments, Fleet Size and Average Daily Hire Rates for Capesize Charters, 1994-200

1994 1995 1996 1997 1998 1999 2000

Iron ore vessel shipments 375 397 385 424 420 410 440

Fleet size NA NA NA 540 523 523 552

Avg. spot rate $16,851 $20,149 $11,730 $14,794 $10,105 $9,427 $22,575

Avg. 3-yr charter rate $18,250 $18,544 $14,079 $16,063 $13,076 $12,626 $15,344
Capesize Charters, 1994-2001

2001E

436

612
Exhibit 6 Forecasted Daily Time Charter Rates for New Capesize Vessel

Iron Ore
Shipments Avg Daily Charter
Age of Ship Event Year Calendar Year (Millions of Tons) % Growth Rate

0 2000 440 7.30% 15,344

1 2001 436 -0.90% 14,747
2 2002 445 2.00% 15,072
1 3 2003 454 2.00% 15,403
2 4 2004 463 2.00% 15,742
3 5 2005 472 2.00% 16,088
4 6 2006 479 1.50% 16,273
5 7 2007 486 1.50% 16,460
6 8 2008 493 1.50% 16,650
7 9 2009 501 1.50% 16,841
8 10 2010 508 1.50% 17,035
9 11 2011 516 1.50% 17,231
10 12 2012 524 1.50% 17,429
11 13 2013 532 1.50% 17,629
12 14 2014 540 1.50% 17,832
13 15 2015 548 1.50% 18,037
14 16 2016 556 1.50% 18,245
15 17 2017 564 1.50% 18,454
16 18 2018 573 1.50% 18,667
17 19 2019 581 1.50% 18,881
18 20 2020 590 1.50% 19,098
19 21 2021 599 1.50% 19,318
20 22 2022 608 1.50% 19,540
21 23 2023 617 1.50% 19,765
22 24 2024 626 1.50% 19,992
23 25 2025 636 1.50% 20,222
24 26 2026 645 1.50% 20,455
25 27 2027 655 1.50% 20,690
 Adjustment Adjusted Expected
Factor for Daily Hire Daily Hire
% Growth Hire Rate Rate Rate

21.50%
-3.90%
2.20%
2.20% 1.15 17,713 20,000
2.20% 1.15 18,103 20,200
2.20% 1.15 18,501 20,400
1.20% 1.15 18,714 ###
1.20% 1.05 17,283 ###
1.20% 1.05 17,481 ###
1.20% 1.05 17,682 ###
1.20% 1.05 17,886 ###
1.20% 1.05 18,092 ###
1.20% 1.00 17,428 ###
1.20% 1.00 17,628 ###
1.20% 1.00 17,831 ###
1.20% 1.00 18,036 ###
1.20% 1.00 18,243 ###
1.20% 0.80 14,762 ###
1.20% 0.80 14,932 ###
1.20% 0.80 15,104 ###
1.20% 0.80 15,278 ###
1.20% 0.80 15,454 ###
1.20% 0.75 14,654 ###
1.20% 0.75 14,823 ###
1.20% 0.75 14,993 ###
1.20% 0.75 15,166 ###
1.20% 0.75 15,341 ###
1.20% 0.65 13,448 ###
 0 1 2 3 4
Year 2001 2002 2003 2004 2005
Daily Charter Rate $ 20,000 $ 20,200 $ 20,400
Days in maintenance 8 8 8

Incremental Earnings Forecast

Revenues* $ - ### $ 7,140,000 $ 7,211,400 $7,282,800
COGS $ 3,900,000 $ 3,900,000 $ 31,200,000 $ - $ -
Gross Profit $ (3,900,000) $(3,900,000) $(24,060,000) $ 7,211,400 $7,282,800
Operating Costs** $ - ### $ 4,000 $ 4,160 $ 4,326
Depreciation $ - ### $ - ### $ -
EBIT $ (3,900,000) $(3,900,000) $(24,064,000) $7,207,240 $7,278,474
Income Tax at 35% $ (1,365,000) $(1,365,000) $ (8,422,400) $2,522,534 $2,547,466
Net Income $ (2,535,000) $(2,535,000) $(15,641,600) $4,684,706 $4,731,008
Plus: Depreciation $ - $ - $ - $ - $ -
Less: Capital Expenditures $ - ### $ - ### $ -
Less: Increases in NWC $ 500,000 $ 1,500 $ 3,045 $ 4,636 $ 6,275
Free Cash Flow $ (3,035,000) $(2,536,500) $(15,644,645) $4,680,070 $4,724,732
Projected Cost of Capital 0.12
PV of Free Cash Flow $40,860,769
NPV $ 5,130,968

No Tax Case
Net Income = EBIT $ (3,900,000) ### $(24,064,000) $7,207,240 $7,278,474
Plus: Depreciation $ - ### $ - ### $ -
Less: Capital Expenditures $ - ### $ - ### $ -
Less: Increases in NWC $ 500,000 $ 1,500 $ 3,045 $ 4,636 $ 6,275
Free Cash Flow $ (4,400,000) $(3,901,500) $(24,067,045) $7,202,604 $7,272,198
Projected Cost of Capital $ 0.12
PV of Free Cash Flow $63,260,149
NPV $ 8,240,688

*In year 15 includes $5M scrap value plus 15 years' interest

**Incurred every day, initially $4K/day, growing at inflation 3% + 1% = 4%
 5 6 7 8 9 10 11 12
2006 2007 2008 2009 2010 2011 2012 2013
$ 18,714 $ 17,283 $ 17,481 $ 17,682 $ 17,886 $ 18,092 $ 17,428 $ 17,628
8 8 12 12 12 12 12 16

$6,680,898 $6,170,031 $6,170,793 $6,241,746 $6,313,758 $6,386,476 $6,152,084 $6,152,172

$ - $ - $ - $ - $ - $ - $ - $ -
$6,680,898 $6,170,031 $6,170,793 $6,241,746 $6,313,758 $6,386,476 $6,152,084 $6,152,172
$ 4,499 $ 4,679 $ 4,867 $ 5,061 $ 5,264 $ 5,474 $ 5,693 $ 5,921
$ - $ - $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000
$6,676,399 $6,165,352 $6,105,926 $6,176,685 $6,248,494 $6,321,002 $6,086,391 $6,076,251
$2,336,739 $2,157,873 $2,137,074 $2,161,840 $2,186,973 $2,212,351 $2,130,237 $2,126,688
$4,339,659 $4,007,479 $3,968,852 $4,014,845 $4,061,521 $4,108,651 $3,956,154 $3,949,563
$ - $ - $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000
$ - $ 300,000 $ - $ - $ - $ - $ 350,000 $ -
$ 7,964 $ 9,703 $ 11,494 $ 13,339 $ 15,239 $ 17,196 $ 19,212 $ 21,288
$4,331,695 $3,697,776 $4,017,358 $4,061,507 $4,106,283 $4,151,455 $3,646,942 $3,998,275

$6,676,399 $6,165,352 $6,105,926 $6,176,685 $6,248,494 $6,321,002 $6,086,391 $6,076,251

$ - $ - $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000
$ - $ 300,000 $ - $ - $ - $ - $ 350,000 $ -
$ 7,964 $ 9,703 $ 11,494 $ 13,339 $ 15,239 $ 17,196 $ 19,212 $ 21,288
$6,668,435 $5,855,649 $6,154,433 $6,223,346 $6,293,256 $6,363,806 $5,777,179 $6,124,963
 13 14 15 16
2014 2015 2016 2017
$ 17,831 $ 18,036 $ 18,243 $ 14,762
16 16 16 16

$6,223,019 $6,294,564 $6,366,807 $12,941,775

$ - $ - $ - $ -
$6,223,019 $6,294,564 $6,366,807 $12,941,775
$ 6,158 $ 6,404 $ 6,660 $ 6,927
$ 70,000 $ 70,000 $ 70,000 $ 70,000
$6,146,861 $6,218,160 $6,290,147 $12,864,848
$2,151,401 $2,176,356 $2,201,551 $ 4,502,697
$3,995,460 $4,041,804 $4,088,595 $ 8,362,151
$ 70,000 $ 70,000 $ 70,000 $ 70,000
$ - $ - $ - $ -
$ 23,427 $ 25,629 $ 27,898 $ 30,235
$4,042,033 $4,086,174 $4,130,697 $ 8,401,916

$6,146,861 $6,218,160 $6,290,147 $12,864,848

$ 70,000 $ 70,000 $ 70,000 $ 70,000
$ - $ - $ - $ -
$ 23,427 $ 25,629 $ 27,898 $ 30,235
$6,193,434 $6,262,530 $6,332,248 $12,904,613
 0 1 2 3 4
Year 2001 2002 2003 2004 2005
Daily Charter Rate $ 20,000 $ 20,200 $ 20,400
Days in maintenance 8 8 8

Incremental Earnings Forecast

Revenues* $ - ### $ 7,140,000 $ 7,211,400 $7,282,800
COGS $ 3,900,000 $ 3,900,000 $ 31,200,000 $ - $ -
Gross Profit $ (3,900,000) $(3,900,000) $(24,060,000) $ 7,211,400 $7,282,800
Operating Costs** $ - ### $ 4,000 $ 4,160 $ 4,326
Depreciation $ - ### $ - ### $ -
EBIT $ (3,900,000) $(3,900,000) $(24,064,000) $7,207,240 $7,278,474
Income Tax at 35% $ (1,365,000) $(1,365,000) $ (8,422,400) $2,522,534 $2,547,466
Net Income $ (2,535,000) $(2,535,000) $(15,641,600) $4,684,706 $4,731,008
Plus: Depreciation $ - $ - $ - $ - $ -
Less: Capital Expenditures $ - ### $ - ### $ -
Less: Increases in NWC $ 500,000 $ 1,500 $ 3,045 $ 4,636 $ 6,275
Free Cash Flow $ (3,035,000) $(2,536,500) $(15,644,645) $4,680,070 $4,724,732
Projected Cost of Capital 0.12
PV of Free Cash Flow $52,263,933
NPV (5K salvage) $ 6,219,708
NPV (no salvage) $ 6,214,275

No Tax Case
Net Income = EBIT $ (3,900,000) ### $(24,064,000) $7,207,240 $7,278,474
Plus: Depreciation $ - ### $ - ### $ -
Less: Capital Expenditures $ - ### $ - ### $ -
Less: Increases in NWC $ 500,000 $ 1,500 $ 3,045 $ 4,636 $ 6,275
Free Cash Flow $ (4,400,000) $(3,901,500) $(24,067,045) $7,202,604 $7,272,198
Projected Cost of Capital $ 0.12
PV of Free Cash Flow $ 80,905,118
NPV (5K salvage) $ 9,938,765

*In year 15 includes $5M scrap value plus 20 years' interest

**Incurred every day, initially $4K/day, growing at inflation 3% + 1% = 4%
 5 6 7 8 9 10 11 12
2006 2007 2008 2009 2010 2011 2012 2013
$ 18,714 $ 17,283 $ 17,481 $ 17,682 $ 17,886 $ 18,092 $ 17,428 $ 17,628
8 8 12 12 12 12 12 16

$6,680,898 $6,170,031 $6,170,793 $6,241,746 $6,313,758 $6,386,476 $6,152,084 $6,152,172

$ - $ - $ - $ - $ - $ - $ - $ -
$6,680,898 $6,170,031 $6,170,793 $6,241,746 $6,313,758 $6,386,476 $6,152,084 $6,152,172
$ 4,499 $ 4,679 $ 4,867 $ 5,061 $ 5,264 $ 5,474 $ 5,693 $ 5,921
$ - $ - $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000
$6,676,399 $6,165,352 $6,105,926 $6,176,685 $6,248,494 $6,321,002 $6,086,391 $6,076,251
$2,336,739 $2,157,873 $2,137,074 $2,161,840 $2,186,973 $2,212,351 $2,130,237 $2,126,688
$4,339,659 $4,007,479 $3,968,852 $4,014,845 $4,061,521 $4,108,651 $3,956,154 $3,949,563
$ - $ - $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000
$ - $ 300,000 $ - $ - $ - $ - $ 350,000 $ -
$ 7,964 $ 9,703 $ 11,494 $ 13,339 $ 15,239 $ 17,196 $ 19,212 $ 21,288
$4,331,695 $3,697,776 $4,017,358 $4,061,507 $4,106,283 $4,151,455 $3,646,942 $3,998,275

$6,676,399 $6,165,352 $6,105,926 $6,176,685 $6,248,494 $6,321,002 $6,086,391 $6,076,251

$ - $ - $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 60,000 $ 70,000
$ - $ 300,000 $ - $ - $ - $ - $ 350,000 $ -
$ 7,964 $ 9,703 $ 11,494 $ 13,339 $ 15,239 $ 17,196 $ 19,212 $ 21,288
$6,668,435 $5,855,649 $6,154,433 $6,223,346 $6,293,256 $6,363,806 $5,777,179 $6,124,963
 13 14 15 16 17 18 19
2014 2015 2016 2017 2018 2019 2020
$ 17,831 $ 18,036 $ 18,243 $ 14,762 $ 14,932 $ 15,104 $ 15,278
16 16 16 16 16 16 16

$6,223,019 $6,294,564 $6,366,807 $5,151,938 $ 5,211,268 $ 5,271,296 $ 5,332,022

$ - $ - $ - $ - $ - $ - $ -
$6,223,019 $6,294,564 $6,366,807 $5,151,938 $ 5,211,268 $ 5,271,296 $ 5,332,022
$ 6,158 $ 6,404 $ 6,660 $ 6,927 $ 7,204 $ 7,492 $ 7,792
$ 70,000 $ 70,000 $ 70,000 $ 70,000 $ 150,000 $ 150,000 $ 150,000
$6,146,861 $6,218,160 $6,290,147 $ 5,075,011 $5,054,064 $ 5,113,804 $ 5,174,230
$2,151,401 $2,176,356 $2,201,551 $1,776,254 $1,768,922 $ 1,789,831 $ 1,810,981
$3,995,460 $4,041,804 $4,088,595 $3,298,757 $3,285,142 $ 3,323,973 $ 3,363,250
$ 70,000 $ 70,000 $ 70,000 $ 70,000 $ 150,000 $ 150,000 $ 150,000
$ - $ - $ - $ - $ 750,000 $ - $ -
$ 23,427 $ 25,629 $ 27,898 $ 30,235 $ 32,642 $ 35,122 $ 37,675
$4,042,033 $4,086,174 $4,130,697 $3,338,522 $2,652,499 $ 3,438,851 $ 3,475,574

$6,146,861 $6,218,160 $6,290,147 $ 5,075,011 $5,054,064 $ 5,113,804 $ 5,174,230

$ 70,000 $ 70,000 $ 70,000 $ 70,000 $ 150,000 $ 150,000 $ 150,000
$ - $ - $ - $ - $ 750,000 $ - $ -
$ 23,427 $ 25,629 $ 27,898 $ 30,235 $ 32,642 $ 35,122 $ 37,675
$6,193,434 $6,262,530 $6,332,248 $ 5,114,776 $4,421,422 $ 5,228,682 $ 5,286,555
 20 21
2021 2022
$ 15,454 $ 14,654
16 16

$ 5,393,446 $ 5,204,552
$ - $ -
$ 5,393,446 $ 5,204,552
$ 8,103 $ 8,427
$ 150,000 $ 150,000
$ 5,235,343 $ 5,046,124
$ 1,832,370 $ 1,766,143
$ 3,402,973 $ 3,279,981
$ 150,000 $ 150,000
$ - $ -
$ 40,306 $ 43,015
$ 3,512,667 $ 3,386,966

$ 5,235,343 $ 5,046,124
$ 150,000 $ 150,000
$ - $ -
$ 40,306 $ 43,015
$ 5,345,037 $ 5,153,109