Ocean Carriers Project Analysis Essay

1455 Words Sep 21st, 2005 6 Pages
November 9, 2004

Mary Linn
Vice President of Finance
Ocean Carriers

Re: 180,000 DWT Vessel Proposal

Dear Mary:

Our analysis of the proposal for the construction of a new 180,000 DWT vessel has brought us to the conclusion that the project should not be undertaken. Our recommendation and decision is based on a discounted cash flow analysis of expected future cash flows from the vessel that produced a net loss for the project of $7,201,639. Included in this recommendation are a number of important assumptions, each of which is described in detail below, that we believe are neither conservative nor aggressive in nature. A sensitivity analysis of major assumptions in our analysis is included on the final page of this memo. In
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Company Beta – We examined current market conditions of similar companies within the water transportation industry to determine an appropriate beta. Our beta for the industry is determined by taking the market cap weighted average of individual peer betas.

Capital Structure – Our capital structure assumptions for this project are based on industry averages. Our research showed that industry peers had a capital structure of 25.2% debt and 74.8% equity. Given the long-term nature of the vessel, we chose to match the useful life of the Vessel with a similar debt structure and chose the 8-15 year debt yield as our cost of debt in our final analysis. Project Premium – As noted above, a premium was added to compensate for project specific factors.

Tax Considerations and Impact on WACC - Currently many water transportation companies are heavily subsidized by the government or are domiciled offshore. However, we use the average corporate tax rate of 35% in our analysis. Exclusion of taxes results in a higher WACC, and consequently produces a lower NPV of the project.

Valuation Assumptions
Our analysis includes a number of assumptions including several challenges to previous assumptions, including estimates developed by the independent consulting firm hired to project market demand. A summary of these assumptions, and the values used in our analysis are presented below.

Factor

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