Required: Using the present value method (PV), what is the value of Jahre Viking? What is the value of the Mariner? Please note that you will need to replace the Mariner in your calculation by purchasing another ship after 10 years. This is necessary since your investment horizon is 20 years. For the second ship, assume that it is sold when the contract is completed in 20 years.
Show your supporting calculations and document your assumptions. The difficulties in this case are: (1) to come up with a defensible cash flow forecast based on realistic assumptions, (2) deal with some technical issues (3) make assumptions that will hold when the auditor scrutinizes your valuation, (4) how to deal with the volatility in shipping prices and daily shipping rates. Please provide a list of decisions you need to make in bullet point format. Note that you must perform the discounted cash flow analysis (PV) and all calculations and formulas should be done in an Excel sheet. If you feel that some information is missing, please make reasonable assumptions and provide an explanation and motivation for each assumption. List any sources you use to arrive at your assumptions and conclusions, if any. What conclusions can you draw from your analysis? Due Date: November 1st before midnight via email. Late assignments will not be accepted.
Shipping Evaluation©
Dark Star Enterprises (DSE), which you work for as CFO has decided to diversify their
transportation operations. Currently, the company is active in leasing box and tank cars to
US based railroads. The company has 10,000 railroad cars under lease contracts (a railroad
car costs about $100,000 to purchase). An investment opportunity has recently come up,
which involves the purchase of a shipping company that owns two (2) ships, the Mariner and
the Jahre Viking. Each vessel is 100,000 deadweight (dwt) tons and both will serve the route
between Abu Dhabi and Tokyo for Shell on a 20-year contract basis. The ship type is referred
to as an AFRAMAX tanker and is about 240 to 245 yards in length and can carry about
600,000 to 800,000 barrels of crude oil. You have been asked to do a valuation of two of the
tankers, the Jahre Viking and the Mariner. Based on your analysis, the following data is
available.
1. Daily running costs for each oil tanker: $8,000 per day.
2. While the oil tanker is expected to operate every day of the year, Shell will not pay for
downtime such as maintenance. Based on industry information, you determine that in
the first 10 years of operation, 10 days per year will be required to perform necessary
maintenance and repairs. In the second five years of operation, this will increase to 20
days per year. For the remaining life of the ship, non-revenue days will increase to 30
days per year. Note that the company has a policy of not operating ships older than 20
years. The scrap value is estimated to be $3 million at the end of 25 years.
3. Shell had offered to pay $22,000 per day but this will be subject to adjustments based on
the age of the ships. Shell wants to portray themselves as an environmentally friendly
company and requested the following adjustments to the daily rate (generally, the
younger the ship the higher the rate). Daily hire rate adjustment factor:
a) 4 years and younger: 1.15
5 to 9 years: 1.05
10 to 15 years: .85 16 to 25 years: .65
4. A new ship would cost $85 million.
5. The ship would be depreciated straight-line over 25 years (assuming the ship would be in
use for 25 years) with no salvage value.
6. An additional investment in working capital of $1,000,000 will be required, all of which is
“returnable” at the end of the life of the ship or at the end of the contract, as
appropriate. The Corporate tax rate is zero since the ship will be registered in Panama.
7. The discount rate is 12 percent.
8. The market value of the ship at the end of year 20 would be $15 million.
9. The age of the Mariner (ship 1) is 10 years; and the Jahre Viking (ship 2), is brand new.
10. Cash Flow to value on a per share basis for similar firms is 9. This is similar to the p/e
ratio, but it is based on cash flow rather than earnings. Price to earnings ratio for similar
firms is 12.
Required: Using the present value method (PV), what is the value of Jahre Viking? What is
the value of the Mariner? Please note that you will need to replace the Mariner in your
calculation by purchasing another ship after 10 years. This is necessary since your
investment horizon is 20 years. For the second ship, assume that it is sold when the contract
is completed in 20 years.
Show your supporting calculations and document your assumptions. The difficulties in this
case are: (1) to come up with a defensible cash flow forecast based on realistic assumptions,
(2) deal with some technical issues (3) make assumptions that will hold when the auditor
scrutinizes your valuation, (4) how to deal with the volatility in shipping prices and daily
shipping rates. Please provide a list of decisions you need to make in bullet point format.
Note that you must perform the discounted cash flow analysis (PV) and all calculations and
formulas should be done in an Excel sheet. If you feel that some information is missing,
please make reasonable assumptions and provide an explanation and motivation for each
assumption. List any sources you use to arrive at your assumptions and conclusions, if any.
What conclusions can you draw from your analysis? Due Date: November 1st before midnight
via email. Late assignments will not be accepted.
Other Information (source: Clarkson’s):
Price/Values
AFRAMAX
Brand New
$85 million
5 Years old
$50 million
10 Years old
$39 million
20 Years old
$15 million
New Production
AFRAMAX
2018
17
2019
58
2020
23
Total
98
© Jan Smolarski
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