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Ocean Carriers Essay

2700 words - 11 pages

For exclusive use at Stockholm School of Economics, 2015

REV: APRIL 18, 2002


Ocean Carriers
In January 2001, Mary Linn, Vice President of Finance for Ocean Carriers, a shipping company
with offices in New York and Hong Kong, was evaluating a proposed lease of a ship for a three-year
period, beginning in early 2003. The customer was eager to finalize the contract to meet his own
commitments and offered very attractive terms. No ship in Ocean Carrier’s current fleet met the
customer’s requirements. Linn, therefore, had to decide whether Ocean Carriers should immediately
commission a new capesize carrier that would be ...view middle of the document...

For a new ship coming on line in early 2003, operating costs were expected
to initially average $4,000 per day, and to increase annually at a rate of 1% above inflation.
Charterers were not charged a daily rate for the time the vessel spent in maintenance and repair,
although operating costs were still incurred. Initially, 8 days a year were scheduled for such work.
The time allotted to maintenance and repairs increased to 12 days per year after five years of
operation, and to 16 days a year for ships older than ten years.
Angela Chao (HBS MBA 2001) and Research Associate Kathleen Luchs prepared this case under the supervision of Professor Erik Stafford. HBS
cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.

This document is authorized for use only in Corporate Finance and Value Creation by Cristina Cella, Stockholm School of Economics from October 2015 to April 2016.

For exclusive use at Stockholm School of Economics, 2015

Ocean Carriers

The company had a policy of not operating vessels older than 15 years. Every five years,
international regulations mandated that a special survey be undertaken to ensure seaworthiness as
defined by international regulations. By the fifteenth year, the maintenance required to comply with
the special surveys was very costly. Exhibit 1 shows the capital expenditures anticipated in
preparation for the special surveys. These outlays were considered capital expenditures, which
would each be depreciated on a straight-line basis over a 5-year period. To avoid the larger
expenditures for older ships, the company planned to sell the vessel into the secondhand market, or
“scrap” the vessel just before the third special survey. When scrapped, the vessel was demolished
and its steel was sold to demolition yards. The company estimated the scrap value to be $5M at the
end of the fifteenth year.
Exhibit 1

Capital Expenditures Anticipated in Preparation for Special Surveys











Source: Company estimates

Supply of Capesizes
Daily hire rates were determined by supply and demand. The number of ships available
equaled the number of vessels in...

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