Ocean Carriers - Original case information:
Ocean Carriers is a shipping company with offices based in the US and Hong Kong. In 2001, the company's Vice President for Finance received a proposal for a leasing agreement of a ship for three years. While the customer was ready and wants to enter into the contract immediately, the company was in a dilemma as it had no available ship that meets the customer's requirement. The company was looking into commissioning a new carrier to be built in two years, after which it may be rented to the customer. Original case information at Harvard Business Review
Ocean Carriers case solution extract:
"Upon careful examination of all available information, the firm should not undertake this project and not commission a $39 million capsize vessel, because the NPV of undertaking this project for most scenarios is negative, making this investment non-profitable. Further, even for nominally positive NPV, the project should not be undertaken due to secondary considerations ( see details section ).
With regards to assumptions, since the company is headquartered in New York and in Hong Kong, there are two different NPV project calculations needed to be taken into account for decision making along with two sets of projected timelines: 15 and 25 years resulting in 4 distinct NPV results.
When calculating the NPV of the project for the New York location within 15 year timeline, we factored in a 35% tax rate on the present value of all cash flows. This for New York headquarters results in -$8,662,975. The NPV of the project remains negative ( -$1,252,916 ) even when the company takes advantage of Hong Kong's 0% tax rate by moving its offices there.
There is one scenario, in which positive NPV is possible. However, it requires extending the lifetime of the ship to 25 years and a moving of headquarters to Hong Kong in order to take advantage of 0% rate there. As per research referenced in details section..."
