Dark Star Enterprises (DSE), which you work for as CFO has decided to diversify their transportation operations. Current
Posted: Sun May 29, 2022 8:53 pm
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 four (4) ships. Each
vessel is 100,000 deadweight (dwt) tons and all 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: $6,000 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 15
years. The scrap value is estimated to be $3 million at the end of
25 years.
3. Shell had offered to pay $16,000 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: .70
4. A new ship would cost $45 million.
5. The ship would be depreciated straight-line over 25 years
(assuming the ship would be in use for 25 years).
6. An additional investment in working capital of $500,000 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 9 percent.
8. The market value of the ship at the end of year 15 would be
$7 million.
9. The age of the Mariner (ship 1) is 10 years; the age of the
Namib and the Hamburg (ship 2 and 3) is the same, 5 years; and the
4th ship, the Jahre Viking, 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 (DCF), 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 have 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?
Other Information (source: Clarkson’s):
Price/Values Brand New
5 Years old 10 Years old
20 Years old
AFRAMAX $45 million
$30 million
$19 million $7 million
New Production 2018 2019
2020 Total
AFRAMAX 17
58 23
98
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 four (4) ships. Each
vessel is 100,000 deadweight (dwt) tons and all 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: $6,000 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 15
years. The scrap value is estimated to be $3 million at the end of
25 years.
3. Shell had offered to pay $16,000 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: .70
4. A new ship would cost $45 million.
5. The ship would be depreciated straight-line over 25 years
(assuming the ship would be in use for 25 years).
6. An additional investment in working capital of $500,000 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 9 percent.
8. The market value of the ship at the end of year 15 would be
$7 million.
9. The age of the Mariner (ship 1) is 10 years; the age of the
Namib and the Hamburg (ship 2 and 3) is the same, 5 years; and the
4th ship, the Jahre Viking, 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 (DCF), 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 have 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?
Other Information (source: Clarkson’s):
Price/Values Brand New
5 Years old 10 Years old
20 Years old
AFRAMAX $45 million
$30 million
$19 million $7 million
New Production 2018 2019
2020 Total
AFRAMAX 17
58 23
98