Ocean Carriers - Coursework Example

Finance and Accounting 7th February, The foremost objectives of this analysis are to forecast cash flows and calculate net present value of the company. It also involves calculating internal rate of return, pay back period and discounted pay back period rate. It also involves an analysis on sensitivity analysis on Net Present Value (NPV). Project Cash flows Revenues=Daily hire rate*days hired=20,000*(365*3) =20,000*1,095= 21,900,000 Minus: operating expenses= daily operating expenses*365=$4000*365= (1,460,000) Minus: depreciation= (39,000,000/25) +1/5*500000*(t-1) =1560000+ (100000*0.97) = (1,657,000) operating income (earnings before interest and tax) EBIAT= 18,783,000 Minus: Taxes= 18,783.000*(1-0.35) = 18,783,000*0.

65= 12,208,950 Earnings before Interest after Tax = 12,208,950 Plus: Depreciation= 1,460,000 Minus: Capital expenditure (300,000) Minus: Change in net working capital (500,000) Plus: After tax proceeds from sales of equipment = sales price- Tax rate*(sales price-Book value) = 5,000,000-0.35*(5000000-(39000000-1,460,000) = 5000000- 0.35(5000000-37540000) = 5000000+11,389,000 = 16,389,000 = 29,257,950 Cash flow = $ 29,257,950 Ocean carriers as a US firm is a viable project because it will have positive cash flows; therefore, the project should be established because it will add value to the company.

Miss Linn should purchase the capsize vessel since it will be profitable to the company. Ocean carriers based in Hong Kong will have high and positive cash flow; therefore, it should be accepted. The tax exemption increases the profits of the company. This makes it even more viable (Pollio, p74). Internal Rate of Return The internal rate of return of this venture is greater than the cost of investment and; therefore the project should be accepted in the case of Ocean carriers being a USA company.

This shows that the company will be able to settle its obligations in time. The project will have immediate benefits and return to capital. In the case of being a Hong Kong company, the project should not be accepted because the rate of return is less than the cost of capital of the company. This means the project will take a long time before it benefits the company (Pollio, p79). Payback period and discounted rates The project will take long in the US case before it pays back its obligation.

This is as a result of taxation and other challenges that affect the company. The discounted pay back period rates of the company are high meaning that they can not reinvest their profits back in the business as it will affect the company’s operation; therefore, the company will destabilizes. The company will take long to break even which is not a promising analysis to new project. In case of Hong Kong, the pay back period is short. This means that the company will take a short time to pay its debts.

This will add on to the high rate of return to capital. This analysis means that the project is viable and should be accepted because will create a positive reputation of the company. The discounted pay back period of the company is positive meaning that it will take a diminutive time for the project to break even which makes the project most viable and; therefore; acceptable (Pollio, p83). Sensitivity analysis There might be errors in the process of analyzing the project. This might make the project viable when it is not.

It is therefore, advisable to consider the risk factor in the analysis which eliminates errors. The sensitivity analysis would not have changed the decision to accept the project (Pollio, p85). In conclusion, the project in both cases is viable and should be accepted since it will be profitable to the company. The case of Hong Kong will break even at an early stage; therefore, it is most viable Works Cited Pollio, Gerald. International project Analysis and Financing. Michigan: University of Michigan, 1999. Print.