1Project DCF valuation

Valuation summary

Discount rate :

Tax rate :

Inflation :

Project NPV ($000s) =

12,0%

20,0%

3,0%

0

Cash flow estimation ($000s)

Time-line (t = 0 : end of 2050) ——>

Calendar year

Ship year (SY)

1

2051

2

2052

SY0

3

2053

SY1

4

2054

SY2

5

2055

SY3

6

2056

SY4

7

2057

SY5

8

2058

SY6

9

2059

SY7

10

2060

SY8

11

2061

SY9

12

2062

SY10

13

2063

SY11

0,32%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

351

351

351

351

351

351

351

351

351

351

351

Revenues (= daily hire rate x days of oper )

– Costs (= daily cost x 365)

Gross profits

– Depr — acquisition cost ($44 mln /25 years)

– Depr — additional capex SY5, SY10, SY15, SY20 (each capex/5 years)

– Depr total

EBIT

– Income taxes

Unlevered net income ($000s)

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

[+] Depr add back

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Daily hire rate growth assumption

Est. daily hire rates, $000s

Est. days of operation (14 days to subtract)

Est. daily oper. costs, $000s, growing @(1+ infl)*1.01

.

.

0

2050

50,00

14,00

*WC balance (to be recovered at the end)

[-] Changes in WC (incr. = outflow)

*Ship acquisition cost (10%, 10% & 80% of $44 mln)

*Add’l capex (0.3 mln; 0.35 mln; 0.65 mln; 1.2 mln)

[-] Investment costs total (sum of the above two)

500

0

0

[+] CF from liquidation *Liquidation at the end of SY25 (cash flow, net of tax) ——>

.

Unlevered CF ($000s)

DCF Discounted (Unlevered) CF (i.e., PV)

NPV (sum of all discounted cash flows) =

0

0

0

2

Project DCF valuation

Valuation summary

Discount rate :

Tax rate :

Inflation :

Project NPV ($000s) =

12,0%

20,0%

3,0%

0

Cash flow estimation ($000s)

Time-line (t = 0 : end of 2050) ——>

Calendar year

Ship year (SY)

14

2064

SY12

15

2065

SY13

16

2066

SY14

17

2067

SY15

18

2068

SY16

19

2069

SY17

20

2070

SY18

21

2071

SY19

22

2072

SY20

23

2073

SY21

24

2074

SY22

25

2075

SY23

26

2076

SY24

27

2077

SY25

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

351

351

351

351

351

351

351

351

351

351

351

351

351

351

Revenues (= daily hire rate x days of oper )

0

– Costs (= daily cost x 365)

0

Gross profits

0

– Depr — acquisition cost ($44 mln /25 years)

– Depr — additional capex SY5, SY10, SY15, SY20 (each capex/5 years)

– Depr total

0

EBIT

– Income taxes

Unlevered net income ($000s)

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

[+] Depr add back

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

Daily hire rate growth assumption

Est. daily hire rates, $000s

Est. days of operation (14 days to subtract)

Est. daily oper. costs, $000s, growing @(1+ infl)*1.01

.

.

*WC balance (to be recovered at the end)

[-] Changes in WC (incr. = outflow)

*Ship acquisition cost (10%, 10% & 80% of $44 mln)

*Add’l capex (0.3 mln; 0.35 mln; 0.65 mln; 1.2 mln)

[-] Investment costs total (sum of the above two)

—— Liquidation at the end of SY25 (cash flow, net of tax) ——>

[+] CF from liquidation *Liquidation at the end of SY25 (cash flow, net of tax) ——>

.

Unlevered CF ($000s)

DCF Discounted (Unlevered) CF (i.e., PV)

NPV (sum of all discounted cash flows) =

0

0

0

0

0

0

0

0

0

0

0

0

0

0

3

Daily hire rate forecasting

Calendar year

2050

2051

2052

2053

2054

2055

2056

2057

2058

2059

2060

2061

2062

2063

2064

SY0

SY1

SY2

SY3

SY4

SY5

SY6

SY7

SY8

SY9

SY10

SY11

SY12

3.489

3.559

3.634

3.703

3.773

3.833

3.887

3.946

4.007

4.061

4.129

4.191

4.258

4.319

0,022

0,020

0,021

0,019

0,019

0,016

0,014

0,015

0,015

0,013

0,017

0,015

0,016

0,014

3.447

3.519

3.591

3.663

3.744

3.933

4.140

4.248

4.356

4.509

4.815

4.968

5.049

5.157

0,021

0,021

0,020

0,020

0,022

0,050

0,053

0,026

0,025

0,035

0,068

0,032

0,016

0,021

Ship year (SY)

Industry forecast for shipment demand

Estimated annual shipments (millions of tons)

3.415

x 1 (% change in demand)

Industry forecast for the ship supply

Estimated net capacity (new order – scrap)

3.375

x 2 (% change in supply)

Daily hire rate forecast

*Model: y = 0.007 + 1.4*x 1 – 1.6*x 2

y (% change in daily hire rate)

Estimated daily hire rates ($000s)

*Avg. daily hire rate in 2050 = $50 thousand (given)

0,003

50,0

50,160

4

Daily hire rate forecasting

Calendar year

2065

2066

2067

2068

2069

2070

2071

2072

2073

2074

2075

2076

2077

Ship year (SY)

SY13

SY14

SY15

SY16

SY17

SY18

SY19

SY20

SY21

SY22

SY23

SY24

SY25

Estimated annual shipments (millions of tons)

4.381

4.449

4.511

4.586

4.647

4.717

4.793

4.863

4.938

5.007

5.085

5.161

5.239

x 1 (% change in demand)

0,014

0,016

0,014

0,017

0,013

0,015

0,016

0,015

0,015

0,014

0,016

0,015

0,015

Industry forecast for shipment demand

Industry forecast for the ship supply

Estimated net capacity (new order – scrap)

5.211

5.193

5.139

5.139

5.220

5.283

5.301

5.310

5.499

5.751

6.057

6.165

6.237

x 2 (% change in supply)

0,010

-0,003

-0,010

0,000

0,016

0,012

0,003

0,002

0,036

0,046

0,053

0,018

0,012

Daily hire rate forecast

*Model: y = 0.007 + 1.4*x 1 – 1.6*x 2

y (% change in daily hire rate)

Estimated daily hire rates ($000s)

*Avg. daily hire rate in 2050 = $50 thousand (given)

Business | Wed Feb 18, 2015 12:08am EST

Second dry-bulk shipper files for bankruptcy as rates tumble

* Worst dry-bulk cargo market since 1980s – ship owner

* Dozens of iron ore and coal carriers idled

* Baltic dry index falls to all-time low

By Keith Wallis and Henning Gloystein

SINGAPORE Feb 18

A second dry cargo shipper has filed for bankruptcy following a collapse in freight

rates that has forced many companies to idle vessels used to haul iron ore, coal and grain rather than hire

out the ships at a loss.

Weaker demand from China and an oversupply of ships has led to the worst industry downturn in 30 years,

pushing the Baltic dry index – the industry benchmark for freight rates – to an all-time low.

China’s Winland Ocean Shipping Corp filed for Chapter 11 bankruptcy protection in the United States on

Feb. 12, court documents show, the second bankruptcy this month.

“Due to current market conditions, the financial position of the company and its subsidiaries has

deteriorated, leading to immediate difficulties,” the document states, adding that it had therefore filed for

Chapter 11 protection.

Privately owned Danish firm Copenship filed for bankruptcy earlier in February after losses in the dry bulk

market.

“The combination of lower steel demand in China and the huge volume of new tonnage coming on line is

what is causing panic and making this the worst bulk market since the mid-1980s,” said Hsu Chih-chien,

chairman of Hong Kong and Singapore-listed dry bulk shipper Courage Marine.

China’s imports tumbled 19.9 percent from a year earlier as its economy grows at its slowest rate in 24

years.

The current freight rate for carrying a cargo of coal in a panamax ship from Indonesia to southern China is

about $3,000 per day, compared with more than $6,000 last year. The Baltic dry index has slumped by

nearly two-thirds in the past 15 months.

Adding to slowing demand is a swelling fleet, with the number of ordered capesize and panamax carriers

for the next three years equal to 39 percent of the existing fleet, according to shipping services firm

Clarkson. Yet dry-bulk seaborne trade rose only 4 percent last year.

As a result, dozens of capesize and panamax vessels have been idle around Singapore, Hong Kong and

off South Africa’s coast, Reuters ship tracking data showed.

Dry-bulkers are not the only shippers in trouble. Over 10 percent of the global liquefied natural gas (LNG)

tanker fleet is currently idled after Asian LNG prices fell almost two-thirds since February 2014.

Fin. Mgt.

1

Data analysis assignment

– The data analysis assignment is part of the AACSB program requirements.

1 Instructions

•

Use the Project Information provided in Section 2 to conduct the required analyses

described in Section 3.

•

The main task of the assignment is preparing cash flow projection in Excel spreadsheets

(use the template “fm-data-worksheet” available in the course shell).

•

For other tasks, prepare your responses in a Word document (no handwriting).

•

Upload both Excel spreadsheet and Word document to the corresponding submission

point.

2 Project information

Savannah Merchant Marine Co. (henceforth “SMM” or the firm/company) is a cargo shipping

company based in Savannah, Georgia, that operates freight vessels in various sizes. In December

2050, the firm is reviewing the proposal for a new dry bulk carrier in an attempt to capture a

potential increase in the global demand for freight shipping. The CFO has asked you to estimate

cash flows expected from the new ship over its asset life. To aid the analysis, the CFO and the SMM

Finance team have collected data from various sources, as summarized below.

a) Discount rate, inflation, tax, and other information

CFO has made the following baseline assumptions:

•

The discount rate is assumed to be 12%, p.a. (per annum)

•

For simplicity, the CFO has decided to use an expected inflation rate of 3%, p.a., over the

next three decades.

•

SMM is expected to face a marginal tax rate of 20%.

b) Investments required

The purchase price of the new vessel is $44 million. If ordered before the end of 2050, the ship will

be ready by the end of 2052. If SMM decides to purchase the ship, 10% of the price is due at the

end of 2050, another 10% is due at the end of 2051, and the balance is payable at the end of 2052

when the ship is delivered. It will then begin operating from the beginning of 2053. The useful life

Fin. Mgt.

2

of the ship is 25 years with no salvage value. The project life is assumed to be equal to the ship life.

The depreciation is on a straight-line basis.

The CFO also assumes that the firm will liquidate the vessel at the end of its life. Based on your

industry survey, the market value of the ship at the end of its life is estimated at $8 million.

c) Additional capital expenditures required

To enhance the performance and the cost efficiency of its vessels, the firm makes additional

investments in its fleet on a regular basis, typically every five years. Given the liquidation expected

at the end of its 25th year, the new ship will undergo four installments of these capital expenditures,

with the first one taking place at the end of its 5th year (i.e., 2057 if the ship is ready by the end of

2052).

Factoring in additional costs required for old vessels and the overall inflation, these

expenditures are estimated as follows:

$300,000 (1st); $350,000 (2nd); $650,000 (3rd); and $1,200,000 (4th)

The firm is allowed to capitalize these four expenditures, and each will be depreciated over five

years on a straight-line basis, with no remaining book value at the end.

d) Working capital requirements

The CFO expects that the operation of the new ship requires an initial working capital investment of

$500,000 by the beginning of 2053 (equivalently, “the end of 2052”). From then on, the working

capital balance requirement will grow each year at a rate of inflation (provided in subsection a).

The working capital balance will be recovered at the end of the project life.

e) Assumptions for forecasting daily hire rates and revenues

The annual revenues are determined by daily ship hire rates (prices) prevailing in the market and

the number of days the ship is expected to be hired in a given year. The market price is the

function of the demand for shipments and the supply of shipment capacity. The CFO has obtained

from Clarksons the industry experts’ forecast for these factors on an annual basis, as summarized in

the spreadsheet. In addition, the CFO has come up with the following econometric model for

forecasting the rates at which the average daily prices will change each year:

𝒚 = 0.007 + 1.4𝒙𝟏 − 1.6𝒙𝟐

where y = % change in ship hire rate; x1 = % change in demand; x2 = % change in supply, all on an

annual basis.

For example, suppose that in 2051, the expected growth in the demand for shipments is 0.0217

and the expected growth in the supply of shipping capacity is 0.0213 (note that these figures are

Fin. Mgt.

3

taken from the spreadsheet). Then, based on these forecasts and the CFO’s model, the % change

in daily ship hire rate is estimated at 0.007 + 1.4(0.0217) – 1.6(0.0213) = 0.0032 (0.32%). Given the

hire rate $50,000 (given) in 2050, the rate in 2051 is then estimated at $50,000*(1.0032) = $50,160

per day. See the spreadsheet for detailed forecasts for the demand and supply and the % changes

in these variables.

The number of days hired is assumed to be equal to 365 days less the number of days required

to complete annual mandatory maintenance. The company’s assumption is that it takes 14 days to

complete the annual maintenance.

f) Assumptions for operating costs

The CFO assumes that the operating costs are incurred throughout the year, including the

mandatory maintenance period. The annual operating costs therefore can be calculated as the

estimated daily operating costs, multiplied by 365 days. In addition, daily operating costs are

assumed to grow at a rate that is slightly higher than the expected inflation. The CFO suggests the

following equation:

𝐷𝑎𝑖𝑙𝑦 𝑐𝑜𝑠𝑡𝑠𝑡 = 𝐷𝑎𝑖𝑙𝑦 𝑐𝑜𝑠𝑡𝑠𝑡−1 (1 + 𝒉)(1.01),

where subscript t indexes year, and h is the expected inflation rate, provided in subsection a.

For example, given the average daily cost in 2050 estimated at $14,000 (given), the daily cost in

2051 is then estimated at $14,000*(1.03)(1.01) = $14,564 (per day).

Fin. Mgt.

4

3 Analysis

For #1, submit an Excel file. For #2 and #3, prepare your responses in a Word document.

#1 [35 points] Cash flow projection.

Using the Excel template “fm-data-worksheet” available in the course shell, prepare the cash flow

projection for the new vessel (submit the completed Excel file). Note that you must first complete

the forecasting of daily hire rates for each year (a separate tab in the file).

•

All necessary information is provided in Section 2 of this document and the Excel spreadsheet. Note

that some of the cells in the spreadsheet are already filled in for you. Additionally, the header

columns contain brief notes that summarize various assumptions and instructions.

•

The Excel worksheets (and pre-filled inputs) are provided to give you an idea about how one can

carry out cash flow projection, rather than making you build something from scratch. It is therefore

your responsibility to find the correct information to enter in the right places, to use the Excel

functions correctly, to check calculated values, etc., etc. Feel free to create your own spreadsheets if

you don’t want to use the provided template.

#2 [10 points] Project NPV and sensitivity analysis.

a) If a discount rate of 12% p.a. is applicable, what is the NPV of the project? What if the

discount rate for the project was 14%? 16%? Provide the NPVs for each scenario (no need to

include spreadsheets for each).

*Note: To perform the sensitivity analysis of this kind, it is recommended that you complete

the baseline case (i.e., with the 12% discount rate), then create a copy of the completed

spreadsheet, and change the parameter value.

b) Select other parameter(s) for which you wish to change the assumptions. Then check—report

to CFO—how the project NPV changes depending on new assumptions you have made for

that parameter. While it is up to you which one to choose and play with (no correct answer),

you are required to provide parameter values used, the NPVs, and brief discussion.

[cont.]

Fin. Mgt.

#3 [5 points] Analytical reasoning: the assumption concerning the supply of ship capacity.

The premise of the CFO’s pricing model is that the market rate for ship hire is in principle the

function of the demand for commercial shipments and the supply (shipping capacity). However,

although the shipping demand, governed by various economic factors, is likely to evolve smoothly,

the supply of shipping capacity may be lumpy due to the time-to-build constraints and

irreversibility of capital investment. That is, if companies order new vessels once they observe the

increased demand for cargo shipping, the new vessels ordered today will be ready in, say, three

years later. Moreover, once new vessels are delivered, they are likely to stay in the market for the

next 20–30 years, resulting in the problem of irreversible investments (i.e., prohibitively costly to

disinvest because of illiquid secondhand markets).

Required: In what way would the described lumpiness in the supply of ship capacity play out in

determining the market rates for ship hire? Provide your thoughts and discuss.

*Note that a short news article has been provided, which can help you understand the demandsupply dynamics in the industry and prepare your responses.

5

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