This document provides details for Case Assignment #1 for the course "Evaluating Capital Investment Projects" including:
- The objective is to make a capital budgeting decision for a proposed $39 million investment in a new cargo ship using a spreadsheet cash flow model.
- Students must submit a 1-2 page write-up answering three questions about the investment case, along with their spreadsheet models.
- The questions evaluate whether the investment generates a positive NPV given a 9% discount rate and 35% tax rate, whether a 0% tax rate would change the decision, and whether scrapping the ship after 15 years maximizes value.
This document provides details for Case Assignment #1 for the course "Evaluating Capital Investment Projects" including:
- The objective is to make a capital budgeting decision for a proposed $39 million investment in a new cargo ship using a spreadsheet cash flow model.
- Students must submit a 1-2 page write-up answering three questions about the investment case, along with their spreadsheet models.
- The questions evaluate whether the investment generates a positive NPV given a 9% discount rate and 35% tax rate, whether a 0% tax rate would change the decision, and whether scrapping the ship after 15 years maximizes value.
This document provides details for Case Assignment #1 for the course "Evaluating Capital Investment Projects" including:
- The objective is to make a capital budgeting decision for a proposed $39 million investment in a new cargo ship using a spreadsheet cash flow model.
- Students must submit a 1-2 page write-up answering three questions about the investment case, along with their spreadsheet models.
- The questions evaluate whether the investment generates a positive NPV given a 9% discount rate and 35% tax rate, whether a 0% tax rate would change the decision, and whether scrapping the ship after 15 years maximizes value.
This document provides details for Case Assignment #1 for the course "Evaluating Capital Investment Projects" including:
- The objective is to make a capital budgeting decision for a proposed $39 million investment in a new cargo ship using a spreadsheet cash flow model.
- Students must submit a 1-2 page write-up answering three questions about the investment case, along with their spreadsheet models.
- The questions evaluate whether the investment generates a positive NPV given a 9% discount rate and 35% tax rate, whether a 0% tax rate would change the decision, and whether scrapping the ship after 15 years maximizes value.
CORNELL UNIVERSITY, JOHNSON GRADUATE SCHOOL OF MANAGEMENT
Evaluating Capital Investment Projects (NBA 6060)
Professor Hyunseob Kim
Case Assignment #1: Questions for Ocean Carriers
Objective of case: To make a capital budgeting decision by projecting future free cash flows using a spreadsheet model. Deliverables: Please submit a 1-2 page write-up containing answers to the following questions, and attach printouts of spreadsheet models for your analysis to the write-up. Due: 9:30 a.m. on Thursday, February 2, 2017 on Blackboard under Case Assignment Questions on case: You are encouraged to post questions on the case on Blackboard under Case discussion. This would be the fastest way for the professor (or TAs) to respond to your questions. Of course, you are also welcome to come to office hours with questions.
Assume that Ocean Carriers uses a 9% (risk-adjusted) discount rate and that it is a U.S. firm subject to a 35% tax rate. Please answer the following questions. (30 points in total) Hints: a) Assume that today is at the end of 2000 (which is very close to Jan. 2001). b) The initial investment in net working capital should be completed before the ship begins operating. c) There will be tax consequences for any difference between the sale (or scrap) value of the ship and its book value.
1. Project expected free cash flows from the proposed investment in a new capesize ship. Should Ms Linn purchase the $39M capesize according to the Net Present Value (NPV) rule? (20 points)
2. Now, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any taxes on profits made overseas and are also exempted from paying any taxes on profits made on cargo uplifted from Hong Kong. (That is, the effective tax rate is zero.) Would this assumption lead to a change in Ms Linns decision? (5 points)
3. If Ocean Carriers stops operating the capesize ship at the end of year 15 (which is the companys policy) and scrap the vessel then, is this consistent with value maximization? (Note: p.2 of the case states: When scrapped, the vessel was demolished and its steel was sold to demolition yards.) Why? Please provide quantitative justification for your answer. (5 points)
