Case Notes/Answers
Ocean Carriers, by Erik Stafford, Kathleen Luchs, &
Angela Chao
Discussion Questions:
The case provides the opportunity for students to make a capital budgeting decision. The key
pedagogical objective is to develop an understanding of how discounted cash flow analysis can
be used to make investment and corporate policy decisions. The analysis involves:
1. Determining the value and net present value of a real asset;
2. Recognizing that present values are additive;
3. Distinguishing between book value and market value;
4. Identifying and forecasting incremental expected cash flows, including initial and
ongoing capital expenditures, investment in net working capital, and proceeds from asset
sales;
5. Understanding the tax consequences of depreciation and asset sales; and
6. Evaluating whether a policy of reselling or scrapping a vessel is most valuable.
, 5-202-029
JANUARY 10, 2002
TEACHING NOTE
Ocean Carriers
Substantive Issues
Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year
period, beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in
Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future
expected cash flows warrant the considerable investment in a new ship.
Pedagogical Objectives
The case provides the opportunity for students to make a capital budgeting decision. The key
pedagogical objective is to develop an understanding of how discounted cash flow analysis can be
used to make investment and corporate policy decisions. The analysis involves:
1. Determining the value and net present value of a real asset;
2. Recognizing that present values are additive;
3. Distinguishing between book value and market value;
4. Identifying and forecasting incremental expected cash flows, including initial and
ongoing capital expenditures, investment in net working capital, and proceeds from asset
sales;
5. Understanding the tax consequences of depreciation and asset sales; and
6. Evaluating whether a policy of reselling or scrapping a vessel is most valuable.
Ocean Carriers, by Erik Stafford, Kathleen Luchs, &
Angela Chao
Discussion Questions:
The case provides the opportunity for students to make a capital budgeting decision. The key
pedagogical objective is to develop an understanding of how discounted cash flow analysis can
be used to make investment and corporate policy decisions. The analysis involves:
1. Determining the value and net present value of a real asset;
2. Recognizing that present values are additive;
3. Distinguishing between book value and market value;
4. Identifying and forecasting incremental expected cash flows, including initial and
ongoing capital expenditures, investment in net working capital, and proceeds from asset
sales;
5. Understanding the tax consequences of depreciation and asset sales; and
6. Evaluating whether a policy of reselling or scrapping a vessel is most valuable.
, 5-202-029
JANUARY 10, 2002
TEACHING NOTE
Ocean Carriers
Substantive Issues
Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year
period, beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in
Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future
expected cash flows warrant the considerable investment in a new ship.
Pedagogical Objectives
The case provides the opportunity for students to make a capital budgeting decision. The key
pedagogical objective is to develop an understanding of how discounted cash flow analysis can be
used to make investment and corporate policy decisions. The analysis involves:
1. Determining the value and net present value of a real asset;
2. Recognizing that present values are additive;
3. Distinguishing between book value and market value;
4. Identifying and forecasting incremental expected cash flows, including initial and
ongoing capital expenditures, investment in net working capital, and proceeds from asset
sales;
5. Understanding the tax consequences of depreciation and asset sales; and
6. Evaluating whether a policy of reselling or scrapping a vessel is most valuable.
