Q2 (24 points) Gold Bridge Shipping Ltd. is a Hong Kong shipping company which specializes on...

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Q2 (24 points) Gold Bridge Shipping Ltd. is a Hong Kong shipping company which specializes on chemical and oil shipments. The company is considering buying a new ship, which can conduct 8 transits between Hong Kong and the Mideast every year for thirty years once it starts operation. Each transit is expected to generate a gross revenue of $1.6 million and costs $1 million. Besides, this ship also incurs a fixed maintenance cost of $400,000 every year. The ship costs $12 million to purchase, and it depreciates at a straight-line basis over thirty years. At the end of its tax life (thirty years from now), this ship can be disposed at a market salvage value of $1 million. Every year, the company needs an amount of net working capital that equals to 5% of the total gross revenue to support the operation of this ship. The tax rate is 40% and investors' required return on this shipping line is 20%. a. (4 Points) How much operating cash flow do we expect to generate from this ship every year? (2 Points) What is the after-tax salvage value of this ship thirty years from now? (4 Points) What are the cash flows regarding changes in net working capital? (If the cash flows are different across years, please specify the value for each corresponding year.) d. (4 points) What is the NPV of this ship? Under the NPV rule, should the company buy this ship? Now ignore changes in net working capital for the next two questions: e. (4 points) The ship carries 10,000 barrels of crude oil per transit. Thus, the $1.6 million expected gross revenue per transit is charged based on a unit freight charge of $160 per barrel. What is the lowest unit freight charge that the company can accept? (Hint: what is the charge that generates zero NPV?) b. c. f. (6 points) The company's director, Captain Lau Pong Sze is worried about the future uncertainties with the unit freight charge and cost per transit. Assume both the unit freight charge and cost per transit can be higher or lower by 10% than the expected level. What is the NPV under the worst-case and best-case scenarios? Q2 (24 points) Gold Bridge Shipping Ltd. is a Hong Kong shipping company which specializes on chemical and oil shipments. The company is considering buying a new ship, which can conduct 8 transits between Hong Kong and the Mideast every year for thirty years once it starts operation. Each transit is expected to generate a gross revenue of $1.6 million and costs $1 million. Besides, this ship also incurs a fixed maintenance cost of $400,000 every year. The ship costs $12 million to purchase, and it depreciates at a straight-line basis over thirty years. At the end of its tax life (thirty years from now), this ship can be disposed at a market salvage value of $1 million. Every year, the company needs an amount of net working capital that equals to 5% of the total gross revenue to support the operation of this ship. The tax rate is 40% and investors' required return on this shipping line is 20%. a. (4 Points) How much operating cash flow do we expect to generate from this ship every year? (2 Points) What is the after-tax salvage value of this ship thirty years from now? (4 Points) What are the cash flows regarding changes in net working capital? (If the cash flows are different across years, please specify the value for each corresponding year.) d. (4 points) What is the NPV of this ship? Under the NPV rule, should the company buy this ship? Now ignore changes in net working capital for the next two questions: e. (4 points) The ship carries 10,000 barrels of crude oil per transit. Thus, the $1.6 million expected gross revenue per transit is charged based on a unit freight charge of $160 per barrel. What is the lowest unit freight charge that the company can accept? (Hint: what is the charge that generates zero NPV?) b. c. f. (6 points) The company's director, Captain Lau Pong Sze is worried about the future uncertainties with the unit freight charge and cost per transit. Assume both the unit freight charge and cost per transit can be higher or lower by 10% than the expected level. What is the NPV under the worst-case and best-case scenarios?

Answer rating: 100% (QA)

a Operating cash flow per year Gross revenue Cost Mai... View the full answer