Mapec Oil Corporation
7 Pages Posted: 12 Jun 2009
Mapec Oil has been given the alternative of paying a lump sum today or four payments over three years. The payments are in Japanese yen. The student must decide which is better in terms of US dollars. Information is provided on forward rates and prices of options. The case is a good introduction to present value concepts and issues related to foreign exchange. Information on forward contracts and options is provided in an appendix.
MAPEC OIL CORPORATION
Over a two-day period, beginning February 15, 1991, Mapec Oil Corporation would sign a contract for the purchase of a ship. At that time, the company had to commit to making a single payment or to spreading the payment over approximately 34 months. A complicating factor was that the payment(s) would be in yen. The purchase decision had been made only that morning, and Mark Floyd, who only three weeks previously had transferred to corporate headquarters from a regional office, had been asked to make the recommendation on means of payment.
Mapec Oil operated through separate divisions devoted to exploring and producing chemicals, marketing, refining, and transportation and shipping. The company had recently decided that the Middle East would be an increasingly important source of crude oil. Domestic production in the United States was falling, and demands for low-sulfur fuels, of which the Middle East was one of the prime suppliers, were increasing. Mapec had thus made a commitment to purchase several very large crude carriers (VLCC) over the next five years. The construction of the first for a total cost of 15 billion yen had recently been negotiated with a large Japanese shipyard. At the actual contract signing on February 15, Mapec could choose a single payment covering the full cost of the vessel or the 4×4-payment plan usually associated with projects of this type.
Under a 4×4 payment plan, Mapec would pay 25 percent of the purchase price at the time of the signing. The next payment of 25 percent would be due at the time of the keel laying, which was expected to take place by the end of December 1992. An additional 25 percent would be payable when the ship was launched in June of 1993, and the final 25 percent would be due at delivery. The final delivery date specified in the contract was the end of November 1993.
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Keywords: foreign exchange, international finance, present value, project finance, valuation
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Mapec Oil Corporation
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