Ocean Carriers Project Analysis

November 9, 2004

Mary Linn

Vice President of Finance

Ocean Carriers

Re: 180,000 DWT Vessel Proposal

Dear Mary:

Our analysis of the proposal for the construction of a new 180,000 DWT vessel has brought us to the conclusion that the project should not be undertaken. Our recommendation and decision is based on a discounted cash flow analysis of expected future cash flows from the vessel that produced a net loss for the project of $7,201,639. Included in this recommendation are a number of important assumptions, each of which is described in detail below, that we believe are neither conservative nor aggressive in nature. A sensitivity analysis of major assumptions in our analysis is included on the final page of this memo. In each viable case, we arrived at the same conclusion to not undertake this project.

Client Contract Proposal and Timing

This project arose as a result of an attractive offer presented by a client. The client offer is for what we estimate to be a 10-13% premium to 3-year time charter rates over the life of the contract. Despite the attractive terms of this contract and our favorable view of the contract in isolation, the contract offers both limited value and impact to the overall project due to its short length. As a result, cash flows derived from the project during years 4-15 as well as the future resale value of the vessel are important factors in the results of our analysis.

Discounted Cash Flow Analysis

Our cash flow analysis is dependent

upon our forecasts of several key variables. Each of these variables, their estimates and use are described below.

Future Time Charter Rates - Our analysis focuses on time charter rates versus future spot market rates per company historical exposure and high percentage use of time charters versus the spot market. Time charter rates were also used versus Spot rates due to the relatively lower volatility of the time charter market. We also added a premium to the charter rate during the first five years of the vessels life as a result of the vessels size premium compared to the current market average, 175,325 DWT and 180,000 DWT, respectively. The premium equaled 2.7% in addition to projected time charter rates.

% Time (Days) Available for Use - Required maintenance, market demand, ship age, overall market conditions are underlying variables in the forecast of determining revenue producing days per year. Maintenance days increase with age, reducing the number of active revenue producing days available. Market demand and overall conditions lead us to believe that future demand will be stable for a vessel of this capacity as markets in Asia Pacific come online over the next 2-3 years. We forecast total Capesize vessel (80,000 DWT - 200,000 DWT) demand to grow steadily and in line with 1.5% iron ore market growth. Also, given the current size of the company's fleet and worldwide fleet versus future demand, we anticipate that future fleet size will be sufficient to create average demand for a vessel such as the proposed. It is important to note that newer vessels generally produce greater yield in days per year of use versus older vessels. As such, our forecast shows a declining rate of use for the proposed vessel as it ages.

Resale/Salvage Value - Per company standards, we expected to sell the vessel into the secondary market at the end of year 15 and based the value at that time on the discounted future cash flows that a potential buyer would realize from the vessel. This value was used in favor of estimated scrap value of the ship of $5 million and represents approximately a $6 million positive impact to our cash flow analysis, which includes a $2.5 million benefit due to a loss versus book value of the vessel at that time.

Operating / CapEx Costs - We anticipate growth in operating costs to rise with inflation, which we estimate to be 3.0% annually. Operating costs will grow at a rate of 100 basis points above inflation. Included in capital expenditures is the requirement of the periodic 5-year inspection as well as the benefit from the tax shield on the amortization of the inspection cost. The periodic capital expenditures should be considered investments in the vessel and are therefore amortized over their 5 year life.

Cost of Capital - Our estimation of the cost of capital includes a premium of 10% that has been added to our estimate of the firm's overall cost of capital. We believe this premium is warranted due to the uncertainty in future demand for the vessel and the resulting increased risk factor for this project versus that of the overall firm. This is to add individual risk to the project not associated with the company. It, in effect, has the same result as increasing the proportion of equity if this ship were viewed as a stand-alone company.

In analyzing the vessels cash flow projections, we have identified several major trends that impact yearly cash flows for the project and ultimately the projects net present value. In particular, rising operating costs, capital expenditure requirements, and to a lesser extent net working capital requirements, begin to exceed free cash in Year 16 of the life of the vessel. There is also a general decline in revenue over time, largely due to the vessel commanding lower hire rates as well as experiencing fewer

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