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1. Oil tanker case (Strategy) Step 1: Background and question My grandfather has just died and left me an oil tanke r. I need a valuation for tax pur poses, and I have hired you to tell me what it is worth. For your information, there are 3 types of tankers in the wo rld: small, medium, and large. Within these three classes, each tanker is identical to every ot her. I have just in herited a medium tanker Step 2: To be given as a response to student inquiries: Supply-side information Small Medium Large Number 100 100 100 Capacity 1 unit 2 units 4 units Number of trips 1 1 1 per year Operating cost $50,000/trip $75,000/trip $100,000/t rip Demand-side information Scenario I: fixed demand for 500 units of capacity per year (transpo rt costs are a negligible part of total oil-cost structure, and demand is complete ly inelastic for purposes of this analysis). Scenario II: fixed demand for 650 units of capacity per year (note : change de mand-side scenario to this on ly if student correctly determines value of tanker under first scenario and if time permits). The market is highly f ragmented and therefore competitive. The discount rate is 10%. Step 3: Solution Because the market is competitive, the market price will be the lowest p rice sufficient to cause enough capacity to enter the industry to serve the fixed demand, and the marginal unit will earn revenue just sufficient to cover its costs.