Engineering Economics and Ship Design - Buxton

FOREWORD

I am very pleased to send on its way this third edition of Dr Buxton's "Engineering Economics and Ship Design" in the hope that it will continue to be of service to those interested in ship design and operation. The fact that there is still such a demand from both indu stry and from students for thi s work which was first published in 1971, shows how close is the link between design and economics. The designer is today being called upon more than ever to justify his decisions commercially. At the same time the commercial background is, I believe, more uncertain than it used to be, because of the variable nature of fuel price trends, or labour costs; or because of the particular political environments which can affect ship trades. Under these conditions, the designer finds he needs to produce alternative designs and then carry out the economic evaluation of them. It may involve al ternati ve propulsion systems, or different manning levels, or some other variable, but the guidance available in this Volume should prove to be valuable. The basic format is still arranged in the same way as found in the earlier editions, but figures have been updated; and the experience of ten more years of application since the second edition appeared has been incorporated.

MARSHALL MEEK DEPUTY CHAIRMAN BRITISH MARITIME TECHNOLOGY LTD

October 1986

Foreword - 3

CONTENTS

Page 7

SUMMARY AND INTRODUCTION PART I.

SHIPPING'S ECONOMIC ENVIRONMENT

1.

The Demand for Marine Transport

2.

The Supply of Marine Transport

15

3.

The Freight Markets

20

4.

Operating Economics

26

PART 11.

9

MAKING ENGINEERING ECONOMY CALCULATIONS

1.

Introduction

31

2.

The Basic Interest Relationships

31

3.

Economic Cri teria

44

4.

Practical Cash Flows

49

5.

Some Economic Complexi ties

55

6.

A Complex Cash Flow Example

7.

Application

PART Ill.

. . . . . . . . . . . . . . . . . . . . . . . ..

65 72

APPLICATION TO SH I P DESIGN

1.

The General Approach

75

2.

Comparison of Alternative Ship Designs

79

3.

The Optimal Ship

96

4.

The Wider Scene

107

A Selected Bibliography

121

Appendix Estimating Costs

...................................................................

133

Contents - 5

SUMMARY AND INTRODUCTION

The subj ect of Engineering Economics and Ship Design has been treated in a general way as the intention is not to include any extensive coverage of formal economics or detailed ship design, but to show how the two are related. The standpoint is that of the practising designer who needs sufficient information to evaluate the technical and economic performance of alternative designs of ships and their equipment. While many of the techniques may be used by shipowning management, it is not the primary purpose of this book to assist decisions about whether to build, when to build, or where to build, but rather what to build. It is only in the last decade or so that rigorous economic evaluations have been seriously applied to ships. There would appear to be three principal reasons for thi s change:

(i) The' scope for making the wrong decisions in ship design has increased greatly with expansion in ship sizes and types, together with novel concepts. Until recently, the decision depended more on whether to build rather than what to build, as each succeeding ship design was usually a modification of an earlier one. Now, as one design of ocean-going ship can be 100 times larger than another, the scope for poor investment mul tiplies correspondingly. (ii)

It is axiomatic that a ship design must be the best for the job, but technical criteria such as minimum resistance are not enough. It is widely recognised that the main cri terion must be of an economic nature, giving full weight to technical factors in its calculation. The optimal design is that which is most profitable, in the sense described in Part I I.

(iii) There has been increasing complexity in the financial conditions surrounding ship procurement. Traditionally, new ships were largely financed out of retained profits, but now cheap loans, accelerated depreciation, subsidies and tax relief all add greatly to the difficulties of estimating ship profi tabili ty. The principles of 'engineering economy are straightforward, and engineers find no difficulty in making the detailed calculations, al though of course there are computer programs avai lable.

Summary and

Introduction - 7

The book is divided into three parts: I

The supply and demand for marine transport, and shipping's economic environment.

II

The detai led calculations

III

Application of the principles to ship design.

An Appendix includes operating costs.

mechanics

of

information

8 - Engineering Economics and Ship Design

making

on

engineering

economy

estimating building

and

PART I. 1.

SH IPPING'S ECONOMIC ENVIRONMENT

THE DEMAND FOR MARINE TRANSPORT

For centuries past, man has used boats and ships for commerce and trade, but unti I the 19th century, the accent was on the transport of passengers and high-value cargoes - the present-day role of air transport. Until the Industrial Revolution, local economies were largely self-sufficient, so there was no demand for large scale transportation. With the harnessing of steam power based on coal came the demand for raw materials, especially for the textile industry. Distant lands supplied wool and cotton and, in turn, recei ved manufactured goods. The application of steam to ship propulsion in the mid-19th century enabled reliable shipping services to be provided, initially for short-distance trades. As telegraph networks and coaling stations became established further afield, not only were world-wide shipping networks developed, but also an important export trade began in bunker coal, largely supplied from Britain. Thus British ships were able to carry full cargoes outwards, and offer real economies in the homeward transportation of raw materials such as iron ore and grain. The parallel development of railways opened up hinterlands to ports, but trains could not compete with ships over large distances. The alliance of steam propulsion and iron shipbuilding proved an unbeatable combination compared with sail and wood, especially with continuous technical progress in hulls and machinery. Although steamships had higher operating costs than sailing ships, their annual transportation capacity and regularity, and hence revenue earning ability, were very much greater, and by the end of the century they had displaced the latter in deep-sea trades almost entirely. The world's surface area is 71% water and Britain, with its great 19th century empire, was roughly at the centre of the global land mass. Thus geography, politics and technical innovation all served to make Britain the dominant nation in maritime transport, a position which was held well into the 20th century. The present century has seen a massive increase in the demand for marine transport of both raw materials and manufactured goods, although temporarily interrupted by depressions. Freight, rather than passengers, dominate the shipping scenei indeed, more tonne-miles* of international freight are carried by sea than by road, rail, and air put together throughout the world. In terms of both cargo tonnage and tonne-miles, bulk cargoes are more important than general cargoes (typically manufactured goods), although the position is reversed when cargo value is considered. As statistics of international and seaborne trade are not as good as they might be, any analysis inevitably contains estimates and uncertainties. The Standard International Trade

* All miles used in this publication are nautical miles of 1852m.

Part 1 - Shipping's Economic Environment - 9

Classification has four maj or groups: Foodstuffs Basic Materials Fuels Manufactures

Classes 0 and 1 Classes 2 and 4 Class 3 Classes 5 to 8

These divisions are not very convenient for marine transport, as one class may contain both bulk and general cargoes (e.g. foodstuffs) or dry and liquid cargoes (e. g. fuel). Various bodies attempt to produce more meaningful statistics for shipping, one of the more successful being the Norwegi an shipbrokers Fearnleys, who regularly publish figures for major bulk commodities (Rei. 4.1. 2) * . Thp.i r fi gures are derived both from publi shed trade stati stics and from tracking individual shiploads. Individual nations publish extensive statistics on their seaborne trade, the U.K. figures being particularly detailed (Ref.4.9) while there are useful guides to sources of mari time stati stics (e. g. Refs. 4.10.1 and 4.17). The United Nations publish global figures (Ref.4.8.1) which give a general idea of the growth of world trade, and are now extending their coverage of seaborne trade statistics generally, for example Ref.4.8.2, updated in Ref.4.8.1 with an annual special table containing 12 commodities and 19 regions; more detail is gi ven in Rei. 4.8.3, although not as up-to-date. Figure 1 shows the trends for dry and liquid cargo tonnages since before World War 2. Al though tanker cargoes grew steadi ly at about 10% per annum compound until the 1973 oil crisis, there has been effecti vely no growth since then, owing to increased prices restraining consumption and stimulating supplies nearer the point of consumption, e.g. North Sea. Dry cargoes have grown almost continuously wi th minor fluctuations and now outweigh oil cargoes in tonnage terms. Figure 1 also shows the growth in the value of world trade in money terms, i.e. which includes the effect of inflation. In real terms, i . e. money of constant purchasing power, the pre-war figure would have been about the same as the immediate post-war figure. Most of the increase in the 1970s has been due to inflation; the real annual growth rates post-war have been between -5% and 10%.

*

See bibliography on page 121 for references.


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Growth of World Trade


Table 1 shows an approximate breakdown of world seaborne cargoes in 1984. The liner trades are more important for shipping demand than the figures for general cargoes indicate, as general cargo unit values and stowage factors are considerably higher than for bulk cargoes. The divisions between bulk and general cargoes and between deep-sea and short-sea cargoes are not easily defined. TABLE 1 APPROXIMATE TONNAGES OF PRINCIPAL SEABORNE CARGOES IN WORLD TRADE IN 1984

CARGO Crude oil Iron ore Oil products (deep-sea) Coal Grain Forest products Iron and steel products Chemicals Cement Liquefied gases Phosphates Bauxite and alumina Refrigerated cargo Minor bulk cargoes, deep-sea Other general cargoes, deep-sea Short sea cargoes

Total

MI LLION TONNES 950

310 300 230 210 130 100 70 50 50 40 40

30 150

200 450

3310

Note: These figures are approximate guides based partly on Fearnley' s statistics (Ref.4.1.2): V.N. figures (Ref.4.8) are different, as they include a number of 'local' figures such as re-exports of oil after refining, Great Lakes traffic, transhipments etc. Minor bulks include sugar, manganese and non-ferrous ores, salt, petroleum coke, china clay, scrap, sulphur etc.


Table 2 shows that most of the freight moving on deep-sea routes is low value bulk cargo, which will only be traded if transport costs can be kept to a reasonable proportion of the value of the cargo. Bulk transport by sea offers the lowest possible transport cost over long di stances, i. e. less than 1% of air transport costs about 2% of road transport (about 5p per tonne-mi le) and about 3% of rai 1 transport (about 3p per tonne-mi le) . General cargo transport costs by sea are about ten times higher than those of bulk transport owing to the particular nature of the wide range of cargoes, the careful stowage and expensive and slower cargo handling required, the limitations of exploiting the economies of scale with the smaller quantities moving and high overheads, and the higher speeds which higher value cargoes intrinsically demand, due partly to inventory costs, i.e. the capital tied up whiJ.e the cargo is in transit. Nevertheless, the inroads which air freight can make into sea transport are clearly limited, for the simple reason that the low or medium value cargoes which predominate cannot afford high-cost transport. Air freight will continue therefore to be the medium for those cargoes, small in tonnage but high in value, where the advantages of speed and inland penetration are worth a high premium, i.e. urgent, perishable, and valuable commodities. I

TABLE 2 APPROXIMATE UNIT COSTS IN DEEP SEA FREIGHT TRANSPORT

Typical transport mode

Approx annual tonnage, millions

Typical cargo value f./tonne

Bulk cargoes

Tanker, bulk carrier

2500

15-200

General cargoes

Cargo liner

400

200-10000 over 10000

High value Aircraft cargoes

5

Typical freight cost f./tonne 4-15

Freight Approx as % of pence per value tonnemile 10-30

0.1-0.3

50-200

5-15

2-4

300-1000

5-20

30-50

Tonne-miles are a better guide to transportation requirements than tonnes. Of the estimated 13.5 x 10 12 tonne-miles for world trade in 1984, over 80% was composed of the following seven main cargo types: Cl"ude Oil

Principal routes: Arabian Gulf -'7 North West Europe, A.G. -> Japan, A.G. -> Mediterranean, A.G. ~ U.S.A., A.G. ~South America, North and West Africa - U. S. A., North Africa and East Medi terranean -

Part I - Shipping's Economic Environment - 13

Europe, Caribbean - U.S.A., S.E. Asia - Japan. tonne-mi les, average haul 4680 nautical mi les.

4450 billion

Iron Ore Principal routes: Australia Japan, Australia - Europe, Scandinavia - N.W. Europe, West Africa - Europe, Brazil - Europe, Brazil - Japan (combination carriers), West Coast South America - Japan, Indian Ocean Japan, Venezuela U.S.A. 1630 billion tonne-mi les, average haul 5330 nautical mi les. Oil Products

(Deep-sea)

Principal routes: Caribbean - U.S.A., Arabian Gulf - Europe, S.E. Asia - Japan, N. W. Europe - Medi terranean, (Intra-European). 1140 billion tonne-miles, average deep-sea haul 3840 nautical miles. Coal Principal routes: U.S.E.C. - Japan, Australia - Japan, U.S.E.C. - Europe, Canada W.C. - Japan, S. Africa - Europe, Intra-European. 1270 billion tonne-mi les, average haul 5470 mi les. Grain

(Wheat, maize, soybeans, barley, sorghwn, oats, rye)

Principal routes: U.S.A. - W. Europe, U.S.A. and Canada - Far East, U.S.A. and Canada - E. Europe, Argentina - Europe, Australia - Far East. 1160 billion tonne-miles, average haul 5600 nautical miles. Forest Products

(Logs, sawn lwnber, 'Wood pulp, paper, board, newsprint, 'Wood chips etc.)

Principal routes: North America - Japan, Scandinavia - Continent, S.E. Asia Japan. 420 billion tonne-miles, average haul 3200 nautical miles. Deep-sea General Cargoes

(Manufactured goods, machinery, vehicles, processed foods, conswner products, etc. J

Principal routes: N. America - Europe, Europe - Far East, Far East - Australia, N. America - Far East, Europe - Indian Ocean. Approximately 1100 billion tonne-miles, average haul 5500 nautical miles. Note that the above areas include the most highly developed countries of the world. Al though marine transport dominates the shipping scene in terms of tonnage of ships in the world, mi li tary vessels are as significant in terms of construction cost. Ocean resource exploration/exploitation vessels (e.g. for oil recovery and fi shing) are important in terms of numbers, though not of tonnage. Economic forces are seen at their clearest when applied to transport vessels, so that application of engineering economics is best understood in that context. However the basic principles


apply wherever an economic cri terion can be developed as a measure of meri t, particularly when comparing al ternative designs. 2.

THE SUPPLY OF MARINE TRANSPORT

Marine vehicles can be divided into a number of broad categories as shown in Figure 2. Estimates have been made of number, gross tonnage and replacement cost for the world seagoing fleet of vessels over 100 tons gross to give an indication of the relative importance of different categories.

Figures refer to percentage of 100 tons 9"055 NumbersiG. R.T./Replacement c

work! fleet OV!!,r

SELF PROPELLED MARINE VEHICLES

I

I

SEAGOING 100%

I

I

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Transport

Non·transport

45/89137

55/11/63

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General cargo

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rll~ Liquid gas Chemicals

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I

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Dry

~6128/8

Oil tanker BUlk- (crude carrier products) Combination carrier (O.B.O.)

Breal< bulk

24 r-

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freighter Sill\!le ded< (roasterl

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Cargo liner Reefer Heavy lift ship

Unit load

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1

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No' IiSlod in

Lloyds RegIS'"

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Service craft

Military

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I Cstchers Factory vessels

Container I Ro-Ro - - - J Car carrier Barge carrier

Other marine craft

1/'1' Tug Dredger Icebreaker Drill ship Supply vessel Crane ship Cable ship Sur\ll!Y vessel

Carrier Destroyer Escort Submarine Patrol craft Mine craft Land ing craft Support craft

Offshore (Self propell, multi-hull) Large yacht

Dotted line shows dual purpose capability, full line shows caTegory in statistics. Figures may not add due to rounding.

Fig.2

World Fleet of Marine Vehicles 1983


Noteworthy features are:

•

Large tonnage but small numbers of bulk-carrying vessels: 66% and 15% respectively, indicating large average size.

•

Large but declining number of break bulk cargo vessels: 24% compared with 37% 14 years earlier (partially superseded by bulk carriers and unit load ships, the latter having grown tenfold in that period) .

•

Small tonnage of passenger vessels: 2%.

•

Large numbers but small tonnage of fishing vessels: 25% and 3% respectively.

•

Large value but small tonnage of military vessels: 49% and 5% respectively.

•

Growth of service craft such as tugs, dredgers, and supply vessels particulary servicing the offshore industry, from 8% of number 14 years ago to 15% in 1983.

•

The offshore sector is understated, craft such as barges are excluded.

since non-propelled

A more detailed breakdown of the world merchant fleet over 100 tons gross i s given in Table 3 derived form Lloyd' s Regi ster (Ref. 4.3) . Figure 3 shows the expansion of the world fleet since 1890, interrupted only by the depression of the 1930s and from 1982. From about 1950 to 1973, the growth rate was in line wi th the growth of world trade at about 8% per annum compound, but the oversupply of tonnage has not yet worked itself out, especially for tankers. The increasing average size of ships can be deduced from the fact that until about 1950 the actual number of ships remained virtually constant at around 30,000 while the fleet tonnage quadrupled. Figure 4 illustrates the growth in size of the larger vessels used for carrying the most important bulk cargoes over an even longer period. The logari thmic scale reveals the steady growth up to about 1910, the relative stagnation between the wars, and the dramatic expansion as bulk carriers took over from multi-deck freighters in the late 1950s. The curve has now caught up wi th its 1860-1910 trendline, as there now are appreciable numbers of bulk carriers in the 200,000 dwt (deadweight tonnes) size range. The rapid increase of ship size was seen even more dramatically in the case of tankers, where the typical larger vessels went from 30,000 dwt in 1950 to 100,000 dwt in 1960 to 300,000 dwt in 1970. Peaking out at about 560,000 dwt in the late 1970s, the size of tankers ordered since then has fallen sharply, as economies of scale are now less available owing to the fragmentation of the international oil industry, and the reduced role played by the oil majors like Exxon and Shell who are now less able to integrate exploration, production, transportation and refining.


TABLE 3 WORLD MERCHANT FLEET STATISTICS - MID 1985

Ships over 100 gross tons

Type of Ship

Number

Gross Tonnage 1000

Tankers: Over 30,000 GT (ca 50,000 dwt) Under 30,000 GT Liquefied gas carriers Chemical and other tankers

1377 5213 776 1012

110188 28260 9965 3696

Total:

8378

152109

}

Deadweight ·000 268355 15.04M m3

Combination carriers Dry bulk and ore carrriers Over 20,000 GT (ca 32,000 dwt) 6000-20,000 GT

384

23726

2054 2953

68452 41805

Total:

5391

133983

Dry cargo ships: Cellular container & barge carriers Rc-Ro vessels (est. over 2500 dwt) Multi-deck cargo (estimated) Single deck cargo

1011 807 10041 10774

18364 7000 53225 19446

Total:

22633

98035

Total cargo carrying fleet

36402

384127

Other vessels (service craft): Fish catchers Fish factory Passenger vessels & ferries Tugs Dredgers (self-propelled) Supply ships Miscellaneous

21251 872 3815 7737 769 2146 3403

9447 3732 8331 2601 1560 1400 5071

Total:

39993

32142

Total world fleet:

76395

416269

673692

Mid 1975

63724

342162

553379

Source:

237312

Lloyd's Register of Shipping Statistical Tables 1985


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3.

THE FREIGHT MARKETS

The supply and demand for marine transport are matched in the short term through the mechanism of the freight markets, and in the longer term through newbuilding and scrapping of ships. The market is international and the open competition provides a good example of the laws of supply and demand. Figure 5 illustrates typical supply and demand curves, which may apply to, say, the tanker market.

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Supply and Demand Curves

Three levels of demand are illustrated and for any given level, the intersection with the supply curve determines the equi libri urn freight rate and tonnage required and available. Each level of the demand curves depends on the state of world trade as influenced by economic developments, weather, harvests, and political crises, but however high demand goes, there is a limit to supply in the short term, so that the available tonnage is directed to the highest bidder. At lower levels of demand there will be some unused capacity, either ships laid up, or encouraged to be scrapped, or slow steaming, or loading part cargoes, or spending longer in port (waiting for or handling cargo, or under repair). The supply curve shows that the supply of ships will dry up before zero freight rate is reached, because ships are generally laid up when freight rates regularly fail to cover direct costs, excluding capi tal charges. The equi libriurn point moves continuously as demand changes, and as ship operators' perceptions of market trends change, influencing decisions on buying, selling and chartering ships. The actual matching of shipowners' supply of tonnage and charterers' demand is mostly done by shipbrokers operating on shipping exchanges such as the Bal tic Exchange in London. OVer the centuries, the shipping business has evolved standard practices for chartering organisations, and English is the "lingua franca" of the international shipping scene. Standard charter parties (i. e. contracts) are frequently used, with extensive use of "small print" clauses found necessary by years of hard-won experience,


but these may be modified by addi tions and deletions. The following is only a brief summary of the principal features which affect ship design; there are many finer points. For more detai led information, consult a standard reference, such as Ihre (Ref. 1.9) . Ships may ei ther be chartered (i. e. hired to someone wi th cargo to transport) or operated by the owner in his own business.

A. (i)

Chartered Ships

Single Voyage Charter CV IC)

The shipowner undertakes to provide a vessel for the carriage of specific cargo(es) for a single voyage between two (or occasionally more) ports. The charterer pays freight pe":t:"toIlC?; cargo actually loaded wi thin specified limits. "Tons" may be long toris~ {"-e. 1016 kg, or metric tonnes, i.e. 1000 kg. The shipown~r pays:Daily running costs of ship, covering crew expenses, upkeep, insurance etc. Capi tal charges, covering depreciation, interest, taxes, profit. Fuel costs. Port charges and canal dues. Cargo handling charges. The extent to which the cargo handling charges are paid by the owner may be varied according to trade and usage, e. g. Gross terms: shipowner pays for loading and di scharging. Free in and out (f.i.o.): shipowner pays for neither loading nor di scharging. Free on board (f. o. b. ): shipowner does not pay for loading. Free discharge (f.d.): shipowner does not pay for discharging. Voyage chartering is generally used for full loads of liquid or dry bulk cargoes. Freight rates are usually expressed as dollars per ton of cargo for dry cargo, or sometimes as a lump sum for a shipload. Worldscale rates are used for tanker cargoes (see page 25). Rates fluctuate appreciably wi th supply and demand as can be seen from the "fixtures" which are publi shed in the shipping press, such as Uoyds Ust. The voyage charter market is sometimes called the "spot" market. In each fixture, a certain number of days will be allowed for loading and discharging the cargo (" laydays"). If the port time is less than anticipated, the shipowner pays the charterer "despatch money", if longer, the charterer pays the shipowner "demurrage" for delaying the ship. See voyage estimate example, Table 4.


TABLE 4 EXAMPLE OF VOYAGE ESTIMATE CALCULATION

Bulk carrier to carry full cargo of grain from New Orleans to Rotterdam after ballast voyage from U. K.

SHIP

30,000 tonnes d.w. Summer draft 10.4 m. 37,500 cu. m. grain. Speed 14.5/15.5 knots loaded/ballast 32 tonnes high viscosity fuel per day plus 1.5 tonnes diesel oil at sea or in port. Daily running coSts £2900 excluding capital charges.

CARGO

28,000 t~nnes grain. Loading rate 7,000 tonnes per day, discharging 4,000. Loading charge ~1.00 per tonne. Freight: ~16.00 per tonne, free discharge. Brokerage etc. 5 per cent. Assume fl ~1.30

=

TIME

= = = = = =

Outward in ballast 4,800 miles at 15.5 kn Loading New Orleans 28,000/7,000 Bunkering Homeward loaded 4,800 miles at 14.5 kn Waiting for berth Discharging Rotterdam 28,000/4,000 Total voyage Say

BUNKERS

HVF DO

12.9days 4.0 0.5 13.8 1.5 7.0 39.7 40 days

26.7 days x 32 40. days x 1.5

854 tonnes 60 tonnes

°

PORT DISBURSEMENTS $

U.K. port, leaving

f7000 x 1.3 New Orleans: Harbour dues Cargo charges 1.00 x 28000 Miscellaneous

$ 9 000

20 000 28 000 6 000 54 000

Rotterdam:

Harbour dues Cargo charges Miscella.'1eous

30 000 Nil 2 000 32 000 95 000

Total port disbursements

OTHER DISBURSEMENTS Running costs: 40 x HVF at SlOO/tonne: 854 x DO at $170/tonne: 60 x Commission 5 per cent of

2900 x 1.3 100 170 28 000 x 16.00

Total Other Disbursements

150 85 10 22

800 400 200 400

268 800

TOTAL DISBURSEMENTS

363 800

FREIGHT SURPLUS

44.8 000 84 200 2 105

28 000 x 16.00 Total over 40 days Per day

Note: Surplus has to cover loan interest and repayments, and provide a return on shipowner's own capital. If actual loading and discharging times differ from the assumed rates, demurrage or despatch money will be payable. An owner will make similar calculations, often us ing computers, for other voyage charters being offered, and will usually select the one shOWing the highest daily surplus, unless there are complications such as ship positioning before or after the voyage. Voyage charter freight rates fluctuate appreciably with supply and demand.


Consecutive Voyage Charter

(ii)

As above, but two or more voyages in succession may be contracted, e.g. oil companies may charter three consecutive voyages to cover peak demand in winter. Over a year, the owner's chartering wi 11 be:-

income

from

ei ther

type

of

voyage

Average cargo tonnage per voyage x Number of loaded voyages per annum x Average net freight rate per ton of cargo. (iii)

Timecharter (T/C)

The shipowner undertakes to provide a vessel for a period of time for use by the charterer on the latter's business. Timechartering is sometimes called period chartering. The period may either be fixed in time, say three months, one year or even 20 years, or for a round voyage ("trip" charter). The latter is sometimes used by liner companies to supplement their existing fleet for peak periods, the former generally for bulk cargoes. The charterer is thus responsible for arranging voyages and cargoes during this period; the shipowner provides the ship and crew and maintains the vessel. He is thus only responsible for: Daily running costs Capital charges. All voyage expenses, fuel, port charges, canal dues, cargo handling charges, are to the charterer's account, but in practice may be paid by the shipowner and then reclaimed from the charterer. The hire is usually expressed as dollars per unit of capacity (e.g. ton deadweight, cubic metre etc) per month, or as a lump sum per day, especially by offshore companies. Hire is payable only for time in service, i. e. it ceases during repair or breakdown ("off-hire") but it continues to be paid even if the ship sails empty or is delayed in port. Timecharters, especially the longer term ones, l1,aye_El_sj:§.):)ilising effect_ on payrnenJ_s fQ:r-_J:re=ight and are much used by oi 1 companies, about 40 per cent ofact1ve tankers being so chartered. Timechartering reduces the amount of own capital needed, gives long term stability of transport costs, provides flexibility and marginal tonnage, and a yardstick to measure the efficiency of the charterer's own fleet (if any). Market fluctuations with supply and demand are usually less violent than for voyage charters, especially longer term charters. Over a year, the owner's income from timechartering will be: D~adweight x months on hire x

freight rate (per ton dwt per month) or: Number of days on hire x daily hire rate.

( i v)

Bareboat Charter

The shipowner undertakes to provide a vessel to be operated entirely by the charterer for a specified period. The charterer


provides the crew, maintenance and generally uses the ship as if he owned it, merely paying a hire for the "bareboat". Sometimes called demise charter. Not used as much as voyage or timecharters, but is the usual method when a ship operator leases a ship from a financial institution like a bank. Hire is usually paid per ton deadweight per month, or a lump sum per month. There may be an option for the charterer to purchase the ship at the end of or during the charter.

Contract of Affreightment

(v)

The contractor undertakes to provide a specified transportation capability over a period. Although usually no ships are named, there will be maximum and minimum limits on the cargo quantities available, and possible restrictions at loading and discharging ports. The ships may not actually be owned by the contractor, whose skills lie in matching a number of charters to his available fleet, to minimise ballast time. If not already owned, the necessary ships may be obtained by chartering by any of the above methods. Sometimes used for large scale transport of minerals, e. g. iron ore South America to Japan. Freight is usually paid per ton of cargo actually carried. N. B. For all types of charter, the brokers' commi ssion must also be paid out of freight income, typically 2.5%-5%, so that net, rather than gross, freight rates should be used to determine income. B.

Owner Operated Ships

( i)

Industrial Carriers

Vertically integrated industrial concerns may operate their own ships to transport raw materials or finished goods, e.g. oil, steel, sugar, aluminium, paper companies. About 30% of the world tanker fleet is owned by oil companies. Sometimes the actual management of the fleet is subcontracted to a ship management company which may own other ships itself. Freight as such is not necessarily earned: the object may be to minimise transport costs of the overall industrial process, or occasionally to take advantage of favourable tax and other allowances. Other advantages of ownership include: greater control of design and specification, use of vessel as testbed for new developments (e. g. coatings), greater flexibi li ty of operation and, of course, prestige. ( i i)

Common Carriers

Most of the liner companies operate common carrier services, i.e. they provide a scheduled service on regular routes for any quantity of cargo, usually general cargo, at published freight rates. Manufacturers exporting goods c. i. f. (cost, insurance, freight) require a regular service at predetermined rates, so that they can guarantee delivery time and cost. Cargo liners carry a miscellany of general cargoes, none large enough to justify chartering a whole ship. Occasional parcels of bulk commodities may be taken to fill ships on a return voyage. Because fixed


expenses are high in providing a regular service where ships sail whether full or nearly empty, and variable expenses are low, freight rates would tend to be depressed to this latter low level if competition were not regulated, eventually resulting in the service becoming uneconomic and being abandoned. Most cargo liner operators on a particular route are organised into Conferences, which regulate freight rates and sailing for some time in advance, often in di scussions with the shippers of cargo. Freight is usually "Liner Terms", i.e. the shipowner pays for all expenses quay shed to quay shed including cargo handling. Commission is payable to cargo agents, as well as rebates to shippers who use only Conference ships. Liner freight rates do not always reflect the cost of carriage, as the value of each commodity, the inward and outward imbalance of trade, seasonal factors and the high cargo handling charges, especially for break-bulk cargoes, all influence the rate, while the effect of distance is not very marked. The general level of freight rates is usually set so as to give a 'reasonable' rate of return to a Conference operator, and may be negoti ated on thi s basis with shippers' organisations and independent accountants. Competition between operators in a Conference is on quality of service, not freight rates, e. g. offering faster ships, better record in respect of cargo damage and pi Ifering, etc. Independent liner operators ('outsiders') provide competition on some routes, offering slightly lower freight rates. Cargo liners tend to carry cargoes both ways (unlike most bulk carrying vessels) but are usually limited by cubic capacity rather than deadweight. Consequently many rates are expressed per "measurement ton" of one cubic metre (or formerly 40 cu. ft.) or as weight/measurement where freight is charged either per ton weight or per ton measurement (i.e. volume), whichever is the larger. On some containeri sed routes, commodi ty box rates may be used, i. e. a rate per container, irrespective of the quanti ty inside. Al though Conferences have been criticised as inefficient cartels, no-one has yet come up wi th an al ternati ve which provides long term regular services at freight rates acceptable to both shipper and shipowner. Over a year, the owner's income wi 11 be: Maximum cargo capacity avai lable x Average proportion of capaci ty fi lled x Round voyages per annum x Average net freight rate per ton x 2. (The 2 derives from the ability to carry one cargo outward, and another homeward on a round voyage) . Worldscale Al though most freight rates specified in the above methods of operation are expressed as money terms per ton of cargo, together with qualifications as to loading rates etc., the tanker business is sufficiently homogeneous for a freight rate scale to have evolved. By this means current freight rates are expressed as a percentage of a basic figure for each route, without detai led reference having to be made to the exact voyage and conditions during negotiations.


The present scale in use is Worldscale which replaced Intascale and others developed since World War 2. Under Worldscale, a rate of say W80 (i. e. 80 per cent of the basic rate) is intended to give a shipowner the same dai ly return whether on a long voyage, such as Arabian Gulf to Rotterdam (about 30 days) or a short voyage, say North Africa to Trieste (about 3 days). It is thus possible for a shipowner to know if a current market rate is 'good' or 'bad' without making a full voyage estimate, as he knows the break-even Worldscale rate for each of hi s ships. The actual money freight is worked out later from a book of tables, published by the Worldscale Association of London which lists virtually every likely voyage between any two oi 1 ports and gives the W100 value. The latter is derived from a ~ominal 19,500-ton dwt 14-knot diesel tanker to give a daily return of $1800 after paying all voyage expenses, and updated every six months. Although intended for voyage charters, it is sometimes used to fix timecharters. The actual rate negotiated for any given voyage depends on the market si tuation at the time of the charter and the size of the ship - in general, the larger the ship, the lower the rate.

Example Calculate the freight rate between the Arabian Gulf and N. W. Europe, for a 50,000 ton dwt tanker at W80 via the Cape or via Suez Canal, given the W100 rates. W100 via Cape = $28.00 W80 = 0.80 x 28.00 = $22.40 per ton cargo (or t17.23 at $1.30 = t1) Actual income = $22.40 x say 55,000 tons cargo, less say 2.5% brokerage = $1,223,000 W100 via Suez loaded and ballast = $17.00 + 3.00 canal dues W80 = 0.80 x 17.00 + 3.00 = $15.50 (or t12.77) per ton cargo Actual income = 15.50 x say 57,000 tons cargo, less say 2.5% brokerage = $923,000 Note that the canal dues are not proportioned. Thus, although the money freight is less going through Suez, the net daily earnings will be more or less the same owing to the shorter voyage. Cargo deadweight via the Cape would be about 1,000 tons less than via Suez owing to larger bunkers required. The recent enlargement of the Suez Canal now permits vessels of up to about 150,000 tonnes deadweight fully loaded or about 380,000 tonnes in ballast. 4.

OPERATING ECONOMICS

The shipowner's responsibilities for the various items of expenditure are illustrated in Figure 6. Capital charges cover i terns such as loan interest and repayments, and profit, all related to the capital investment in the ship. The full calculation of effective capital charges can be complex, as described in Part 11. Voyage costs cover fuel, port and canal dues, and sometimes cargo handling charges. Daily running costs are those incurred on a day-in, day-out basis whether the ship is at sea or in port; these include crew wages and benefits, victualling, ship upkeep, stores, insurance, equipment hire and


administration. Voyage costs vary considerably from trade to trade, while daily running costs are largely a function of ship type, size and flag. Some guidance on estimating ship first costs and operating costs is given in the Appendix. C.APITAl..

CHARc.E S

OAI "'" It WN N 1 Ne;

COSTS

VOYAGE COSTS ICAItC:.O £:XPENSES! I

LoA.

REPAVMENT S.

N

La.......

t"E""

I.. T£R£ST.

E "PEo
.... £~

CO~TS

lo'o"'NTE", ..",c.£ &- I
?""T C ..... 2.<:O£

T.. ,,£s.

5r="'£5.

C ......... ~

R£Tulr; N A.FT£1It TA,c

l .. sUIl.ANc.e.

(DII"It":"Ar.o,", \.

AQ"'INI~TRAT\ON.

C,,2.(Oo

H .... o"'''' CO.

C.. R,"O Ci.. .. lMS.

S.

CI..li.S .

(P"O",'T.!

OWNEIl':

C"'AR"E~ER

•

•

• OWNER

OPE;<'AiED

•

•

rlt.llC.~" UNO~Q.

I"'C.OME

AN""

R.i.I...E.V'&'""-iT

AC.c.£P""dl,LE

Fig.6

O ..

(AFTE'l

T..... ~E

O~

E)f~i.N~E.5a R ...re

0 ..

OUC.,.'ON

C."",,,,."Ea I .....

T"", ..

RtTU2.....

DF

Mus.T

L01'ooJG

0 .....

B;z,QKact.'S

Co~tsz.

~'W .... , H,s

A""c

T .... ~

CO""'....,I.SION) OWN£Iit..'S,

P'02o...."OE

AN

CAPIT'AL...

Division of Responsibility for Operating Costs

The type of charter and the di vi sion of responsibi li ty for cost and ship's time between shipowner and charterer can influence some features of the design of the ship and its equipment, e. g. time chartered tankers may be designed to oil company specifications. With bareboat charters less than the life of the ship, the charterer has less incentive than an owner-operator to reduce fuel consumption, while time in port is more significant for owners of owner-operated or voyage chartered ships than for timechartered ships. Owner operators may thus be expected to be more forward-looking in fitting fuel saving devices or better equipment to keep port turnrounds short, e. g. bow thrusters or more elaborate cargo handling equipment. Owner operators often have the highest standards of equipment and maintenance, especially if ships are partly self-insured.


From estimates of the components of ship operating costs and the corresponding transport performance, it is possible to calculate freighting costs for a variety of ships, bui 1t up in a manner similar to that shown in Part Ill, pages 82-84. Figure 7 shows calculated freighting costs for bulk carriers, excluding cargo handling costs. I f relying on shore gear having a constant handling rate, time in port is roughly proportional to size, unlike tankers where time in port is almost independent of size. Thus big ships are only economic where handling rates are commensurate with size of ship - compare rates of 1,000 and 10,000 tonnes per day. Shore costs per tonne may increase wi th ship size, as deeper dredging, more powerful tugs, faster cargo handling gear and bigger stockyards are required. An indication of such effects is shown in Figure 7 where the optimal size for 10,000 tonnes per day handling rate is correspondingly reduced. 32

\\

12000, MILES

i ,1-

V

~O

I

TOHHESPROAI CAito HAI(LiHC!RATE

I ROUND I VOYAJ

151
I

I

i

i

I

I

!

I

0

&

= z = =

~

2

I

I

\\: ""

r---

!

I

I

I

I

Tpl'\ i

i

I

iI

I

I

I I

i!

i

"::: ~I

~L-

r:------

I ~

-

1Di, TPO IHI,! Pl US IHO -10- -1000e ---lPO IHI

-....:

-20

I

I

3000

I I

I I

I -

SHORE - -- ---- - -- --&0

&0

TONHES

Fig.7

I

I

I I

I

i

I

1

i

!

!

\\ I

~

II

100

OEAowmHl

120

lO

ooe! IPO

100

1Di: 1 PO

COS 1S

HO

[.!O~ ~ _ _

com

i

-~i

I

I

I I

,.'.lR_l~Hf1&0

Ol~

I

1_ - - - - i -

1~0

-

-

1---

200

220

- - - -HO

I

--I

!

21[

I 1000

Bulk Cargo Freighting Cost.

Actual bulk cargo freight rates are regularly published in the shipping press, shipbrokers' reports, etc. They vary with supply and demand, and can be regarded as oscillating about a level of freighting cost which gives the average efficient operator an acceptable rate of return in the long run. However over-supply of ships leading to long periods of low freight rates can occur owing to, for example, very attractive shipbuilding loan terms. Such influences are discussed in Ref .1.22, as is the background to maritime economics generally. Table 5 indicates that different economic forces apply to bulk as opposed to liner shipping.


TABLE 5 SOME DIFFERENCES BETWEEN DEEP SEA LINER AND BULK SHIPPING

LINER

BULK

Ship Size (deadweight)

Sma 11 - Med i um (5000 - 25000 multi-deck) (5000 - 50000 unit load)

Medium - Large (15000 - 550000)

Ship Speed

Medi um - Fast (15 - 26 k.nots)

Medium

Area of Operation

Specific trade routes

World-wide

Type of Carrier

Common

Contract

Organisation/ Ownership

Conference of member lines

Independent or industrial carrier

Consignments

Large number of small parcels

Sma 11 number of large parcels (often one only)

Nature of Cargo

Heterogeneous (general) (Medium unit value)

Homogeneous (bulk) (Low unit value)

Freight Rates

Administered (level set to cover costs)

Negotiated (set by supply & demand)

Competition

Market shares Quality of service Non-conference lines

Price and delivery

Scheduled Service

Yes (constant speed ship)

No (constant power ship)

Mass or Volume Limited

Volume

Usually mass except certain cargoes and SBT tankers

Ports Serviced

Range of ports near major cities

Usually one port each end near producing/consuming plant

Day at Sea per Annum

150-220 (multi-deck) 200-270 (unit load)

230-320

Own Cargo Handling Gear

Yes (multi-deck) Sometimes (unit load)

Usually none except tankers, and small er bulk carriers

Penultimate Source and Destination

Warehouse/depot

Stockpile

(12 - 17 k.nots)



PART 11. 1.

MAKING ENGINEERING ECONOMY CALCULATIONS

INTRODUCTION

The general economic environment within which shipping operates was discussed in Part I. Before considering how to integrate the related economic factors into the technical design of ships, the methods of making economic calculations which can be used to evaluate alternative designs of freight earning vessels must be taken into consideration. Note that the voyage estimate example in Table 4 is not an evaluation of the design, but an evaluation of the profi tabi li ty of one particular voyage for an exi sting ship at one moment in time, as a basi s of compari son wi th others currently offered on the market. Engineering economy calculations need to take account of performance over longer periods. 2.

THE BASIC INTEREST RELATIONSH I PS

Money has an appreciable time value. flOO to spend right now is of more use than flOO not available for, say, ten years. A.rent or reward must be paid if money is to be lent, to compensate the lender for postponing spending it. The reward, or interest, is fundamental to all economic calculations, whether or not money is actually borrowed. Even if one has the cash in hand to buy, say, a ship, one is foregoing the interest that could be obtained by investing it in, say, a bank deposi t account. Interest may either be contracted, e.g. the nominal rate paid on bank loans, or a rate of return, which is the effective equivalent interest rate generated by the excess of income over expenditure. Interest may either be simple or compound, but nearly always the latter. The basic relationships are shown below using the following nomenclature (standard notation of American Society for Engineering Education with acknowledgements to Professor H. Benford's publications and Ref. 1.5.4) . A

Annual return (e.g. income minus expenditure) or annual repayment e. g. of principal plus interest) .

F

A future sum of money.

P

Principal (investment), or a present sum of money.

N

Number of years (e. g. life of ship, period of loan) .

i

Interest or discount rate (percentage rate/lOO).

per annum,

decimal

fraction

(Note that capi tal letters are used for absolute values, and lower case for fractional values) .

Simple Interest Total repayment after N years = P (1 + Ni)

Part 11 - Making Engineering Economy Calculations - 31

Compound Interest Wi th interest compounded annually, total repayment F after N years =P(l+i)N The Compound Amount factor (CA) is the multiplier to convert a present sum into a future sum: F = (CA) P CA -

~

-

(1

+

i)N

F INTEREST.

R£PA,O.

PItINC.IPAL.

o N

I

YEARS.

P

BOR.R.OWEO.

Fig.S

TIMe

Compound Amount Factor and Present Worth Factor

The corresponding cash inflows and outflows over time can be conveniently shown as in Figure 8. Very occasionally, but rarely in the marine industries, interest may be compounded at less than annual intervals. If interest is compounded T times per year wi th the interest rate expressed annually as i, then For continuous compounding CA = e

iN

(The compound amount factors for annual and continuous compounding do not differ very much:At 10% over 5 years, At 10% over 20 years,

1.611 and 1.649 respectively 6.73 and 7.39 respectively)

The reciprocal of the compound amount factor is the Present Worth factor (PW), and is the multiplier to convert a future sum into a present sum. It is also called the discount factor. P = (PW) F py -

~

-

h '"'

(1

+

i)-N


The "present worth" of F (which includes accumulated interest) is exactly the same as P, i. e. they are effectively egui valent. Owing to its formulation, CA is always greater than 1; similarly PW is always less than 1. Note that the present worth and compound amount factors only apply to single future payments, not to a series. If a loan is repaid by regular (e.g. annual) instalments of principal plus interest, there are two common arrangements:(i)

Principal repaid in equal instalments, and interest paid on the declining balance: which is the usual method with shipbui lding loans.

(ii)

Uniform payments: which is the usual method for house purchase loans, interest predominating in early years, repayments of principal in later years; see Figure 9.

As the latter concept uses uniform payments, it enables a present sum of money to be converted into an equivalent amount repaid uniformly over a number of time periods, usually annual. Hence we have a Capital Recovery factor (CR) which enables an ini tial capital investment (say in a ship) to be recovered as an annual capital charge, which includes both principal and interest. CR is the ratio between this uniform annual amount (A) and the principal (P) i.e. A = (CR) P. It can be shown from compound interest relationships and the sum of geometrical progressions that:

eR

(1 + i)N

A

i

r

(1 + i)N - 1

= w •

or rewritten as

i

1 - (1 + i)-N

-r-l-rJ~l~tf'.".'" --

PRINCIPAL.

N

p

Fig.9

Capital Recovery Factor and Series Present Worth Factor

The reciprocal is the Series Present Worth factor (SPW), which is the multiplier to convert a number of regular (annual) payments into a present sum; also called annuity factor.


P

=

SPI.J' ..

(SPW) A P

or

=

ft

1

~

=

(1

+

i( 1

",r-.

i)N -

+

1

i) N

The recommended notation for capital recovery factor (or any of the other factors) at i per cent for N years is (CR - i% - N). It may be followed by the numerical value of the factor, e. g. i = 8 per cent, N = 15 years:(CR - 8% - 15) 0.1168 Note that the series present worth factor is numerically equal to the sum of the individual annual present worth factors over the life of the investment, so is very useful for dealing wi th uniform cash flows, which can be used for many marine problems, at least in preliminary evaluations. Less commonly used in the marine industries, is the Sinking Fund factor (SF) used to calculate the amount of money needed each year (A) to repay an amount (e.g. a loan) in the future (Fig.lO) i.e. A=(SF) F

A

SF •

Y=

i

(1

+ i)N _ 1

o.

F.

Fig.10

Sinking Fund Factor and Series Compound Amount Factor


The reciprocal is the Series Compound Amount factor (SCA) i.e. F (SCA) A

=

SCA ..

1

'SY

Note that SF

F

=A•

= CR

(1 + i)N - 1

-'---""i~--

- i

SCA can also be used to find the total cash involved in a series of regularly increasing amounts / e. g. the total of crew wages over 20 years, rising at 5 per cent compound per annum, is 33.1 times the first year I s wages / as the SCA is 33.1.

Tables of Basic Interest Relationships To simplify the calculations, the following tables are given for a typical range of years and interest rates: Table 6

Present Worth factor (PW)

Table 7

Capi tal Recovery factor (CR)

Table 8

Series Compound Amount factor (SCA)

All the other factors may be easily calculated therefrom using the basic relationships:1

Compound Amount factor (CA)

a-

Series Present Worth factor (SPW)

== .::-

Sinking Fund factor (SF)

==

N

1

eR

1

SeA or CR - i


TABLE 6 PRESENT WORTH FACTOR

DISCOUNT RATE P. C. YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 30

YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 30

1 0.990099 0.980296 0.970590 0.960980 0.951466 0.9'2045 0.932718 0.923483 0.914340 0.905287 0.896324 0.887449 0.878663 0.869963 0.861349 0.852821 0.844377 0.836017 0.827740 0.819544 0.811430 0.803396 0.795442 0.787566 0.779768 0.741923

2 0.980392 0.961169 0.942322 0.923845 0.905731 0.887971 0.870560 0.853490 0.836755 0.820348 0.804263 0.788493 0.773033 0.757875 0.743015 0.728446 0.714163 0.700159 0.686431 0.672971 0.659776 0.646839 0.63 .. 156 0.621721 0.609531 0.552071

3 0.970874 0.942596 0.915142 0.888487 0.862609 0.837484 0.813092 0.78H09 0.766417 0.744094 0.722421 0.701380 0.680951 0.661118 0.641862 0.623167 0.605016 0.587395 0.570286 0.553676 0.537549 0.521893 0.506692 0.491934 0.477606 0.411987

4 0.961538 0.924556 0.888996 0.854804 0.821927 0.790315 0.759918 0.730690 0.702587 0.675564 0.649581 0.624597 0.600574 0.577475 0.555265 0.533908 0.513373 0.493628 ·0.474642 0.456387 0.438834 0.421955 0.405726 0.390121 0.375117 0.308319

5 0.952381 0.907029 0.863838 0.822702 0.783526 0.746215 0.710681 0.676839 0.644609 0.613913 0.584679 0.556837 0.530321 0.505068 0.481017 0.458112 0.436297 0.415521 0.395734 0.376889 0.358942 0.341850 0.325571 0.310068 0.295303 0.231377

6 0.943396 0.889996 0.839619 0.792094 0.747258 0.704961 0.665057 0.627412 0.591898 0.558395 0.526788 0.496969 0.468839 0.442301 0.417:65 0.393646 0.371364 0.350344 0.330513 0.311805 0.294155 0.277505 0.261797 0.246979 0.232999 0.174110

7 0.934579 0.873439 0.816298 0.762895 0.712986 0.666342 0.622750 0.582009 0.543934 0.508349 0.475093 0.444012 0.414964 0.387817 0.362446 0.338735 0.316574 0.295864 0.276508 0.258419 0.241513 0.225713 0.210947 0.197:47 0.184249 0.131367

8 0.925926 0.857339 0.793832 0.735030 0.680583 0.630170 0.583490 0.540269 0.500249 0.463193 0.428883 0.397114 0.367698 0.340461 0.315242 0.291890 0.270269 0.250249 0.231712 0.214548 0.198656 0.183941 0.170315 0.157699 0.146018 0.099377

9 0.917431 0.841680 0.772183 0.708425 0.649931 0.596267 0.547034 0.501866 0.460428 0.422411 0.387533 0.355535 0.326179 0.299246 0.274538 0.251870 0.231073 0.211994 0.194490 0.178431 0.163698 0.150182 0.137781 0.126405 0.115968 0.075371

10 0.909091 0.826:'46 0.751315 0.683013 0.620921 0.564474 0.513158 0.466507 0.424098 0.385543 0.350494 0.318631 0.289664 0.263331 0.239392 0.217629 0.197845 0.179859 0.163508 0.148644 0.135131 0.122846 0.111678 0.101526 0.092296 0.057309

11 0.900901 0.811622 0.731191 0.658731 0.593451 0.534641 0.481658 0.433926 0.390925 0.352184 0.3172n 0.285841 0.257514 0.231995 0.209004 0.188292 0.169633 0.152822 0.137678 0.124034 0.111742 0.100669 0.090693 0.081705 0.073608 0.043&83

12 0.892857 0.797194 0.711780 0.635518

13 0.884956 0.783147 0.693050 0.613319 0.542760 0.480319 0.425061 0.376160 0.332885 0.294588 0.260698 0.230706 0.204165 0.180677 0.159891 0.141496 0.125218 0.110812 0.098064 0.086782 0.076798 0.067963 0.0601 .. 4 0.053225 0.047102 0.025565

14 0.877193 0.769468 0.674972 0.592080 0.519369 0.455587 0.399637 0.350559 0.307508 0.269744 0.236617 0.207559 0.182069 0.159710 0.140096 0.122892 0.107800 0.094561 0.082948 0.072762 0.063826 0.055988 0.049112 0.043081 0.037790 0.019&27

15 0.869565 0.756144 0.657516 0.571753 0.497177 0.432328 0.375937 0.326902 0.284262 0.247185 0.214943 0.186907 0.162528 0.141329 0.122894 0.106865 0.092926 0.080805 0.070265 0.061100 0.053131 0.046201 0.040174 0.034934 0.030378 0.015103

16 0.862069 0.743163 0.640658 0.552291 0.476113 0.410442 0.353830 0.305025 0.262953 0.226684 0.195417 0.168463 0.145227 0.125195 0.107927 0.093041 0.080207 0.069144 0.059607 0.051385 0.044298 0.038188 0.032920 0.028380 0.024465 0.011&48

18 0.847458 0.718184 0.608631 0.515789 0.437109 0.370432 0.313925 0.266038 0.225456 0.191064 0.161919 0.137220 0.116288 0.098549 0.083516 0.070776 0.059980 0.050830 0.043077 0.036506 0.030937 0.026218 0.022218 0.018829 0.015957 0.00&975

20 0.833333 0.694444 0.578704 0.482253 0.401878 0.334898 0.279082 0.232568 0.193807 0.161506 0.134588 0.112157 0.093464 0.077887 0.064905 0.054088 0.045073 0.037561 0.031301 0.026084 0·021737 0.018114 0.015095 0.012579 0.010483 0.004213

25 0.800000 0.640000 0.512000 0.409600 0.327680 0.262144 0.209715 0.1677i2 0.134218 0.107374 0.085899 0.068719 0.054976 0.043980 0.035184 0.028147 0.022518 0.018014 0.014412 0.011529 0.009223 0.007379 0.005903 0.004722 0.003778 0.001238

30 0.769231 0.591716 0.455166 0.350128 0.269329 0.207176 0.159366 0.122589 0.094300 0.072538 0.055799 0.042922 0.033017 0.025398 0.019537 0.015028 0.011560 0.008892 0.006840 0.005262 0.004048 0.003113 0.002395 0.0018 .. 2 0.001417 0.000382

0.5&7427 0.506631 0.452349 O• .. 03883 0.360610 0.321973 0.287476 0.256675 0.229174 0.204620 0.182696 0.103122 0.1 .. 5644 0.130040 O. 116107 0.103067 0.092560 0.082643 0.073788 0.065882 0.058823 0.033378


TABLE 7 CAPITAL RECOVERY FACTOR

DlSCOUIIT lATE P.C. TEAl 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 )0

n:AR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2I 22 23 24 25 30

1 1.010000 0.507512 0.340022 0.25b281 0.206040 0.172548 0.148628 0.130690 0.116740 0.105582 0.096454 0.088849 0.082415 0.076901 0.072124 0.067945 0.064258 0.060982 0.058052 0.055415 0.053031 0.050864 0.048886 0.047073 0.045407 0.0J8748

2 1.020000 0.515050 0.346755 0.262624 0.212158 0.118526 0.154512 0.13b510 0.122515 0.111327 0.102178 0.0945b0 0.088118 0.082602 0.077825 0.073b50 0.069970 0.066702 0.063782 0.061157 0.058785 0.05b631 0.054668 0.052871 0.051220 0.044650

1.030000 0.522611 0.353530 0.269027 0.218355 0.18'0598 0.160506 0.142456 0.1284)4 0.117231 0.108077 0.100462 0.094030 0.088526 0.083H7 0.079611 0.075953 0.072709 0.069814 0.067216 0.064872 0.062747 0.060814 0.059047 0.057428 0.051019

4 1.040000 0.530196 0.360349 0.275490 0.224627 0.190762 0.166610 0.148528 0.134493 0.123291 0.114149 0.106552 0.100144 0.094669 0.089941 0.085820 0.082199 0.078993 0.OH139 0.073582 0.071280 0.009199 0.067309 0.065587 0.064012 0.057830

5 1.050000 0.537805 0.367209 0.282012 0.230975 0.197017 0.172820 0.154722 0.140690 0.129505 0.120389 0.112825 0.10645b 0.101024 0.090342 0.092270 0.088699 0.085546 0.082745 0.080243 0.077996 0.075971 0.074137 0.072471 0.070952 0.065051

6 1.060000 0.545437 0.374110 0.288591 0.237396 0.2033b3 0.179135 0.161036 0.147022 0.135868 0.126793 0.119277 0.112960 0.107585 0.102963 0.098952 0.095445 0.092357 0.089621 0.087185 0.085005 0.0830106 0.081278 0.079679 0.078227 0.072649

7 1.070000 0.553092 0.381052 0.295228 0.243891 0.209796 0.185553 0.167468 0.153486 0.142378 0.133357 0.125902 0.119651 0.114345 0.109795 0.105858 0.102425 0.099413 0.096753 0.094393 0.092289 0.090406 0.088714 0.087189 0.085811 0.080586

8 1.080000 0.560769 0.388034 0.301921 0.250456 0.216315 0.192072 0.174015 0.160080 0.149029 0.140076 0.132695 0.126522 0.121297 0.116830 0.112977 0.109629 0.106702 0.10412R 0.101852 0.099832 0.098032 0.096422 0.0949H 0.093679 0.088827

9 1.090000 0.568469 0.395055 0.308669 0.257092 0.222920 0.198691 0.180674 0.160799 0.155820 0.146947 0.139651 . 0.1335b7 0.128433 0.124059 0.120300 0.117046 O. 1142 j 2 O. 111730 0.109546 0.107617 0.105905 0.104H2 0.1030:3 0.101806' 0.097336

10 1.100000 0.576190 0.402115 0.315471 0.263797 0.229607 0.205405 0.187444 0.173641 0.162745 0.153963 0.146763 0.140779 0.135746 0.131474 0.127817 0.124664 0.121930 0.119547 0.117460 0.115624 0.114005 0.112572 0.111300 O. 110168 0.106079

11 1.110000 0.583934 0.409213 0.322326 0.270570 0.236377

12 1.120000 0.591698 0.416349 0.329234 0.277410 0.243226 0.219118 0.201303 0.187679 0.176984 0.1&8415 0.161437 0.155677 0.150871 0.146824 0.143390 0.140457 0.137937 0.1357&3 0.133879 0.132240 0.130811 0.129560 0.128463 0.127500 0.124144

13 1.130000 0.599484 0.423522 0.336194 0.284315 0.250153 0.226111 0.208387 0.194869 0.184290 0.175841 0.168986 0.163350 0.158667 0.15"'42 0.151426 0.148608 0.146201 0.144134 0.142354 0.140814 0.139479 0.138319 0.137308 0.136426 0.133411

14 1. 140000 0.607290 0.430731 0.343205 0.291284 0.257157 0.233192 0.215570 0.202168 0.191714 0.183394 0.176669 0.171164 0.166609 0.16lS09 0.159615 0.156915 0.154621 0.152663 0.150986 0.149545 0.148303 0.147231 0.146303 0.145498 0.142803

15 1.150000 0.615116 0.437977 0.350265 0.298316 0.264237 0.240360 0.222850 0.209574 0.199252 0.191069 0.184481 0.179110 0.174688 0.171017 0.1f>7948 0.165367 0.163186 0.161336 0.159761 0.158417 0.157266 0.156278 0.155430 0.154699 0.152300

16 1.160000 0.622963 0.445258 0.357375 0.305409 0.271390 0.247613 0.230224 0.217082 0.206901 0.198861 0.192415 0.187184 0.182898 0.179358 0.176414 0.173952 0.171885 0.170142 0.168667 0.167416 0.166353 0.165447 0.164673 0.164013 0.161886

18 1.180000 0.638716 0.459924 0.371739 0.319778 0.285910 0.262362 0.245244 0.232395 0.222515 0.214776 0.208!>28 0.203686 0.199678 0.196403 0.193710 0.191485 0.189639 0.188103 0.186820 0.185746 0.184846 0.154090 0.183454 0.182919 0.181264

20 1.200000 0.654545 0.474725 0.386289 0.334380 0.300706 0.277424 0.260609 0.248079 0.238523 0.231104 O. 2~5265 0.220620 0.216893 0.213882 0.211436 0.209440 0.207805 0.20&462 0.205357 0.204444 0.203690 0.203065 0.202548 0.202119 0.200846

25 1.250000 0.69444" 0.512295 0.423442 0.371847 0.338819 0.316342 0.300399 0.288756 0.28007) 0.273493 0.268448 0.264543 0.261501 0.259117 0.257241 0.255759 0.254586 0.253656 0.252916 0.252327 0.251858 0.251485 0.251186 0.250948 0.250310

30 1.300000 0.734783 0.550627 0.461629

0.212~15

O. 190~1 0.180602 0.169801 0.161121 0.154027 0.148151 0.143228 0.139065 0.135517 O.1!2"1 0.129843 0.127563 0.125576 0.123838 0.122313 0.120971 0.119787 0.118740 0.115025

J

0.41058~

0.378394 0.356874 0.341915 0.331235 0.323463 0.317729 0.313454 0.310243 0.307818 0.305978 0.304577 0.303509 0.302692 0.3020H 0.301587 0.301219 0.300937 0.300720 0.300554 0.300426 0.300115

Part 11 - Making Engineering Econom;y Calculations -' 37

TABLE 8 SERIES COMPOUND AMOUNT FACTOR

DISCOUNT lATE P.C.

YEAR 1 2 3 4 5 6 7 8

, 10 11 12 13 14 15 16 17 18 19 20 2I 22 23 24 25 30

YEAR 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 30

I 1.000 2.010 3.030 4.060 5. 101 6. 152 7.214 8.286 9.369 10.462 11.567 12.683 13.809 14.947 16.097 17.2H 18.430 19.615 20.811 22.019 23.239 24.472 25.716 26.973 28.243 34.785

2 1.000 2.020 3.060 4. 122 5.204 6.308 7.434 8.513 9.755 10.950 12.169 13.412 14.680 15.974 17.293 18.639 20.012 21.412 22.841 24.297 25.783 27. 299 28.845 30.422 32.030 40.568

3 1.000 2.030 3.091 4.184 5.309 6.468 7.662 8.892 10.159 11.464 12.808 14.192 15.618 17.086 18.599 20.157 21. 762 23.414 25. 117 26.870 28.676 30.537 32.453 34.426 36.459 47.575

4 1.000 2.040 3. 122 4.246 5.416 6.633 7.898 9.214 10.583 12.006 13.486 15.026 11>.627 18.292 20.024 21.825 23.698 25.645 27.671 29.778 31.969 34.248 36.618 39.083 41.646 56. 08 5

5 1. 000 2.050 3. 153 4.310 5.526 6.802 1.142 9.549 11.027 12.578 14.207 15.917 17.713 19.599 21.579 23.657 25.840 %8.132 30.539 33.066 35.719 38.505 41.430 44.502 47.727 66.439

6 1. 000 2.060 3.J84 4.375 5.637 6.975 1.394 9.897 11.491 13.181 14.972 16.870 18.882 21.015 23.276 25.673 28.213 30.906 33.760 36.786 39.993 43.392 46.996 50.816 54.865 79.058

7 1.000 2.070 3.215 4.440 5. 751 7. 153 8.654 10.260 11.978 13.816 15.784 17.888 20.141 22.550 25.129 27.888 30.840 33.999 37.379 40.995 44.865 49.00b 53.436 58.177 63.249 94.461

8 1.000 2.080 3.246 4.506 5. 867 7.33!> 8. 923 10.637 12.4Jl8 14.487 1&.645 18.977 21.495 H.215 27.152 30.324 33.750 37.450 41.446 45.762 50.423 55.457 60.893 66.765 73.106 113.283

9 1.000 2.090 3.278 4.573 5.985 7.52 J 9.200 I 1.02 A 13. 021 15.193 17.560 20. 14 1 22. 953 H.019 !9. 30 I 33.003 36.974 41.301 46.018 51.160 56.765 62.873 69.532 76.790 84.701 136.308

10 I. 000 2. 100 3.310 4. b4 I 1>. 105 7. 7 1 b 9. 487 II.43b 13.579 15.937 18. 531 21.38. 210.523 27,975 31.772 35.950 40.545 45.599 5LI59 57.275 64.002 71.403 79.543 88.497 98.347 164.494

11 1.000 2. 110 3.342 4.710 6.228 7. 913 9.783 11.859 14. 164 16.722 19.561 22.713 26.212 30.095 34.405 39.190 44.501 50.396 56.939 64.203 72.21>5 Ill. 214 91.146 102.174 114.413 199.021

12 1.000 2. 120 3.374 4.779 6.353 8. 1 1 5 10.089 12.300 14.776 17.549 20.655 24. 133 28.029 32.393 37. HO 42.753 48.884 55.750 63.440 72.052 81.699 92.503 104.603 116.155 133.334 241.333

13 1.000 2. 130 3.407 4.850 6.480 8.323 10.405 12.757 15.416 18.420 21.814 25.b50 29.985 34.883 40.417 46.672 53.739 61.725 70.749 80.947 92.470 105.491 120.205 136.831 155.620 293.199

14 1.000 2.140 3.440 4.921 6.610 8.536 10.730 13.233 16.085 19.337 23.045 27.271 32.089 37.58 I 43.842 50.980 59.118 68.394 78.91>9 91.025 104.768 120.436 136.297 158.&59 181.871 356.787

15 1.000 2. 150 3.472 4.993 6.742 8.754 11. Ob 7 13.727 1 &. 786 20.304 24.349 29.002 34.352 40.505 47.580 55.717 65.075 75.836 8lI.212 102.444 118.810 137.&32 IB.27& 184.1 lIB 212.793 434.745

16 1.000 2. 160 3.506 5.066 6.877 8.9" 11.414 14.240 17.519 21.321 25.733 30.850 36. 786 43.672 51.660 60.925 71.673 84.141 98.603 115.3H0 1H.841 157.415 183.&01 213.978 249.214 530.312

18 1.000 2.180 3.572 5.21 5 7. 154 9.442 12. 142 15.327 19.086 23.521 2A. 755 H. 931 42.219 50.818 60.965 72.939 87.068 103.740 123.414 146. 628 174.021 206. 345 244.487 289.494 342.603 790.948

20 1.000 2.200 3.640 5.368 7. 442 9.930 12.916 16.499 20.799 25.959 32.150 39.581 48.497 59.19b 72.035 87. 442 105.931 1H. 117 154.740 181>.688 225.026 271.031 32&.237 392.484 471.961 1181.882

25 1.000 2.250 3.812 5. 766 8. 207 11.259 15.073 19.842 25.802 33.253 42. 56b 54.208 68.760 8b.949 109.687 138.109 173.636 218.045 273.556 342.945 429. b81

30 1.000 2.300 3.990 6.187 9.043 12.756 17,583 23.858 32.015 42.619 56.405 74.327 97,625 127,913 167.2Rb 218.472 285.014 37L518 483.973 630.165

538.10 I

10b7.2AO 1388.4b4 180b.003 2346.803 8729.985


673.626 843,033 1054.791 3227.174

820.215

Figure 11 shows the relationship between CR, SPW, Nand i. It can be seen that CR > i (except for N = ., when CR = i) and that eR < 1 and SPW > 1 (except for N = 1), and that SPW < N.

40

'2·5

36 3

32

3·5

~ 28 u

...,,~"

w a:

~

W l1.

."

~

f-

-: 4

a: 2lo 0

lU

\

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:c f-

...,,~"

looS a: 0

.~

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~ 20 W

5

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a: ..J

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6 ".~'"'

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7

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12

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16

u ~

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• 9

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10

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o

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8'

12

16

20

24

i

28

]

32

INTE1?EST OR DISCOUNT RATE PER CENT

Fig.ll

Capital Recovery Factor vs Interest Rate

The Use of Basic Interest Relationships Interest relationships make allowances for the time value of money; and the life of the investment and may be used' to convert an investment (e. g. cost of a ship) into an annual amount which, when added to the annual operating costs, may be used to determine the necessary level of income to give any required rate of return. Al ternati vely, where annual cash flows are known, the relationships can convert them into present worths, which may be


added together to give Net Present Worths (or Values) (NPV), for compari son wi th the amount of the investment. The future cash flows are discounted (the converse of 'compounded'), hence the common name of Discounted Cash Flow calculations (DCF). For an investment to be worthwhi le, the present worth of the cash flows of income minus expenditure should be greater than the investment, taking inflows as posi ti ve, and outflows as negative, i. e. NPV should be positive, as discussed in more detail on page 44. Cash flow implies money moving in and out of the company's bank account, i . e" not purely bookkeeping transactions. The examples that follow have been deliberately simplified to illustrate the basic interest relationships, but such an approach is still useful, both for general understanding, and as a tool at the preliminary stage of evaluating alternative investments, e.g. to eliminate the least promising candidates. It is useful to sketch the cash flow patterns as shown in Figure 12. Example (i)

A package of control equipment for an i tern of ship's machinery comes in two models: a heavy duty model costing £40,000 which will last the 16-year life of the ship and a standard model costing £26,000 which lasts 8 years. Which model offers the lower cost over the ship's life, if maintenance and operating costs are the same for both models? Assume 12 per cent opportunity cost of capi tal, i. e. the owner wants as good a rate of return as is avai lable to him in other investment opportuni ties. Cash flows shown in Figure 12 (i) must be converted for both options to present worths by use of the present worth factor. Option (1) Pay £40,000 now: Present Worth = £40,000 Option (2) Pay £26,000 now, plus £26,000 in 8 years Present Worth 26000 + (PW - 12% - 8) x 26000 26000 + (1 + o. 12 to x 26000 26000 + 0.404 x 26000 = £36,500

= =

Thus the standard model has the lesser effective cost over the ship's life. The cost of the replacement standard model would have to rise to over £34,660 before the heavy duty model has a lesser present worth, because: 26000 + 0.404 X X

~

~

40000 £34,660

Example (ii)

In order to encourage initial sales, the manufacturer of a novel type of deck crane offers a 'buy now, pay later' deal. The equipment would cost £120,000 if purchased now, but the manufacturer is willing to accept instead a lump sum of £130,000

, 40 - Engineering Economics and Ship Design

paid in three years' time. What rate of interest is implied? Does it look a good deal financially? See Fig .12 (ii) .

=

Present sum P 120000 Future sum F = 130000 Compound amount factor =

For N • 3 130000

120000 •

1 + i i

(1

=

+

3

i)

1. 027

= 2.7%

This is appreciably less than the rate of interest likely to be paid for borrowed money, so looks a good deal. E:mmple (Hi)

In a new diesel propelled bulk carrier, fitting of an exhaust-gas waste-heat generating plant to provide electrical power at sea is estimated to cost f300,OOO more than the equivalent system using only diesel alternators. The equipment reduces auxi li ary fuel consumption by 1.0 tonne per day at sea, with fuel assumed to cost f200 per tonne. If the ship operator expects the ship to spend 230 days at sea a year, and is looking for a rate of return over the 16-year life of the ship of at least 11% on the extra capi tal, does the equipment look a good investment? As a first approximation, it may be assumed that differences in maintenance costs, weight and space are negligible. See cash flow pattern in Figure 12 ( i i i ) . Daily saving in fuel cost = 1.0 x 200 = 200 Annual saving = 200 x 230 = f46,OOO Series present worth factor for 16 years at 11% (SPW - 11% - 16) 7.38 (calculate or from Table 7 for CR 1/SPW) Present value of savings 7.38 x 46,000 = f339,000 Present value of extra investment = f300, 000 Net present value +f39,OOO

=

=

=

=

The investment appears to be a good one, as the NPV is positive, indicating a rate of return greater than 11%. The actual rate of return can be found via the capital recovery factor: Annual saving (A) Initial investment (P)

eR

= AlP

= 46,000 = 300,000 = 46,000/300,000 = 0.1533

By solving for i in the equation for CR, or interpolating in Table 7 for a 16-year life, the actual rate of return is found to be about 13.2%.


.

It would also be wise to repeat the calculation with different assumptions, e.g. fuel price or daily saving of fuel, to see whether any likely change would greatly affect the profitability of the investment (lower fuel prices and/or fewer days at sea a year would reduce the rate of return). It would thus be worth going ahead with an engineering evaluation of the technical influence of such an installation on machinery space layout, weight, maintenance and reliability, to be followed by a final economic evaluation when detailed costs and performance are known. E:romple (iv)

A flag-of-convenience shipowner buys a 200,000 tonne d.w. bulk carrier for f30M cash (i.e. no loans or taxes). He is offered a 15-year timecharter by a steel company. What is the minimum hire per tonne deadweight per month that he would accept to obtain at least 10 per cent rate of return? Assume 11.5 months trading per annum. The income must be at such a level as to cover operating costs and capital charges, the latter repaying principal plus interest. Fig.12 (iv) shows the cash flow pattern.

=

Assumed annual running costs f2000000 Capital recovery factor for 15 years at 10 per cent: (eR - 10% - 15) •

Annual Annual Assume Annual

0.10 Cl + 0.10)15 (1 + 0.10)15 - 1 0.10 x 4.177 • 0.1315

3.17,

capital charge = CR x P = 0.1315 x 30000000 = 3945000 cash flow required = 2000000 + 3945000 = 5945000 a timecharter rate of T pounds per tonne d.w. per month income = 200000 x 11.5 x T

For minimum rate, T.

5945000 200000 x 11.5

• £2.58 or $3.36 at £1 • $1.30

E:romple (v)

Problem (iv) could be reversed: given the timecharter rate, say £2.50, what is:(a)

Rate of return for a given ship price, say f29M. Annual income = 200000 x 11.5 x 2.50 = £5750000 Annual expenditure = 2000000 Net annual cash flow, A = 3750000 = 3750000/29000000 Capital recovery factor = AjP = 0.1293


Rate of return, i, is solution of 1 (1 (1

+ 1 )15

By interpolation from Table 7, solution, i=9.7%. (b)

- 0.1293

+ 1)15 - 1

or Figure 11 or i terati ve

Maximum price payable for the ship to obtain the required rate return, say 10 per cent. From (a), net annual cash flow

= 3750000

The present worth of a series of uniform cash flows is given by SPW x A. Therefore an investment of this amount will provide a 10% rate of return. Series present worth factor = l/CR = 1/0.1315 = 7.605. Maximum price payable

= 7.605

x 3750000

= f.28,517,OOO. 110000

o

,..-------

40000

•

0

j

"H"1.5

110000

1 t .. ooo

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Ft"

(2)

f1U.12 I ii I

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200000

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410000

o r-W...l..l...L..J.J....l..l...l....J....'...l..l...L..l..._

••

o rl-++++++-H+1-+-H-+-Z 000 000 EA~" 'ttA"

)00000

FlU 12 Ii ii)

Fig.12

SO 1160 000

Ft G12

(i,)

Cash Flows in Examples


3.

ECONOMIC CRITERIA

Examples (iv) and (v) on pages 42-43 showed that there was more than one way of looking at a particular problem. These showed four factors, and having been given three, we had to calculate the fourth. The factors were:1. 2. 3. 4.

Rate of return Freight rate (timecharter rate in the example) Permissible price for ship Net present value (NPV)

The last was not stated explici tly, but in structuring the problem to find the minimum values, we were implying that the present worths of income and expenditure were equal so that their Net Present Worth or Value was zero. The numerical results were different in each case depending on what information was being processed, but if being used to compare alternative ship designs as in this case, all would have indicated the same optimal design if data were consistent, e.g. rates of return were commensurate wi th freight rates. The most important economic criteria for marine problems can be summari sed as:(i)

Net Present Value (NPV)

If we know the acquisition cost of a ship, the required rate of return on the capi tal invested (or di scount rate), all the operating costs each year, the cargo quantity transported each year and the corresponding freight rate (i.e. annual income), we can calculate the present worth of each i tern of income and expenditure and add them to find the Net Present Value. If cash flows are not uniform, the present worth of each annual cash flow can be calculated for each of the N years of the ship's life, often in tabular form as shown on page 50. The general form of calculating NPV for freight earning vessels is: N

NPV -

I

o

PW (annual c.argo quantity x freight rate)] - PW (annual operating costs) [ - PW (ship acquisition costs)

Typically the result will be expressed as pounds, dollars etc, at today's prices. If the cash flows are uniform over the ship's life, series present worth factors provide a useful short cut:NPV

=

SPW

(annual cargo quantity x freight rate - annual operating costs) - ship first cost.

One may regard NPV as an instantaneous capi tal gain if posi ti ve (or loss, if negative, thus reducing the net wealth of the company), or as a discounted profit, or the sum for which the total project could be sold at its start. Consequently designs wi th the highest NPVs are sought. In the U. S., NPV is sometimes called the "venture

44 - Engineering Economics and Ship Design (

worth". Where no income is generated, NPV is still measure, but will of course always be negative.

a useful

(ii) Required Freight Rate (RFR) The Required Freight Rate is the freight income needed per uni t of cargo to cover all operating costs and provide the required rate of return on the capi tal invested in the ship. I f we know the acquisition cost of a ship, the required rate of return, all the operating costs and the annual cargo quantity transported, we can find the level of freight rate which produces equal present worths of income and expendi ture, i. e. zero NPV. In general: N

RFR -

L o

[

~J (annual operating costs) + PW (ship acquisition cost)] annual cargo quantity

For uniform cash flows, a useful simplification is possible:RFR _ annual operating costs + eR (ship first cost) annual cargo quantity

The RFR can be regarded as a calculated freighting cost, which can then be compared wi th actual frei ghting price, i. e. market frei ght rates. It is thus likely to have units such as pounds per tonne, dollars per cubic metre etc. For service vessels, RFR may be calculated in the form of necessary daily hire rate, e.g. for offshore craft like crane barges. In general, the design wi th the lowest RFR is best. RFR can sometimes be referred to as a "shadow price". For non-uniform cash flows, an initial freight rate has to be assumed so that an initial NPV can be calculated as in (i) above. This NPV is unlikely to be zero, so an iterative procedure has to be used to find the exact freight rate which gives zero NPV. A rather similar cri terion is the Average Annual Cost (MC), which excludes the denominator Cargo Quantity. For uniform cash flows, it is simply: annual operating costs + CR (ship first cost). Minimum AAC can then be used as a criterion where no income is generated, e.g. some service vessels, or for items of alternative equipment which do not affect revenue earning potential. ( i i i)

Internal Rate of RetlU'n (lRR) or Yield

In cases where the freight rate or income is known, we can calculate the Internal Rate of Return, (also called Discounted Cash Flow Rate of Return, Yield, or Equivalent Interest Rate of Return, or Investor's Method), which is that discount rate which gi ves zero NPV. Designs offering the highest IRR are sought. NPV is calculated as in (i) for an assumed di scount rate, and an iterative procedure used to find the rate giving zero NPV. There are also various extensions to the basic method to cater for special situations.


Capital recovery factor is analogous to IRR, and can be used instead in uniform cash flow situations with equal lives. In the relationship for CR (see page 33), i is the IRR, but is only equal to CR when N = CD. (i v)

Permissible Price

Al though not usually quoted as a formal economic criterion, problems arise where permissible price can be used, e.g. Example (v)b. Given the information on operating costs and income (or freight rate and cargo tonnage), it may be required to calculate the maximum permissible price which can be paid for a ship (or piece of equipment) and still yield a specified rate of return, or specified NPV. Except for cases where the ship is purchased by a single payment, an i terati ve solution is required. Choice Of Economic Criterion

Net Present V~ue is widely used as a criterion especially where investment funds are limited, but it is best used in those cases in which income can be predicted reasonably confidently, e.g. long-term timecharters. It has the computational meri t of being a single calculation not requiring an iterative solution. A drawback to its use is interpretation of the results. One investment may have a NPV of f400, 000 and another f100, 000 but the former is not four times more valuable than the latter; it is simply f300,OOO higher. The differences are absolute, not relative, and this can make comparison of widely different alternatives difficult. This may be partially overcome by the Net Present Value Index (NPVI) introduced by Benford (Ref .1.5.2) which divides the NPV by the investment, producing a ratio which can be used to compare investments differing greatly in absolute size, e. g. coastal tankers versus very large crude oil carriers. Al ternati vely a Profi tabi li ty Index may be calculated: NPV of cash inflows/NPV of cash outflows. There still remains the problem of compari son when NPVs are c lose to zero or negative, and of forecasting income in a fluctuating business like shipping. NPVI used as a measure of merit is analogous to IRR, since it is effecti vely a 'profi t' divided by first cost. See page 52 for choice of discount rate in NPV calculations. Required Freight Rate is useful in the many cases where incomes are unknown. In an internationally competitive business like shipping, rates of return oscillate about a long-term trend, and over a ship's life it is not unreasonable to expect that freight rates will provide a return on an efficient ship tending to the average trend. If this did not occur, shipowners would not reinvest in new tonnage, demand would ul timately exceed supply and produce its own correction in the form of higher freight rates, unless there is too much non-commercially run tonnage available (e. g. state supported fleets). Freight rates do not remain permanently in peaks or troughs so it would be unwise to design ships with, say, speeds based on extreme levels. RFR is particularly useful when comparing alternative ship sizes, as a single freight rate cannot be expected to apply to all sizes - the market ensures that economies of scale are eventually passed on to


the consumer. RFR can be compared with predicted market rates to see if the results appear realistic. Low discount rates may lead to over-design, e. g. ships faster than is 'economic', since capi tal cost is being assessed more 'cheaply' than operating costs. High discount rates may result in required freight rates so high as to be unattainable under normal market conditions, so the design is likely to be uncompetitive in the sense of being able to find business. Average Annual Cost is analogous to RFR where the alternatives have equal transport capability, and can be also used for items of equipment which do not affect a ship's earning potential.

Internal Rate of Return gives a more recognisable comparison between Widely different alternatives, especially where funds available for investment are relatively unrestricted, e.g. how do tankers, pipelines, refineries or filling stations compare as oil company investments, and how do they compare with the return on alternatives like Government stocks or some other yardstick? It is a useful method for additional pieces of equipment, especially those not significantly affecting a ship's income, where it can be measured against some target rate of return for the degree of ri sk involved (see below) . Like NPV, there is the problem of forecasting income, but in addi tion, IRR is not related to the absolute amount of the investment. For example, is a 20% return on a f1M investment (f200,000) to be regarded as 'better' than a 15% return on a f2M investment (f300, OOO)? Are two investments of f1M feasible and of equal ri sk to one of f2M? IRR is, however, not the same as the profit on historic capital shown in a company's accounts, but is more like the rate of return on a fixed interest rate investment like a government stock. In general, the design with maximum CR will be that with the highest IRR, if lives are equal. In theory, there will be multiple solutions to the calculation of IRR where cash flows alternate in sign, but this is not often a problem in marine work. (See Ref. 1.15) .

Incremental rate of return is a variant which calculates the IRR on an addi tional investment, e. g. an extra piece of equipment on a ship, or the difference between two projects' cash flows to show whether the rate of return on this' incremental' investment is at least as high as that on the basic ship. In this case, only the cash flows and extra first cost associated with the 'increment' are used in calculating the rate of return, so simplifying the appraisal, as 6A/6P -+ CR' -+ i ' . Permissible price can be used when assessing newbui lding prospects or the purchase of second-hand ships, comparing this price against current ship prices and expected freight rates. It can also be used to assess new items of machinery or equipment, whose operational costs and savings can be estimated.


n.

Ne

h .. SU.'''IC.t(looJ1' D4'1'/II..

FoR

C. .... C.ULATtOW

Fig.13

C AL t.1.IL..AT E PI"""!~! I.L'[ ~lR.'T

CO!"

Decision Chart for Choice of Economic Criterion

Figure 13 shows the normal circumstances under which one of the criteria may be selected for ships, according to the amount of information known. The engineer's task is primarily that of selecting the best alternative, leaving to management the problem of whether to invest at all and if so, when. In the marine field, , where it is not always possible to predict income over the life of a ship, the author's preference is for Required Freight Rate as a basic cri terion for comparing al ternati ve ship designs. In the case of closely competing alternatives, a range of assumed freight rates may then be taken, so that NPVs and IRRs can be calculated to see whether the order of merit of the al ternati ve designs indicated by RFR is changed. This can be useful where there is a range of designs, whose characteristics are gradually altered, rather than in discrete steps, e.g. selecting ship speed, rather than alternative machinery types. Where equipment, rather than the entire ship, is being considered, income may take the form of cost savings,. and IRR (or incremental rate of return) is a useful cri terion - especially where ship performance is not significantly affected, e. g. speed, payload, or port time. The criterion of payback period is sti 11 sometimes used in industry. This is the number of years it takes the net revenue (income expenditure) to accumulate to the level where it equals ('pays back') the investment. While payback period is numerically equal to SPW for uniform cash flows, (PIA), the value of i should still be calculated for the appropriate N. A variant calculates the number of years before the discounted net revenue equals the investment. This is analogous to rate of return, but solving for N instead of i. Payback period should not be used for non-uniform cash flows, as all variation in income and expenditure for years beyond the payback period is completely ignored, taking little account of cost escalation or change in performance with time. Its use as a primary criterion is therefore not recommended, but it can be presented as a supplementary result or a simple shorthand for results derived more rigorously, especially if the result is attractively small!


Even if non-economic factors are the primary reason for purchasing a ship in the first place, e.g. national prestige, technical and economic criteria still have their place in assisting the selection of the best of the alternative ship designs, machinery and equipment. 4.

PRACTICAL CASH FLOWS

Although it is possible to make good use of the uniform cash flow relationships in preliminary calculations and obtain results of about the correct order of magni tude, cash flows in most practical cases of ship investment are not uniform. The most important of these irregular cash flows are:(i)

Loans for less than the life of the ship

(ii)

Differing relative rates of growth in main items of income and expendi ture (escalation)

(iii)

Tax allowances interest

(iv)

Subsidies.

for

(capital)

depreciation and

loan

Other variations occur but, although altering the absolute values in the economic calculations, are unlikely to change significantly the relative values ('ranking') between alternative designs, as they tend to affect all designs in a similar manner. The variations would have to be taken into account where the differences in the designs affect one particular factor, e. g. different scrap values between steel, aluminium and GRP hulls. (v)

Scrap value

(vi)

Irregular pattern of building instalments

(vii)

Special surveys or major overhauls appreciable cost and time out of service

involving

(viii) General decrease of speed wi th increasing age (ix)

Long term charters less than ship's life.

Al though corrections may be applied to the uniform cash flow cases to cater for some of the items quoted, the more general procedure is to make complete year by year calculations. A table is constructed to show for each year of life, the items of income and expendi ture generating a before-tax cash flow. After making allowances for tax, the after-tax cash flows are multiplied by each year's present worth factor, and totalled to give the discounted cash flow over the ship's life and a resulting NPV.


Example of Discounted Cash Flow Tabular Calculation

Consider a 40,OOO-tonne deadweight oil products carrier bought by a flag-of-convenience shipowner, for a total of i18,OOO,000 cash. It is operated on a five-year timecharter at i9. 00 per tonne deadweight per month after commissions, and then sold for i13, 000,000 cash. Assume that crew costs are i700, 000 in the first year, rising by 10% per annum and other operating costs are fixed at i600,OOO per annum. Calculate NPV at 10% discount rate to assess whether the investment is profi table. Assume 11.5 months trading per annum: Annual income

=

Present worth factor

=

Year

Ship

Cost 0

=

40000 x 9.00 x 11.5 i4140000 (1 + 0.10)-N

2 3 4 5 6

+13000

Total

-5000

PW 10%

DCF

+4140 +4140 +4140 +4140 +4140

-18000 +2840 +2770 +2693 +2608 +2515 +13000

1.000 0.909 0.826 0.751 0.683 0.621 0.565

-18000 +2582 +2288 +2022 +1781 +1562 +7345

+20700

+8426

Other Costs

Income

-700 -770 -847 -932 -1025

-600 -600 -600 -600 -600

-4274

-3000

-18000

1

Cash Flow

Crew Cost

(thousands of pounds)

-420

Net Present Value = -i420,OOO

N.B. Although in crude terms (i.e. no time value of money) the ship is 'profitable', having a positive cash flow of i8,426,OOO, the yield is less than 10% because the NPV is negative. This investment is thus less profitable than others which induced the shipowner to set a 10% rate of return as target. The actual rate of return is found by iterating the last two columns wi th 9% di scount rate: about 9.4%. Escalation

The previous example shows how increasing costs reduce the profitability of an investment .. During the years of industrial expansion of the post-war period, the price of every commodi ty and service increased significantly, although previously, rapid inflation was a feature mainly of wartime periods. Up until about 1970, there was an underlying rate of inflation of about 2-5 per cent per annum in most developed countries, i.e. to maintain the purchasing power of money in real terms, money prices had to rise by, say, 4 per cent. This was an average rate: some prices rose more, some less (e.g. crew wages rose by about 8 per cent p.a. in money terms for many years, which was about 4 per cent p. a. in real


terms) . Oil fuel prices, however, generally remained roughly static, i. e. falling at up to about 4 per cent p. a. in real terms. During the 1970s there was a rapid escalation in nearly every item concerned with ship operation, at around 15-25 per cent p.a., but with oil fuel going up tenfold in price. These high escalation rates have fallen back into low single figures in the 1980s in the world's stronger economies. Freight rates for a given ship and cargo have generally followed a broadly similar pattern, although the underlying trend has often been obscured by market fluctuations, increasing ship efficiency and the reductions arising from the economies of scale as larger ships have been introduced. Voyage charter rates do not include escalation clauses, nor do the maj ori ty of timecharter rates, which cover short and medium periods, i.e. they remain fixed for the duration of the charter. However, sometimes escalation clauses covering increases in certain operating costs are included in the few long-term charters. Liner conference freight rates have been adjusted regularly over the years as elements of running costs have increased, particularly bunker costs. In the majority of economic studies concerned with actual ships, it is suggested that money terms are used throughout (i.e. the actual cash amounts moving through the company's bank account, including escalation), as this is the form usually used by shipowners in evaluating projects, whose cash flows from charter income and loan repayments are expressed in money terms. Use of money terms also forces attention on differential escalation rates (if all costs and income rose at equal rates, it would be easy to work in real terms), on secondhand values (ships are often sold long before the end of their physical life), and on likely rates of return, both before and after tax. It also makes hindcasting easier, checking on the results of previous evaluations. General forecasts of inflation, plus analysis of past data, can be used to assist in estimating escalation rates, but if no such data are available, the following figures give some indications of the ranges found at different times for Bri tish ships. It is equally possible to work in real terms, i.e. in money of constant purchasing power, say 1986 dollars, but adjustments need to be made when some costs may be quoted in money terms, e. g. progress payments when bui lding ships, whi le others may be estimated in real terms, e. g. crew costs.

Average Escalation Rates, per cent per annum 1950 & 1960s Maintenance and repair costs. of one ship, allowing for deterioration with age Crew costs Other daily running costs including insurance Residual oil fuel price Port and canal charges Cargo handling costs per unit Cargo liner freight rates Voyage and short terms charters, applied as a succession of charters for a single vessel.

8-12 5-8 3-6 0-3 3-7 5-8 3-5 0-3

1970s 12-25 15-20 8-15 20-30 5-15 10-20 10-15 6-12


Different countries have experienced different rates, not only expressed in domestic currency, but also when converted via fluctuating exchange rates into other currencies such as dollars. Shipbuilding prices, and thus indirectly secondhand ship prices, have also experienced some long term escalation, say 3-6% p.a. 1950s &. 1960s and 5-10% 1970s, but are much influenced by exchange rates and world competition, and indeed have been falling in the 1980s. Discount Rates and Rates of Return

Fundamentally, the discount rate applicable to DCF calculations is the opportunity cost of capital, i. e. a rate of return at least as good as the next best available investment. It may also be compared with the average cost of the company's capital, shareholders' and borrowed funds, though this is not always easy to determine. The discount rate should also be higher than the interest rate on loans, as these are prior charges, and the investment should generate a higher rate of return to provide a margin. It should also be higher than the return of risk-free government stock. High risk investments require higher discount rates; they are also necessary in periods of rapid inflation, otherwise real rates may be negative. The real rate of return in percentage points is approximately equal to the money rate of return minus the rate of inflation - more accurately, see page 53. Shipping, in common with most other forms of transport, has for many years shown low~r rates of return than most other industries. Hence a realistic attainable discount rate applicable to ship calculations tends to be relatively low. Until the early 1970s, actual long-term charter rates implied rates of return in money terms of 6 to 9%, the exact values depending on ship first cost, market situation, tax, credit terms and resale value. The rate of return in real terms was thus only about 3 to 6%. The U. K. Government currently use about 5% in real terms before tax for new major capital investment, i.e. nearly 10% in money terms. Analysis of the profitability of industrial companies in the UK (excluding those involved in North Sea oil) shows the annual average between 1970 and 1984 to have fluctuated between about 3 and 8% in real terms (although of course individual companies experienced a much wider variation). International competition, subsidies, flags-of-convenience, national prestige, cheap loans, and underestimates of escalation of running costs, all tend to increase the supply of shipping and keep the rate of return below what it should ideally be, and lower than many shore-based industries offering equal or less risk. While it is the job of a company's management to specify the appropriate discount rate for any particular project (usually in the form of a target or hurdle rate), it is useful for the engineer to have some appreciation of possible rates. For general ship investment problems, rates in the region of 10 to 15% in money terms after tax are suggested at present, which might be reduced by two or three points if long term inflation can be kept down to the levels prevailing before 1970.


While these are not high in real terms, market conditions and competition do not usually allow significantly higher rates of return to be obtained for long. other operators will move into that sector of shipping and increase the supply and decrease the freight rate. If a shipowner requires higher rates of return, in general he will not find them in the shipping industry unless he is in a special situation. Since many economic evaluations are made in money terms, it is important to use a discount rate higher than the assumed rates of escalation of cost items, to represent a real rate of return. If uniform cash flow calculations are being made, the omission of cost and freight escalation implies that the calculation is being made in real terms. In such cases lower discount rates are appropriate, say 4 to 8% for entire ships. Higher rates are appropriate for equipment above the bare minimum, on the grounds that it is an 'optional extra'. Depending on the degree of risk associated with the equipment and its anticipated performance, a discount rate say 5 to 10 points higher in money terms might be used. Combined Discount and Escalation Rates - Example

For uniformly increasing cash flow examples, discount and escalation rates can be combined for use in Series Present Worth type calculations. In non-uniform cases, they need to be applied separately to the annual elements of the DCF calculation table. What is the present worth of an annual freight income starting at f100,OOO and ~ising at 3% per annum over 10 years, discounted at 10%? Present Worth Factor after one year

=

(1

=

1.10

=

(1

+

-1

i)

1

Multiplier for actual income after one year, escalation rate (e)

..

rate

(1

+

r)

(l

+

r)

J

(r)

is

1.03

given by the solution of the

1 + e

1.03

- T:"I'U'

• 11 + + ie

e)

-1.03 LlD

Present worth of first year's income Effective discount expression:

+

1 ..

+1

~·.5~"

1.068

r - 6.8%


Series Present Worth factor for 10 years is given by:

(SPW - 6.8% - 10)

(1.068)10 - 1

...

0.068 (1.068)10 1.93 - 1 x 1. 93

...

0.068 7.08

.. Present Worth

... 7.08 x 100000 .. £708.000

(Wi thout escalation it would have been £614,000) The actual cash income over the 10 years is given by the Series Compound Amount factor as follows:

= 11.46

(SeA - 3% - 10)

Thus, effective expression:

SPW =

SPW

x 100000 = £1.146.000

may

be

calculated

directly

from

the

1_(11 ++ e1-)N (1 - e)/(l + e)

Note that for low rates of interest and escalation, the effective rate is approximately (i-e)% because 1

1

+ 1

+e =

(1

+

1 - e)

Note also that this assumes that escalation starts from year zero, i.e. the first actual year's income includes the first year escalation. ,. may be considered as the real rate of return, i the money rate of return, and e the rate of inflation/escalation.


5.

SOME ECONOMIC COMPLEXITIES

Loans To stimulate their shipbuilding industries, most countries throughout the world offer loans for ship purchase, subsidised from central sources at below-market rates of interest. The loans reduce the effective cost of the ship, and encourage owners to place orders. Credit terms officially available are broadly similar in each major (O.E.C.D.) country, for ships typically 80 per cent of the contract price for 8.5 years at 7.5 per cent interest. For offshore mobile units, typically 85% loans are available but only for five years. Exceptionally favourable terms may sometimes be granted, e. g. for developing countries as 'overseas aid'. Loans for secondhand vessels are usually made on normal commercial terms. Interest payments are allowed to be deducted before tax liability is calculated on profits earned during the ship's life. Various initial and legal fees are charged in addition to loan repayments and interest, usually about 1 per cent of the total loan. Generally the credit is advanced to the owner as building instalments become due, so that interest becomes payable before the ship is delivered unless arrangements are made to defer it. Repayment is usually in equal amounts at six-monthly intervals after delivery, plus interest on the declining balance. A more detailed discussion of shipbuilding credit is given in Ref.1.15. Al though favourable credi t terms are an important marketing factor for shipbuilders (and have cont:ributed to the world over-supply of ships), they do not usually affect the order of merit between technical alternatives. Figure 14 shows that as the credit proportion approaches 100 per cent, the IRR on the shipowner's diminished equity capital approaches infinity, but NPV or RFR continue to give meaningful results. While this might suggest that shipowners should borrow near 100% of their capital needs, in fact this is risky, as in adverse market conditions, prior charges such as loan servicing would be excessive, which could force the owner into liquidation wi th insufficient cash flow. An appropriate balance of own capital (e.g. shareholders' or equity funds) and debt (loans or credi t) is necessary for financial stability.

o 100

Fig.14

PIiR c:.ENT.

100

CREDIT PItOPO~TION.

o

faUlTY PROPORTION.

Effect of Borrowed Capital on Return

Part II - Making Engineering Economy Calculations - 55

Subsidies and Investment Grants

From 1966 to 1970, British shipowners were able to claim investment grants on new ships. In order to stimulate capital investment, the Government would refund the shipowner 20 per cent of the ship's first cost. This system has now been abolished, but in certain other countries, including the U.S., subsidies are given for construction and/or operating costs. In economic calculations, subsidies can generally be treated by reducing the actual cost by the amount of the subsidy and amending tax allowances accordingly. Similarly, subsidies to shipbuilders are simply allowed for by using the contract price to the owner after the subsidy is given, e.g. after Intervention Fund payment. Unequal Lives

Where investments have unequal lives, it is necessary to make a correction to NPV calculated in the normal way, as otherwi se longer life investments would appear unduly favourable. The correction converts the NPVs into equivalent annual cash flows over equal lives, which may then be compared with one another (Ref .1.4.2 contains a useful discussion on the subj ect) . Example

Which is the better freight contract for the owner of an existing ship: one with an NPV of flM, with a duration of 8 years, or one with fl. lM over 10 years? Owner's opportunity cost of capi tal 10 per cent. Superficially, the 10-year contract looks better, but no allowance is being made for possible earnings in years 9 and 10 after the capital has been recovered from the 8-year contract. However, each NPV can also be regarded as having been produced by a series of equivalent uniform annual cash flows. These may be calculated by the use of the capital recovery factor. (CR - 10% - 8) (CR 10% - 10)

= 0.1874 = 0.1627

Equivalent annual cash flows: 8-year contract: 0.1874 x 1,000,000 10-year contract: 0.1627 x 1,100,000

= f187,400 = f179,OOO

The first contract has the higher equivalent annual cash flow, so is the better investment, even though it has the lower NPV. For technical alternatives with unequal lives, it is often easier to make lives equal, but give the longer life alternative the advantage of a higher di sposal or secondhand value at the same age as the shorter life vessel.


Taxation

The present tax structure applicable to British shipowners is basically as follows:Corporation Tax is levied at a particular rate on the "trading profi t" (or before-tax cash flow). Thi s taxable profi t is broadly: Income

Operating Expenses - Depreciation Allowances - Interest on Loans

(or Capital)

Tax is assessed after the company's annual accounts are made up and are thus paid 1 - 2 years in arrears of the corresponding cash flows. Annual income can therefore be divided as shown in Figure 15. RETURN aEFOItE TAX

RETU~N AF'TE2 TAX.

I TAX. I

OPERATING

LOAN

EXPENSE5

1Fig.15

INTEREST

TOT"'~

ANNuA~

OEPREc:.IATION ALLOWANC.E

IN~OME.

TAXAB~e P~OFIT

-I

Distribution of Annual Income

The return after tax, which includes the depreciation provision, is the shipowner's disposable income to use for repayment of loan principal, dividends, fleet replacement or any other permissible use. Dividends, however, are paid to shareholders without any further deduction to tax (as occurred under the old system); allowance is made in the shareholder's own tax liability for the amount already paid under Corporation Tax (tax credit). Unti I 1984, the tax rate was 52%, now reduced to 35% as from 1986. Depreciation (or capital) allowances

When using the basic interest relationships, e.g. CR, it is not necessary to add any further ,amounts for 'depreciation'. The use of CR recovers the capital invested over the life of the ship, plus the required rate of return. However, depreciation affects the amount of tax payable by a company. Regularly occurring expenses, such as operating costs, may be deducted in full before tax is levied, but purchase of an asset the life of which is greater than one year, e.g. a ship, is treated on a different basis by means of depreciation allowances, strictly called' capi tal allowances' .

Part 11 - Making Engineering Economy Calculations - 5'1

Depreciation is not an actual cost or expenditure of cash, but a book transaction used both for tax and for accounting purposes. For accounting purposes, depreciation must comply with the Companies Act and it is used to assess the 'profit' available for distribution to shareholders (and reserves) after applying a rate on fixed assets that maintains capital intact in money terms. See Figure 16. The calculation of depreciation for tax purposes is nearly always different, and as it affects the actual cash flows and final net income, it is the aspect considered here.

-.-

Pl""li::"-------,r--------------, CUMULATI't'E PR.O't'I!!lION FOR O£PRec.IATION To MAINTAIN C.APITAL INTACT.

HISTOR.IC.

C.API'TA~

INTA.C.T

C.oST

A.T

OR.

ENO

OF LIFE. 'HR.ITTEH

INITIAL

DOWN

VALUE

VALUE

s R.ESIDu .... 1.. Ott. S .... I..V .... GE ¥II.LuE.

o

Fig .16

y£ .... ~~

Straight-line Depreciation

Traditionally, depreciation (or capital) allowances have been calculated either as 'straight line' (annual allowance = ship cost/ship life) or 'declining (or reducing) balance' (annual allowance = percentage of residual value of ship each year), or other variants which, in effect, write off the initial cost over the expected life of the investment. In many cases, 'cost' maybe acqui si tion cost minus expected residual value, e. g. assumed scrap value. In the U.S. a method called 'sum-of-the-year-digits' is sometimes used. If the initial value or historic cost is P, and the residual or salvage or scrap value is S, and the life of the asset N years, then:-

(i)

Straight line: annual allowance =

p-s N

e.g. 20-year life, zero scrap value, allowance = 5% (ii)

Declining balance of, say 15% per annum (R First year allowance Second year allowance Third year allowance Nth year allowance

= = =

= = = =

15% of 100% 15% 15% of (100 - 15)% 12.75% 15% of (100 - 15 - 12.75)% 10.84% 100R (1_R)N-1

Accumulated depreciation to year N

= 100

(l-(l-R)N)

The declining balance rate, R is given by:


= 0.15)

R. 1 _

1

(;)N

Such methods can be used for accounting purposes, and some countries' tax authorities use variants of them. In 1984, the declining balance method was insti tuted for Bri tish shipowners for tax purposes. Following a transi tion period, the system adopted a declining balance rate of 25%. Thus first year allowance is 25%, second 18.25%, third 14.06%, fourth 10.55% etc. Thus it takes eight years to accumulate to 90%, a typical amount allowing 10% residual value. Until 1984 British shipowners were allowed to depreciate their ships for tax purposes at any rate they liked, wi th 100% first year allowances and 'free depreciation'. In practice, this meant writing the ship off as fast as profits permitted, i.e. extinguishing all liability for tax until the depreciation allowance had been exhausted. If there were profits from other ships in the fleet, or other acti vi ties of the business, it was possible to write off the entire cost of a new ship against tax liability on these other profits in the first year, e.g. on a f. 1,000,000 ship, f 520,000 tax could be saved. From then on, tax was paid on the full profit. This could be called the 'Full Depreciation' or 'Full Tax' position. The first year tax saving is now limited to 25%, but in association with a lower rate of Corporation Tax (35%), i. e. £87,500 on a £lM ship. Any unused allowance (e.g. because of insufficient profits) can be carried forward and used in subsequent years. A more general case for economic studies was to assume that depreciation could only be allowed against the profits of the particular ship or project being studied. This is equivalent to a newcomer to shipping, so can be called the 'New Entry' position. At typical freight rates, it then takes some 6 to 12 years before tax becomes payable, but with the time value of money, thi s is not worth so much as wri ting off in one year, but was better than wri ting off over say 20 years. In all cases, tax balancing charges are usually levied if the disposal value of a ship exceeds its wri tten-down value for tax purposes, i. e. tax allowances have been granted on the full cost of the ship, but the disposal income needs to be set against this, so is potentially taxable (see page 67) . The 100% allowance system encouraged the leasing of expensive ships whereby a financial institution like a bank actually owned the ship, and could claim the full tax allowance against its other profi ts in the fi rst year. The ship was then bareboat chartered to a ship operator at a slightly lower rate than would otherwise be possible. British shipowners have been campaigning for a return to the system of free depreciation. Nearly every mari time country gives special tax treatment to ships, usually including some form of accelerated depreciation.

EzampZes Involving Alternative Tax Regimes A large anchor-handling/tug/supply vessel costing f6M cash on delivery is to be built for charter. The owner anticipates a timecharter hire rate averagingfSOOO per day. Annual operating costs are expected to be l855,OOO. Annual on-hire days 340. Vessel life 15 years, zero residual value. Calculate NPV at 8% discount rate with corporation tax at 35% under six different tax regimes.


Figure 17 sketches the cash flow patterns.

o ~

N ..

...

'T"",.

ALLOW

-ANt.E

~

~....

RI ,,-,ttoJ Afl£t TA.X

1~

TAJA.L.£

£

DEPRHIA'TIO>l

~ .. ,P.

~

'\,.1,.0,...,,/ --'''''-'-

".,Co.''''

:'

MAU.Wi.D

MrAS

TA_A.Lt

Au.£au.oc To

"""lA.L.

VAUJ£

Fig.17

Comparison of Cash Flows Under Different Tax Regimes

Annual income

=

Annual expenses Annual cash flow (surplus before tax)

=

Case 1.

=

No Tax

=

PW of cash flows (SPW-8%-15) PW of ship cost = (PW-8%-0) NPV of investment

Case 2.

5000 x 340 f1,700,OOO f855,OOO f845,OOO

=

= 8.56 = 1.000 x =

x 845,000 6,000,000

=

=

+ f7,233,OOO

f6,OOO,OOO + f1,233,OOO

Straight Line Depreciation

Annual allowance for depreciation Taxable profit Tax at 35% Annual cash flow after tax PW of cash flow after tax PW of ship cost NPV of investment

= 6,000,000/15 = 845,000

= = =

- 400,000 0.35 x 445,000 845,000 - 156,000 8.56 x 689,000


= = = = = = =

f400,OOO f445,OOO f156,OOO f689,OOO + £5,900,000 £6,000,000 - £100,000

Case 3.

Declining Balance at 25% (Single Ship or New Entry)

A tabular presentation in thousands of pounds shows how the depreciation allowance is used to make taxable income zero, as long as cash flow before tax exceeds the 25% allowance for that year.

Year ~ash flow Written down ~efore tax value 0

.1

2 3 4 5 6 7 8 9

10 11

12 13 14 15

845 845 845 845 845 845 845 845 845 845 845 845 845 845 845

Depreciation Taxable all owance income

6000 5155 4310 3465 2620 1775 1067 800 600 450 338 254 190 142 107 0

*

845 845 845 845 845 708* 267 200 150 112 84 64 48 35 107 6000

Total 12675

0

0 0

0 0 0 137 578 645 695 733 761 781 797 810 738

0 0 48 202 226 243 257 266 273 279 284 258

845 845 845 845 845 797 643 619 602 588 579 572 566 561 587

6675

2336

10339

0

PW

35% Cash tax flow after tax

0

DCF

8%

I

0.926 0.857 0.794 0.735 0.681 0.630 0.584 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315

782 724 671 621 575 502 375 334 301 272 248 227 208 191 185 6216

* Maximum of 25% of previous year's value, or (for new entry) cash flow before tax. In year 6, accumulated 25% allowances limited to 4933 - 5 x 845 = 708

PW of cash flow after tax PW of ship cost NPV of investment

= = =

= 4933,

so allowance in year 6

+ £6,216,000 - £6, 000, 000 + £216,000


Case 4. Declining Balance at 25% (Other Profits Available)

Sufficient company profits are avai lable to use the full 25% allowance in early years.

Year Cash Written Deprecflow down iation allowance ~efore value tax 0

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

845 845 845 845 845 845 845 845 845 845 845 845 845 845 845

Total 12675

6000 4500 3375 2531 1898 1423 1067 800 600 450 338 254 190 142 107 0

1500 1125 844 633 475 356 267 200 150 112 84 64 48 35 107

cas~1 PW DCF flow 8% after tax

TaxablJ 35% Accumuincome tax lated allowances

1500 2625 3469 4102 4577 4933 5200 5400 5550 5662 5746 5810 5858 5893 6000

6000

-655* -280'" 1 212 370 489 578 645 695 733 761 781 797 810 738

-229* -98* 0 74 130 171 202 226 243 257 266 273 279 284 258

6675

~336

1074 943 845 771 715 674 643 619 602 588 579 572 566 561 587 10339

0.926 0.857 0.794 0.735 0.681 0.630 0.584 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315

995 808 671 567 487 425 376 334 301 272 248 227 208 191 185 6295

* Other profits available to make up the £845,000 surplus to the full depreciation allowance for years 1 and 2, giving tax savings shown.


= =

=


+£6,295,000 -£6,000,000 +£295,000

Case 5. Free Depreciation (Single Ship or New Entry) (UK pre-1984)

A tabular presentation shows how the depreciation allowance is used to make taxable income zero each year until the allowance has been exhausted.

Year Cash flow Depreciation Taxable before tax all owance income 1

2 3 4 5 6

7 8 9 10 11

12 13 14 15

Total

35% tax

Cash flow PW after tax 8%

0 0

0 0 0 0 0 0 0 760 845 845 845 845 845 845 845

0 0 0 0 0 0 0 266 296 296 296 296 296 296 296

845 845 845 845 845 845 845 579 549 549 549 549 549 549 549

6000

6675

2338

10337

845 845 845 845 845 845 845 845 845 845 845 845 845 845 845

845 845 845 845 845 845 845 85 0 0

12675

0 0

0


=

0.926 0.857 0.794 0.735 0.681 0.630 0.584 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315

DCF 782 724 671 621 575 533 493 313 274 254 236 218 202 187 173 6225

+ £6,255,000

= - £6, 000, 000 = + £255,000


Case 6. Free Depreciation (Full Depreciation in First Year) (UK pre-1984)

There are profits from other sources sufficient to write the ship off in the first year, i.e. over f6,OOO,OOO. Tax is then payable normally over the rest of the ship's life: Normal taxable profit Tax at 35% = 0.35 x 845,000 Annual cash flow after tax = 845,000 - 296,000 PW of cash flow after tax = 8.56 x 549,000 Free depreciation: 35% of f6,OOO,OOO PW of free depreciation at Year 1 x (PW - 8% - 1) 0.926 PW of cash flow to shipowner PW of ship cost NPV of investment

= = =

f845,OOO f296,OOO f549,OOO = + f4, 701, 000 = + f2, 100,000

= + f1, 945,000

= + f6, 646, 000 - - f6, 000,000 = + f646,OOO

The above examples indicate the general influence on after-tax profitability of alternative tax systems, together with the internal rate of return which can be found by iteration with discount rates of 10, 12% etc. NPV, f 1. 2. 3. 4. 5. 6.

Case Case Case Case Case Case

1. 6. 4. 5. 3. 2.

No tax Free depreciation (first year) Declining balance (other profits) Free depreciation (new entry) Declining balance (new entry) Straight line depreciation

+1,233,000 + 646,000 + 295,000 + 255,000 + 216,000 100,000

IRR% 11.2 10.3 8.9 8.8 8.7 7.7

The pre-1984 cases are included to show the principle of the calculation of free depreciation. In practice, the corporation tax rate was 52% at that time, which would have given NPVs of -f263,OOO and +f361,OOO in cases 5 and 6 respectively. Case 2 would have become -f747, 000. Tax payments are usually made a year or more in arrears. If this effect had been included, the NPVs above would have been slightly increased. Although most cash flows occur fairly regularly over the 365 days of the year, it is usually sufficiently accurate to simplify the calculation by assuming that they all occur at 23.59 on 31st December. Two possible exceptions may sometimes be made: (i) building instalments may often be very large and several may occur wi thin a 12-month period (ii) repayments of loans may be calculated at their usual six-month intervals. In a particularly detailed calculation, it would be worth incorporating the exact timing of these large cash flows, by putting N at its exact value. Note the small size of the present worth factors for cash flows a long time ahead, e.g. 0.315 for Year 15 in Cases 3, 4 and 5. Hence


the influence of any errors in forecasting future cash flows are reduced in the calculation. The case of straight line depreciation permits a short-cut calculation of the effect of taxation on annual cash flows. It is easily shown (e.g. Ref.l.5.2.) that the capital recovery factor after tax (CR' ) is given by: CRI = CR(l - t) + tIN

=

where CR CR before tax, A/P t = tax rate as a decimal fraction N = life of ship, years For example, Case 2 above provided a return of £845,000' before tax on an investment of £6M, or a CR before tax of 14.08%. The CR after tax is: 0.1408 (1 - 0.35) + 0.35/15

= 0.0915

+ 0.0233

= 0.1148

This is the same as the CR after tax calculated from

Case 2, line

4: 689,000/6,000,000

= 0.1148 = 11.48%

A CR of 11.48% over 15 years is equivalent to a true rate of return of about 7.1%, i. e. less than the 8% specified, hence its negative NPV (-100,000). In some companies, project evaluation incorporating tax considerations is assessed by a separate department only after a proj ect has been shown by operating departments to be sufficiently attractive in the first place. Thus although the engineer should be aware of the general influence of tax on profi tabi li ty, he need not be an expert in the calculations. 6.

A COMPLEX CASH FLOW EXAMPLE

The following example illustrates most of the complexi ties of real life cash flows involved in ship purchase and operation. The ship in the example is a 100,000 cubic metre liquefied gas carrier operating in a consortium with a 12-year timecharter. The ship price is $100,000,000 with a 80% loan for eight years at 8% interest. The shipowner wishes to calculate if the proposed charter will be profi table, in providing a rate of return after tax of at least 12% in money terms. He has to make his own assumptions as to escalation of operating costs, and expected secondhand value at the end of the charter. The tax situation illustrated is U.K. new entry wi th declining balance, but others could be substituted. Although i t is possible to combine all cash flows associated with building and operation into a single table, the important features are best illustrated by separating them. The following notes should be calculations in Tables 9 and 10:

read

in conjunction with

the


(a)

Building Account (see Table 9)

Column*

° is contract signing, end year 3 delivery.

1.

Year

2.

Bui lding instalments: 5% construction progresses.

3.

Owner pays his 20% in four instalments. Note that other patterns to Columns 2 and 3 could be negotiated in the contract.

4.

Remaining 80% advanced to pay instalments.

5.

Owner's technical staff, supervi sion, fees for arranging loan, extras, own supply items ($3M).

6.

Equal repayments of loan over eight years. six-monthly intervals.

7.

Cumulative sum of Column 4 minus Column 6.

8.

Loan interest at 8% on Column 7, payable at end of each time interval. Note some intervals are six months.

9.

Owner's cash outflow, i.e. owner's 20% + owner's expenses + loan repayments + loan interest. Column 3 + Column 5 + Column 6 + Column 8. $138.4M can be regarded as the total 'hire purchase' price.

on

contract

signing,

others

as

May be paid at

10. Present Worth Factor at 12% di scount rate. 11. Di scounted cash flow. (b)

Operating Account (see Table 10)

1.

Twelve year timecharter secondhand thereafter.

2.

Timecharter rate of $2M per 30-day month, after commissions. Assumed 340 days on-hire per annum (11.333 months), with one extra month off-hire in Year 8 for special survey and two extra months in Year 13. Estimated secondhand value after twelve years' service 30% of shipyard price ($30M). This is equivalent to 15% of newbuilding cost at that time if shipbuilding prices escalate at 6% per annum.

3.

Annual crew costs currently estimated at $1.2M, but increases are covered by an escalation clause.

*

from

Column numbers refer to Table 9


Years

4

to

15,

ship

sold

4.

Annual maintenance, repair and stores costs currently estimated at $l.lM, but assumed to escalate at 8% per annum from Year O. Regular annual provision made for special survey costs.

5.

Annual insurance, admini strati on etc. costs currently estimated at $1.4M but assumed to escalate at 5% per annum from Year O.

6.

Total annual operating costs, i. e. Column 3 + Column 4 + Column 5. (Under a timecharter, no fuel or voyage costs) .

7.

Cash flow before tax, i. e. Column 2 - Column 6.

8.

Interest from Column 8 of Building Account. Figure for Year 4 includes interest from Years 1 to 3, not yet set off against profi ts for single ship.

9.

Maximum capital (depreciation) allowance 25% per annum, based on $103M including owner's costs, declining balance. Tax si tuation equivalent to new entry, i. e. no other profi ts to set allowances off before the ship begins earning.

10. Cumulative depreciation total, i.e. written off value cannot be more than thi s for tax purposes. Cumulative sum of Column 9. 11. The actual depreciation allowance is adjusted to make taxable profit zero each year as long as the cumulative sum actually used in Column 12 is less than the allowance available in Column 10. Until Year 11, this is Column 7 Column 8. Thereafter, allowance is limited to 25% allowance in Column 9. 12. Cumulative sum of depreciation allowance used in Column 11. This does not reach the allowance available in Column 10 until Year 11. 13. Total tax allowance, i. e. Column 8 + Column 11. 14. Taxable profit = Column 7 - Column 13. The total surplus over the life of the vessel totals $82. 5M before tax. Year 16 includes a tax balancing charge. The depreci ation allowance has been based on $99.737M by Year 15, but $30M has now been recovered, with allowances of only $3. 263M as yet unused. Hence the excess allowance of $26. 737M is recovered by the taxman. 15. Tax at 35% of Column 14, assumed paid one year in arrears. 16. Cash flow after tax, i. e. Column 7 - Column 15. 17. Present worth factor at 12% discount rate. 18. Discounted cash flow.


~ Cl!) I

S'

TABLE 9

CS. ~ a>

BUILDING ACCOUNT

....;::t"'S

Thousands of Dollars

fQ

~

§

III

I 2)

~.

Year

Owner's Building Instalments 20%

(')

r.,

~

~

~

t:J

-. ~ a>

r.,

(I

11.5 1

1.5 2

:!.5 'l

SOIlO lUll011 IOOIlO 15000 20000 :lOUOO 20UOO

(J)

(4)

I S)

( 6)

(J)

CIf)

( I)

(}O)

I.oan Orawetown

Owner's F.xpenses lir Fees

I.oan Repayments

}.oan Outstanding

I.oan Interest M%

Owner's Cash Outflow

Present Worth Factor

DCF

1.OOO(J O.1J449 (J.8nl) O.M37 O. JlJ7'l U. 75JJ O.711H O.b)SS O.5b/4 O.50bb 0.4523 0.40)') 0.3b1l6 1I.3no O.2H7S

SSOO 472 5268 506 5341 lJ56

10000 10000 1()()OO 10000 10UUO 10000 1000U lUlIlJO

101100 151100 )IlOOO 4S000 bSUUII 80000 100()0 60000 5000U 411000 30UOO WOOO 10000 0

sono SOOO 50110

10(lOO SOOO 1SOOO 15000 :WOUII 1501111

~llO

SOO SOO 1000

4 ') {)

1 II 'J

HJ 11

"0 tal

lOUUIIO

200m)

IMIO HlIO

SSIIO SUO 5lJOO 6011 6700 1800 8600 164011 15600 141HlO 14UOO 1320() 12400 11 Mill IIHlOO

3541llJ

13840U

SilO

SOm)

8000(l

30110

8U(lOO

U 400

Mm

I :WO 1KOO 2ftOO MOO Sf, 00 41100 4000 ]:.!O() :.!400

(IU

6121

111422 HllSl 14lJM ft]JZ

5331 4411

:Ins

3105

7430'J

TABLE 10 OPERATING ACCOUNT

Thousands

0' Dollars

~....

::::

& ::s

(Q

~ '9. ::s

.,.... ~ ~

::s (Q

tl:I

(')

§

~

~ (')

.... ....~ ::s0Cl) I

0)

CO

(I)

Year

(2) Annull Incolle

(3) (4) Cnll Upkup Coetl Coatl

( 5)

(6)

(7)

(8)

Other COlt.

Annual O"eutinR Coat.

Cuh Flow Before

T A Interut

(9) X 2S1 Annual

M!IX.

CUIII.

Actual Annual

Actual CUIII.

Tax 4

5 6 7 8 9 1.0 II

12 13

14 15 16 17

22667 22667 22667 22661 20667 22661 22661 22661 22661 18661 22667 22667 30000

Total 296002

1200 1200 1200 1200 1200 1200 1200 1200 1200 1200 1200 1200

1496 1616 1145 1885 2036 2199 2375 2565 2110 2991 3231 3489

1702 1838 1985 2144 2315 2500 2700 . 2916 3150 3402 3674 3968

4398 4654 4930 522'1 5551 5899 6275 6681 1120 1593 8105 8657

18269 18013 17137 1H.:l8 151 I 5 16768 163!'2 15986 15541 llO73 14562 14010 30000

13000 5600 4800 4UOO

14400 28398

32294

15091

220910

35400

)lOO

2400 1600 800

-----

--

25150 19313 14484 10863 8141 6111 4583 3437 2578 1933 1450 1088

(l5)

( 16)

(17)

(\ 8)

Tu et 35X

Pre8'!nt Worth factor

[lCF

Tu:

ellSh Flow After

Allowanc..

Tax

12% 0.6355 0.5674 0.5066 0.4523 0.403'1 0.3606 0.3220 0.2875 0.2567 0.22Q2

1161f.l 10221 8'186

0.20 /,6

2325 1721 4155 -1362

(12) (l3) (10) (11) A L L 0 11 A N C t: S

25750 45063 59541 70410 78557 84668 89251 92688 95266 91199

98649 99737

S269

12 /,13

12'173 13438 11'115 14368 14792 1556 2578 1933 1450 1088 +3263 103000

5269 17682 30619 441151 55972 10340 85132 92688 9n1l6 97199 98649 99737 103000

Total

(14) TII XIIb le Profit

0

0

1450 1088 3263

0 0 0 1636 12%9 9140 13112 12922 26737

0 0 0 0 2673 4539 3199 4589 4523 9358

18269 180n 17737 17438 15115 16768 163"2 15'186 12874 6534 11363 9421 25477 -9358

138400

82516

28881

192029

18269 18013 17737 17438 15115 16768 163n 8356 2578

I'Jn

0 0 0

0 0 0

0.1827 0.1631 0.1456

78~7

61115 6047 5278 45% 3305 1I,Q~

72311

(c) Result Present Worth of Operating Account Present Worth of Building Account Net Present Value

=

= =

+ $72,371,000 $74,309,000 $ 1,938,000

As the NPV is negative, the investment yields less than 12% rate of return after tax. To find the actual rate of return, the last two columns in the Tables are re-calculated with one or two lower discount rates, and the results interpolated to find the rate giving zero NPV. The internal rate of return turns out to be 11.0%. The prospective owner then needs to decide whether this is adequate. If not, he must seek mo~e favourable conditions, for example: association with other activities to give earlier use of tax allowances a lower ship contract price more favourable loan terms a higher timecharter hire rate lower operating costs further escalation clauses earlier delivery selling when secondhand prices are high good timing of foreign exchange. In practice, such calculations are not often done by hand, but computer programs used to evaluate a variety of alternative assumptions and fiscal situations. The annual and cumulative cash flow patterns are shown in Figure 18, i. e. Column 16 of Operating Account minus Column 9 of Building Account. A positive annual cash flow occurs from the first year of operation, i.e. earnings are sufficient to repay loan principal and interest. However the cumulative cash flow shows that the owner needs up to about $30M of his own funds to carry the investment through its first few years. In practice, most owners have more than one ship, built at different times whose cash flow patterns overlap, thus reducing the year to year fluctuations, as well as influencing the overall tax situation.


I CA~\ol

FL.ClW

MIL.L.IClN OClL.L.A s:t.S. \

... .0

I

\

I

\

I I

\

I

H.O

I I

I

1+-40

I

/

/ / +30 1

1

/

I

I~ 1\

/ +2.0

J~

+10

AN~U"'L

r-

-0

-.10

...
0

......

C It to

Z

0

-30

. . . . . . ./'

4-

u

Fig.18

\ \

\

, / CASH

~

~L.O"'S

III

I'

/

\ ~ \0 \

"' .......

CUt-tUL.A11"E

,;'

..... .....

V

,

"

~~

/-- , \

//

,,"

./

"

\ 14

12

I

10 /

,.et

/

I

S

ill

/

V

I

CASH FLOWS

~ III

~

, ,, 2

//

/

I

"

IUt

It\

0 ~

-;

Q. III

OJ

7c 0

..J

III

0 ~

-'

<

0 II'l

~ 0/1

CL

I

)C )(

C

~

at ~

\n.AltS

\ ')l

-:r ~l-

'"

0(

I-

-.J

~

Cash Flows for Complex Example


7.

APPLICATION

It is more important to appreciate the general form of the calculation of Tables 9 and 10 than to become expert in the arithmetic. There are, of course, a number of computer programs available for DCF calculations, some more applicable to ship conditions than others and some more suitable for evaluating the complexities of alternative financing methods. The BMT computer program ECEVAL can be used where comparison of technical alternatives is the principal aim. This program was used to produce the curves in Figure 19 which illustrate the effect on NPV of alternative conditions applying to the same ship design. The basic ship is a large tanker wi th the following characteristics: 260,000 tonnes deadweight Steam turbine, 15.5 knots 23,000 mile round voyage £15,000,000 first cost 80% loan for 8 years at 7% interest Discount rate 10% Corporation tax rate 40% Depreciation of single ship as fast as its profit permit ( 'new entry') Ship life 16 years Freight income escalating at 3% per annum. 1.0,000 To .. ..,(

O''''O...,I£IGoW'T

,. ... .,K5 •.

~

•o ,1

:.

"3o

i

~

:" ~

.. L

z

.~ f----b"'-----~-.

• J f---+-'7""--+-

-~f------:;,..jL--+---+--+----+---+--+-----j

·1

f----f----+----+--+---+----+--t------i

.-+

t·, 'a'IGoWT

Fig .19

.... ,£)

P'O\olWQS

PElt

T."'Nt.

I nfJuence of Alternative Economic Conditions


2·'

J·o

Whi le some of the conditions no longer apply to present ships, the purpose is to show that alternative financial conditions have a marked effect on overall profitability. It can be seen that the NPV results vary linearly with freight rate, and are broadly parallel to one another. There is thus little change in ranking, apart from variants with no tax liability having a steeper slope as, when freights are high, the corresponding increased profits are not incurring any tax. The importance of obtaining loans at relatively low rates of interest is shown - well over flM in NPV terms on a flSM investment. Sufficient profi ts from other sources to permit full depreciation in the first year give considerable benefits - nearly f2M in NPV. The reason for the No Tax case not being the best at all freight rates is that such a first year depreciation case includes the savings of tax OL other activities of the company which have provided the other profi ts, permitting a full write-off in one year (a situation no longer avai lable in the OK). Low first cost is also very significant - a reduction of 20% (f3M) is worth nearly f2M in NPV. In general it can be accepted that, for any chosen design having the required capability, i. e. technical performance is identical, a higher rate of return will be achieved by: • purchasing at lowest first cost • borrowing on favourable terms • paying as little tax as possible, allowances

e. g.

by accelerated tax

• obtaining cover against escalation of costs • achieving a long life, assuming that greatly superior designs do not become available in the earlier years, i.e. physical deterioration rather than economic obsolescence is the main reason for di sposal. Figure 19 underlines the danger of over-simplifying economic evaluations for detailed studies of whether or not to invest; the difference between best and worst is over f4M, equivalent to a 30% difference in freight rate. The complexities, however, tend to be less important to the engineer who is considering technical alternatives, which all tend to be affected in a broadly similar way. The main exception is where ther~ are large differences in capital intensity, e.g. a very advanced small crew automated ship versus one wi th no automation, and large crew. All the calculation examples have been based on fixed input data but, of course, there will be uncertainty about some of the items, e.g. fuel prices, and risk about the operation of the ships, e.g. a future ship type may render the present design economically obsolete. It is possible to introduce such stochastic effects in the calculation as discussed in Ref.l. 7 .1, but it is usually found that the order of merit of the al ternatives is not affected thereby. Stochastic effects can be more readily included in the overall systems approach discussed in Part Ill, Sections 3 and 4.


For engineers, the author's recommendation for using economic evaluation techniques are: (i)

Use capital recovery factor and series present worth factor in association wi th uniform cash flows and single payment acquisition cost for preliminary screening of ship and equipment alternatives. This will quickly eliminate the 'non-starters' without requiring extensive data input and calculation. It will also give resul ts of the correct order of magni tude and thus form a useful 'first shot' in more detailed iterative calculations. It will often be adequate for modest items of equipment, whose investment level does not justify great detail. Such calculations are likely to be made in real terms.

(ii)

Make full DCF calculation for evaluation of promising designs from (i) appearing on the short list, especially where closely competi ti ve. The designs are likely to be enti re ships or maj or on-board systems such as main propulsion machinery. It will in general be necessary to allow for economic complexities such as loan terms and escalation, so the calculations are likely to be in money terms requiring a higher di scount rate than (i).

Similar techniques may also be used to evaluate investment in other marine capital equipment, e.g. shipbuilding plant or offshore facilities.


PART Ill. APPLICATION TO SH IP DESIGN ,•

THE GENERAL APPROACH

Earlier Parts have given a broad picture of the economic environment within which marine transport operates, and the mechanics of making economic calculations. Ship design links the two, i.e. the marine transport or service requirements must be developed into a series of feasible ship designs, which must then be evaluated for their technical and economic performance, covering the following: Trading pattern and operating environment ~ Range of feasible technical designs ~ Estimation of building and operating costs, and income Economic evaluation of alternatives.

~

Although a superficial glance might suggest that such a process is a matter only for ship operators, this is not so; the shipbuilder is also concerned, in two principal ways: knowledge. To design the optimal ship, extensive experience is required of the influence of different design features on first cost. The builder is much better able than the shipowner to quantify accurately the cost of alternative hull proportions, materials, machinery arrangements, etc.

Specialist

Commercial competition. Since ship operators are concerned to maximise the difference between present worths of income and costs, rather than minimising ship first cost, there has arisen a greater need for a shipbuilder to show not that his design is necessarily the cheapest, but that it is the most profi table. This approach has been used by the aircraft industry for some time, and is particularly applicable to standard ship designs.

Traditionally, ship design from the builder's viewpoint has meant the receipt of an enquiry from a shipowner, accompanied ei ther by a statement of requirements or an outline design. In the former case, a design is worked up, often using a basis ship; in the latter, the design is checked out. Time usually prevents anything but a single design being investigated. Then the cost is estimated and a price submitted to the shipowner. If the tender is successful, a contract is placed,' and the design worked up into a complete building design. There are thus two principal stages of design: (i)

Preliminary or tender design

(ii) Detai led or post-contract design Stage (ii) will not be considered here, because the principal design features will have already been settled and calculations are largely in the form of analytical procedures and detailing for production. The importance of stage (i) is often overlooked, but

Part 111 - Application To Ship Design - 75

it is at this creative stage that the application of engineering economics has its greatest pay-off, since there is then greater scope for selecting the most economic design variables, such as draft. The traditional approach survived during the many years in which developments in ship types were slow, e.g. 1910 to 1960 in Fig.4. It has proved inadequate for the highly competitive years since then, during which ship types have changed significantly, because:

•

Design was usually based on previous ships, yet there was no eXisting experience of the new ship types

•

Generally only one design for investigated

•

No economic evaluations were made either for the single design or any alternative

•

Traditional cost estimating methods did not reflect the changing ship types and production methods.

one

size

and

speed was

A modern approach aimed at improving designs of ships requires good collaboration between potential owners and builders. Shipbrokers can contribute to this dialogue, while it is often desirable for consultants to be used to investigate the range of possibi li ties (especially for the smaller ship operator) on account of their independent commercial status, and the avai labi li ty of sui table staff. A comprehensive process includes:(i)

Investigation of transport demand, corresponding market research and feedback of operational experience.

(ii)

Concept formulation: range of possible technical solutions, ship types, configurations, sizes and speeds.

(iii)

Preliminary technical design of a number of alternatives (often using specialised computer programs) including dimensions, machinery, etc.

(iv)

Estimates of first cost, operating costs and potential revenue earning abi li ty of each al ternative.

(v)

Economic evaluation of the alternatives, under a variety of assumptions.

(vi)

Selection of the optimal design, either by judgement, or mathematical programming techniques.

(vii) (viii)

Discussion of the proposed alternatives) with clients.

design

(and

any

sui table

Contract, detailed design and construction of the final selection.


Figure 20 shows some of shipbuilder's viewpoint. IM .. llllU

the

more

important

stages

from

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An Integrated Design Process

The practising ship designer should be interested in every aspect of these stages, but here we are concerned mainly with stages (iii), (iv) and (v). The relationships between these activities are shown in the design spiral, Figure 21. The important feature of the design spiral concept is that each successive cycle is made with an increasing degree of complexity, but a decreasing number of possible designs. The spiral starts with known information on cargoes and routes, generating a matrix of several hundred potential designs, with different numbers of ships, lengths, breadths, depths, drafts, speeds and hull form characteristics. Before the economic evaluation is made, each combination of principal particulars has its design features evaluated in terms of capacity, deadweight, trim and stability, and cost. After the first cycle, the matrix is reduced in size by the application of technical criteria, e.g. stowage factor too small or insufficient stabili ty, and of economic criteria, e. g. inadequate rate of return. The second cycle focusses on the optimal region and


enlarges it, examining a few tens of designs in greater depth, using the results of the first cycle as first approximations. The results of the second cycle may be sufficient for giving price indications to a shipowner for a range of possible designs. For a more detailed estimate, a third cycle may be made in still greater depth, but for only a single design or a very small number of designs. (Note that an inwardly converging spiral is sometimes used to illustrate the concept of iteration in design calculations, e.g. main dimensions adjusted until sum of masses equals buoyancy). TYPES OF ESTIMATE

ECONOMIC

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The Design Spiral

Such a system is ideal for computers, where each intersection of spoke and spiral can be a sub-program, increasing in complexity as each spoke is traversed outwards, e.g. steelmasses are initially estimated from principal dimensions and coefficients, and


subsequently from estimated scantlings. The early cycles should treat each function as continuous, as at thi s stage relative values are more important than absolute values. The later cycles will use the step functions that may apply in practice, e.g. diesel engines available with integer number of cylinders. The application of step functions too early may lead to the area to be enlarged proving non-optimal when more accurate design information has been generated. It should be noted that principal dimensions are the independent variables. Deadweight, although a convenient and simple measure of ship size, is a merging of three one-dimensional measures which does not reflect the relative importance of length, breadth and draft (or depth for volume-limited ships). There is an infinite number of ships which can be designed to have equal deadweight, but one of these will prove to be more economical than all the others, gi ven particular operating and financial circumstances. Route characteristics generally have a strong influence on the principal dimensions which, in conjunction wi th hull fullness, may determine displacement and, for a particular ship type, largely determine lightship also. Hence, deadweight tends to be a drop-out from the calculation and should not require to be attained exactly in a broad-based design system. What is required is the optimal ship wi thin a general band of deadweight and speed, allowing the individual dimensions to take up whatever values produce the most profi table ship within any given market constraints, such as availability of cargoes and port facilities. Such a design system is most easily applied to the straightforward ship types (such as bulk carriers) which usually dominate the number of enquiries; in practice, this frees valuable design effort for the more complex ship types, where a wider range of design features needs to be investigated, e.g. ship motions for offshore craft.

2.

COMPARISON OF ALTERNATIVE SHIP DESIGNS

Having briefly looked at the design process and where technical and economic factors come together, a more detailed discussion of the comparison of alternative ship designs follows, as this is the usual situation facing the designer. The alternatives need not be entire ships; they may of course involve individual features, such as a comparison of different cargo handling systems or different materials for piping systems. Such features are straightforward to analyse economically, when they do not affect earning oapacity, as in the latter case. The alternative first costs and maintenance costs are evaluated in terms of annual cash flows and converted to present worths to find the system with the highest NPV (in this case income is not involved, so the least negative value is looked for), or incremental rate of return, if cost savings are being related to extra first cost. In practice, most alternative designs differ not only in building and operating costs, but in performance, so that care must be taken

Part III - Application To Ship Design - 79

to include second-order effects. For example, better cargo handling gear many not only save on operating costs, but may save port time, offering the prospect of carrying more cargo per annum. Here, those alternative features which have a significant effect on the overall design are mainly considered. The secrets of success in comparing alternative designs are to obtain sufficiently realistic data and to use an appropriate method of economic analysis. These seemingly simple requirements are not sati sfied without some careful effort; there are many examples, published and otherwise, which violate these principles and therefore produce results which are likely to be misleading. The scope for error multiplies with the size and complexi ty of the alternatives; short-cuts and doubtful assumptions may be tolerated for low investments in small items of equipment, but are liable to produce serious errors when entire ships or maj or systems are being compared. Some of the most common pitfalls include: •

Emphasis on costs alone rather income minus costs, i. e. profit.

•

Failure to recognise that the engineer is usually more concerned to evaluate differences correctly than absolute values, e.g. ranking the alternatives, rather than deciding whether to make any investment at all.

•

Failure to distinguish between differences which separately influence earning capacity or payload, either from mass or from volume considerations.

•

Failure to establish a sufficiently realistic model of ship operation, e. g. by implicitly assuming that ships carry 100% payloads 100% of the time, or by not recognising that some ships operate at constant speed, while others operate at constant power or constant fuel consumption.

•

Failure to consider the whole service life of the design, in particular any fall-off in performance and increase of operating costs with time.

•

Failure to include second-order effects, e.g. reduced fuel consumption not only reduces costs but also fuel load which may enable more cargo to be carried.

•

Confusion over treatment of depreciation; it is not an item of expendi ture but a bookkeeping and tax calculation device.

•

Mixing cash flows in real and in money terms, e.g. using rates of return in money terms, but excluding cost escalation (which implies real terms).

•

Failure to take account of financial complexities in cases where these are significant (e.g. cheap loans, accelerated depreciation, subsidies, or taxation) although they do not usually alter the order of meri t of technical al ternatives.


than

the difference of

The above considerations mean that the most elegant technical analysis is useless unless the economic analysis is sufficiently realistic, and vice versa. Most of the practical difficulties boil down to obtaining realistic data to include in the analysis, rather than the mechanics of making the analysis. The fact that certain data may be missing or of doubtful value does not prevent an analysis being made - rather, special attention should be devoted, firstly to see whether the factor concerned is critical or not and, if it is, secondly to assess the sensitivity of the resul ts thereto. The area of uncertainty is then more explicitly appreciated, which simplifies the answer to questions of the type 'What level can we tolerate in this factor before this design loses its superiority over the alternatives?' A General Approach To The Evaluation Of Economic Performance of Freight Earning Vessels

In any marine transport system, the principal parameters to be considered are:• • •

Cargo type, quantity and unit value Distance and physical characteristics of route Operating system, e.g. unitised, bulk, dedicated vessels.

Secondary parameters include:• • • • • • • • • • • • • • • • • •

Number of vessels in fleet Vessel size Vessel speed, or transit time Cargo stowage and handling rates Fluctuation in cargo availability Availability of return or backhaul cargoes Terminal restrictions Port time - facilities, shifts etc. Inland transport Power requirements Vessel first cost, new or secondhand Shore investments Operating costs dependent on throughput Operating costs not dependent on throughput Fuel costs and availability Financial conditions: taxes, loans, subsidies etc. Life of system components Alternative services and competition.

In more specific terms, especially applicable to the movement in ships of bulk commodities available in large quantities, these parameters may be expressed as:• • • • • • • •

Cargo payload Load factor* (see footnote on next page) Round trip distance Speed Effective cargo handling rate Number of ports of call and duration Daily fuel consumption at sea and in port Service days per annum


• •

•

•

• • •

• • •

• •

• •

•

Ship cost Crew costs Maintenance, insurance and other daily running costs Bunkering pattern Fuel cost per tonne Port charges Cargo handling charges Freight rate Expected rate of return Tax rate Ship life Depreciation (capital) allowances Credit facilities Subsidies Anticipated escalation.

The essential first step is to establish the technical performance of the vessel (and any alternatives) from design calculations, and collect operational and economic data. (a)

Ship Data

Type of ship and general characteristics Deadweight, tonnes (usually to summer draft) Cargo cubic capacity, m3 (bale, grain, liquid etc. or other capacity as appropriate e.g. containers) Service speed, knots, loaded and ballast together give Service power, kW or HP sea fuel per Specific fuel consumption (sfc), grams } day per kWh or HPh Auxiliary and port fuel consumption per day Gross and Net Tonnage (GT, NT) (b)

Operational Data

Cargoes to be carried, average stowage factor Cargo load factor (% full when cargo on board) Steaming load factor (% miles loaded) Typical round trip steaming distance, naut,ical miles Number of ports of call per round trip Average duration of each port call, days Days off-hire per annum

*

product gives } overall load factor (LF)*

Load factor can be broadly defined as: Actual tonne-miles per annum Potential tonne-miles per annum It thus has two components: Average cargo payload on loaded voyages Maximum cargo payload Average miles steamed with cargo Total miles steamed


x

(c )

Economic Data

Type and duration of charter, where appropriate Average freight rate and any escalation clauses (if known), less commissions Ship first cost, for single ships (or multiple ships if fleet) Any necessary extra initial costs for the vessel in question, e. g. outfi t of containers Expected life of ship Expected disposal value** Required rate of return, money or real terms Loan terms** Tax conditions** Exchange rates, if income and expendi ture are not in same uni ts Crew costs, annual including benefi ts, victualling etc. Upkeep costs, annual including maintenance and repair, stores etc. Other costs, annual including insurance, administration etc. Fuel cost per tonne, main and auxiliary machinery Port costs, average per port per GTjNT, or total per round trip Cargo costs per uni t, including loading, discharging, claims etc. Annual escalation of each cost i tem** ( d)

Derivation of Annual Cash Flows· of Income and Expenditure

(i) Sea days per round trip (SD) = Miles/(24 x Service speed, knots) N. B. Speed should be a reali stic value allowing for average weather, fouling, ballast legs, canal passages etc. (ii) Port days per round trip (PD)

= Number

of ports of call x Average duration. N.B. Allow for waiting and berthing time, delays etc.

(iii) Number of round trips per annum (RTPA) = (365 - Offhire days) (SD + PD) (iv) Sea fuel per day (tonnes) = Service power x sfc x 24/10' + auxiliary fuel (if any). (v) Total fuel consumed per round trip (FPRT) = Sea fuel x SD + port fuel x PD N.B. Maximum fuel load carried (MFL) will depend on location of bunkering ports and prices, amount of reserve fuel, bunker capacity of ship, operator's policy etc. Typical reserve about 20% of total carried or 4-6 days steaming, whichever is the smaller. (Vi) Maximum Payload = Mass limited: Dwt - MFL - stores, water etc. or Volume limited: Cargo capacity/average stowage factor

**

In 'short-cut studies', these items wi 11 not normally be included, since uniform cash flows are likely to be assumed.


N.B. Check both to find the limiting condition, if it is not obvious. Consider if ballast is required in a load condition, e.g. Ro-Ro vessels. (vii) Cargo carried per annum (CCA)

= Max.

payload x RTPA

x LF x 2

N.B. The 2 derives from the ability to carry one cargo outwards and another homewards on a round trip, thus potentially earning two lots of freight income. (viii) Cargo costs per annum = CCA x Cost per unit N.B. Ensure consistency of cargo units, e.g. tonnes, m3 , container etc. 'Tons' for cargo liners may be 'freight tons' , partly volume, partly mass. (ix) Port costs per annum = Number of calls x RTPA x Cost per GT x GT (or NT for certain ports) (x) Fuel costs per annum

= FPRT

x RTPA x Cost per tonne.

N.B. Allow at some stage for consumption of more expensive fuel, e.g. diesel oil in port, either here or at (v). (xi) 'Daily' costs per annum = Crew + Upkeep + Other costs (xii) Voyage costs per annum = Cargo + Port + Fuel costs (xiii) Capital Charges (CC) = Uniform cash flows: CR x (First cost - PW x Disposal value) Non-uniform: Full DCF calculation year by year N.B. CR for other initial costs like containers may be different if their life is shorter.

Freight Revenue (xiv) Voyage charter or Common carrier: CCA x Freight rate per unit after commissions etc. (xv) Timecharter: Dwt x Months on Hire per Annum x Freight Rate; or Daily Rate x Days on Hire per Annum. N.B. If TIC, no cargo, port or fuel costs, and round trips and cargo carried per annum not important.

Calculation Of NPV, RFR, Etc. The author's phi losophy in most cases is to make an ini ti al short-cut economic analysis by hand, assuming uniform cash flows so that CR and SPW may be used. This has the following advantages: • •

A feel for the range of likely answers is quickly obtained; Much less initial effort and data collection is required.


In many cases, it may not be necessary to take the economic analyses any further, as the simplified calculations will quickly screen the alternatives into 'obviously-on', 'obviously-off', or 'requires further investigation' categories. In the latter case, full DCF calculations, probably now in money terms, usually carried out by computer, should be undertakenj in which case the analyst already has a reasonable idea of the magnitude of the likely answers - a useful check on the computer, or more correctly its input and output. In the case of modest investments, e. g. small items of equipment, i t may well not be necessary to go any further than the CR-type approach - indeed the data may not be readily available to do any more, e. g. insufficient records to estimate escalation of maintenance costs or deterioration of performance with time. In these less complex cases, it is rare for the CR-type approach not to rank the al ternati ves in their correct order of merit - the engineer's job. Of course, a manager deciding whether or not to make the investment will consider the financial complexi ties, such as loans and taxes - but while the engineer will be aware of their influence, his is not the final decision. In practical calculations of al ternative ship designs, many of the above parameters may remain constant for all alternatives, e.g. cargo handling cost. Others may require extensive preliminary technical calculations, e.g. cargo payload requires the accurate estimation of deadweight and power from principal dimensions. Estimating both first and operating costs must also reflect the differences between the al ternati ve designs. The example which follows has been deliberately simplified, partly because the assumed constraints determine the ship size and engine power, but it does show that differences in performance between the two designs have been allowed for throughout.

Example Approximately 1.25M tonnes of mineral ore per annum require to be transported between mine and smelter 2,000 miles apart. Compare the economic performance of a self-unloading bulk carrier of about 60,000 tonnes d.w. with a conventional ship using existing shore discharging plant. Port limitations restrict the ship to 225m overall length and 13m draft. Available machinery fixes ship speed at about 15 knots. Flag-of-convenience shipowner requires 10 per cent rate of return over 16-year life of ship.

Both Alternatives: Breadth restricted to 32.2m for possible Panama Canal . transits. Adequate cubic capacity exi sts for the cargo stowage factor. Dimensions 210m b. p. x 32. 3m x 17. 7m depth x 13. 1m draft. Same hull form. Fuel consumption 50 tonnes heavy fuel + 2 tonnes diesel oil per day. Time at loading port 1.5 days. Two 8-hour shifts per day worked at discharging port, plus one day manoeuvring and miscellaneous time per call. Basic ship price f18M.


Shore Discharging Gear:

1,000 tonnes per hour, at cost of 90p per tonne. Self Unloading Gear:

2,000 tonnes per hour. Weight of gear plus structure 2,300 tonnes Additional cost f9.08M. Additional maintenance i90,OOO, engineers i50,OOO p.a. Additional diesel oil consumption during discharge 0.5 tonnes per working hour. Addi tional three days out of service per annum. CONVENTIONAL Displacement, tonnes Lightship, tonnes Summer deadweight, tonnes

SELF-UNLOADING

73,500 13,250 60,250

73,500 15,550 57,950

11.11 59.1 4.70 1.50 17.31 555 35 722

11.11 28.4 2.77 1. 50 15.38 555 45 720

400 1,122 59,128 350 20.22 1,195,500

400 1,120 56,830 347 22.56 1,282,200

Voyage Details

Round trip steaming days Hours to discharge Discharging days Loading days Days per round trip Heavy fuel per round trip, tonnes Diesel oil per round trip, tonnes Fuel load carried for round trip (includes 20 per cent reserve) Other deadweight items Total non-cargo deadweight Maximum payload, tonnes Days in service per annum Round trips per annum Cargo carried per annum, tonnes Operating Costs per Annwn

Crew f Other 'daily' running costs i Maintenance of self-unloading gear Heavy fuel costs (f120/tonne) Diesel oil cost (f180/tonne) Port charges (f20,OOO/RT) Cargo handling charges Total Operating Costs Ship first cost, f Capital recovery factor (CR-10%-16) Capital charges Total Annual Cost f Cost per Tonne Cargo, f


600,000 800,000 1,347,000 127,000 404,000 1,076,000 4,354,000

650,000 800,000 90,000 1,502,000 183,000 451,000 3,676,000

18,000,000

27,080,000

0.1278 2,300,000 6,654,000

0.1278 3,461,000 7,137,000

5.566

5.566

Thus the cost per tonne is identical. If the cargo quantity per annum had been fixed, the result would have been a reduced load factor for the self-unloader, giving a higher unit cost. If shore discharging costs had been below/above 90P, the conventional ship would have been better/worse. If an actual freight rate were fixed at above £5.566, the self-unloader would have been more profitable, because of its greater annual tonnage; if below, the conventional ship. The simplified calculation above shows the two systems evenly matched. It would thus be desirable to make a more rigorous calculation along the lines of Tables 9 and 10 to include year by year tabulations of:Escalation of items of expenditure Credit arrangements Accelerated depreciation allowances Different building times and instalments Residual value Sensitivity of results to changes in principal assumptions, e.g. fuel prices. A third possibility may also be investigated: new di scharging gear with a rate of over 1, 000 tonnes per hour.

shore

Comparison of Alternative Machinery Systems

The compari son of al ternati ve machinery systems is a frequent application of engineering economics, but not all published examples take into account properly both the technical and economic factors. Typical sources of error include:(i)

Incorrect translation of volume and mass differences into usable payloads for varying operational profiles.

(ii)

Use of test-bed or manufacturer's provi sional data instead of service figures for fuel or lubricating oil consumption.

(iii)

Over-optimism about maintenance and repair costs and time out of service.

(iv)

Use of service power ratings or grades of fuel typical of actual experience.

not

Where they are significant for the al ternatives being studied: (v)

Calculations based on one current year's opeation, ignoring changes in performance and operating costs with time.

(vi) Omission of periods of operation at partial load or wi th high auxiliary loads. (vii) Fai lure to examine results for different assumptions, e. g. higher fuel prices.

operating


Typical prime movers considered in such compari sons include:Geared steam turbine: oil or coal fired Direct drive slow speed diesel Geared medium speed diesel Gas turbine - industrial type or aircraft type Nuclear reactor plus steam turbine. Alternative transmissions may also be considered, e.g. direct, geared, electric, with or without controllable pitch propellers. Single or multiple propellers may be included. Each alternative may have different:Specific fuel consumption Type and cost of fuel Mass and volume of machinery Mass and volume of bunkers First cost as installed Running costs: fuel, maintenance etc. Propeller r.p.m. and ship speed which are of particular interest to the naval architect. Other factors include:-

of particular

interest

to

the

marine

engineer

Auxiliary power requirements and alternative means of providing same, e. g. shaft driven alternators Degree of automation Manning requirements Noise and vibration Lubricating oil requirements Bunkering arrangements Time out of service for breakdown and repairs (off-hire) Number of models or frame sizes available Availabili ty of construction and repair faci li ties Slow steaming capabili tyjpart load specific fuel consumption. The following example shows how a basic comparison between slow speed and geared medium speed diesel may be carried out for a single screw lS-knot 28, aaa-tonne deadweight bulk carrier. The slow speed (direct drive) ship is conventional, with diesel alternators prov.iding the electrical power at sea, while the medium speed ship has a gearbox-driven alternator and a controllable pitch propeller. See Figure 22. It should be emphasised that, while the figures used are typical, any conclusion indicated should not necessarily be regarded as a general one, as the data applicable in any particular case may well differ. Especially in borderline cases, unquantifiable factors like the availability of experienced engineers may affect final decisions.


SLOW SPEED

ME DrUM

Fig.22

DIESEL

SPEED DIESEL

Alternative Machinery for Bulk Carrier

As with all technical and economic evaluations, the establishment of realistic (rather than precise) data applying to the ship in service is the foundation ofa proper evaluation. In some cases, especially where data is uncertain, e.g. price of fuel in the future, it is wise to investigate a range of values to determine the sensi ti vi ty of the results to any future change. Note the typical number of significant figures usedi not too much spurious accuracy, but enough to reflect the differences between the designs.


Comparison of Slow Speed and Medium Speed Diesel Bulk Carrier

(Numbers in brackets refer to notes at end of calculation)

Technical Data

Main machinery

One 6-cylinder slow speed direct drive diesel

One 12-cylinder medium speed diesel geared to single screw

Maximum continuous rating (MCR). kW(HP) Propeller r.p.m. Continuous service rating (CSR). kW (1) Power deductions. KW (2) Power delivered to propeller. KW(HP) Corresponding speed: loaded. Knots ba 11 ast (3) Total weight of machinery. tonnes Summer deadweight. tonnes (4) Main engine fuel viscosity, cSt at 50°C (Redwood seconds at 100°F) Specific fuel consumption, g/kWh (g/HPh) (5) (6) Main engine fuel at sea, tonnes/day Auxiliary fuel at sea. tonnes/day (7) Port fuel. diesel oil. tonnes/day Lub. oil, system, g/kWh (g/HPh) (6) Lub. oil. cylinder, g/kWh (g/HPh) (6) Lub. oil. system. kg/day Lub. oil. cylinder, kg/day

7360 (10.000) 125 87.5% = 6440 130 6310 (8580) 15.0 15.9 650 28.000 380 (3500)

7720 (10.500) 125 85% = 6560 660 5900 (8020) 14.6 15.7 500 28,200 180 (1500)

182 (134) 28.1 2.0 3.0 0.27 (0.20) 0.68 (0.50) 42 105

197 (145) 31.0

°31.22 .0 (0.9)

3,400.000 12.000,000

3.000,000 11.600,000

120.000

150,000

1,000,000 120 190 3752 570 0.80 0.90

1.030.000 122 190 3782 570 0.85

192

Economic Data (costs in pounds)

Cost of machinery installation (8) Total cost of ship Annual cost of machinery maintenance and repair (6) Annual running cost excluding fuel. lub. oil and port costs Cost of heavy fuel per tonne (9) Cost of diesel fuel per tonne Cost of fuel at sea per day Cost of fuel in port per day Cost of system lub. oil per kg. Cosy of cylinder lub. oil per kg. Cost of main engine lub. oil per day at sea (10) Port costs per round trip


128 30.000

163 30.000

Operational Data

Slow Speed

Miles per round trip Proportion of miles in ballast, % Average loaded cargo/maximum, % Load factor % Average speed, knots Steaming days per R.T. Port days per R.T. Total days per R.T. Days on-hire per annum Round trips per annum Critical draft point Bunkering pattern Reserve fuel. days Number of steaming days to next bun ker port Main engine fu~l carried. tonnes Diesel fuel carried, tonnes Total bunker load, tonnes Other deadweight items. tonnes Summer deadweight, tonnes Cargo deadweight. tonnes Cargo cubic capacity, grain, cubic metres Total cost of sea fuel per R.T., f Total cost of port fuel per R.T., f Total cost of 1ub. oil per R.T., f

( 11) ( 11) (11) ( 11) (l2)

(11) (l3)

(14 ) (14)

Medium Speed

11,000 11.000 35 35 90 90 58.5 58.5 15.32 14.98 29.9 30.6 14.0 14.0 43.9 44.6 352 350 8.02 7.85 Unrestricted Unrestricted Loading port for round trip 6

6

(l6)

35.9 1010 200 1210 350 28000 26440

36.6 1130 150 1280 350 28200 26570

(16) (l7) (l7) (17)

35000 112200 8000 3800

35000 115700 8000 5000

(l8)

248100 1000000 31000 964000 ~ 241000 ~ 2236000 0.1175 1410000 3646000 14.70 7.65

244000 1030000 39000 971000 236000 2276000 0.1175 1363000 3639000 14.91 7.61

I

(15)

Annual Results (Mass Limited)

Cargo carried per annum, tonnes Annual running costs, f Annual 1ub. oil costs, f Annual fuel costs, f Annual port costs, f Total operating costs, f Capital recovery factor, (CR-10%-20) Annual capital charges, f Total annual costs, f Cost per tonne cargo. f Equivalent timecharter rate f

(l9) (l9) (19)

(20) (21) (22)

(Volume Limited) (23)

328400 11.10

321500 11.32

Freight rate. f per tonne Annual income. f Annual surplus before capital charges, f· Surplus/investment (eR) (24) Rate of return before tax. % (25) N.P.V .• f

15.00 3720000 1484000 0.1237 10.8 + 630000

15.00 3660000 1384000 0.1193 10.2 + 179000

Cargo carried per annum. m' Cost per cubic metre. f Alternatively for Known Freight Rate


Notes on Comparison

of Slow Speed and Mediwn Speed Diesel

1.

Typical service ratings from actual experience.

2.

Slow speed diesel: transmission losses only (2%). Medium speed: gearing and transmission losses (4%) plus 400 kW al ternator power take-off at sea.

3.

Average service speed after allowance for weather, fouling and age. Same propeller diameter and propeller r.p.m., although if a larger diameter propeller could be fitted, the geared medium speed diesel could be better matched in r.p.m. Controllable pi tch propeller in medium speed diesel ship gives higher ballast speed relative to loaded.

4.

Both ships have same main dimensions and di splacement. Assumed difference in lightship is due to machinery and 50 tonnes extra steel, resulting in increase in medium speed diesel deadweight.

5.

Adjusted from manufacturer's figures based on diesel oil for the actual heavy oil used in service (typically about 8% increase) .

6.

Typical of service conditions, including differences between designs.

7.

Diesel fuel for alternators for slow speed diesel ship, gearbox driven in medium speed ship.

8.

Higher MCR of medium speed ship and c.p. propeller slightly reduces the usual cost differential in pounds per kW for engine plus gearbox.

9.

Price differential between grades of fuel is about 2-3%.

10. Assumed in-port and generator lub. oi 1 consumption not greatly different between the designs and comparatively small. 11. Typical of bulk carrier trading. Load factor (100 - Ballast percentage) x Cargo percentage/lOO.

=

12. Weighted average of loaded and ballast speeds. 13. Medium speed two days more off-hire reflecting greater number of cylinders and slightly more breakdowns in service. 14. If a draft restriction is encountered, whether at load or di scharge port or en route, the maximum payload should be calculated by reference to the deadweight at this draft, less fuel and non-cargo items, relative to the last bunkering port. 15. Number of days bunkers carried x tonnes per day at sea .. Assumed port fuel comes out of reserve.


16. Maximum deadweight - fuel - other items. A bulk carrier carries a wide range of cargoes like grain, coal, ore etc whose stowage factors are such that the ship is usually limi ted by deadweight rather than cubic capaci ty. Twin medium speed diesels may give a slightly shorter engine room, gi ving slightly more cargo capacity, but in thi s case there is li ttle difference in machinery length wi th single engine. If there were a difference in cargo capaci ty, the corresponding payload in trades wi th low densi ty cargoes could be calculated, and a weighted average taken. 17. From earlier lines for daily costs x number of sea or port days for round trip. 18. Cargo deadweight x number o~ round trips x load factor x 2 for cargoes potentially both ways. 19. From earlier lines for round trip costs x number of round trips per annum. 20. Capital recovery factor for 10% rate of return before tax and 20 year life. Rate of return is implicitly in real terms, since uniform cash flows are assumed. 21. Total annual costs divided by annual cargo. Thi s is rather higher than recent freight rates, as not only do low freight markets last longer than high, but most existing ships will have been built at lower prices and therefore able to accept lower freight rates, if their technical performance is not greatly inferior. The potential value of secondhand price at early di sposal is not taken account of, but could be important if there was a degree of novelty about one of the machinery alternatives. 22. Total annual costs excluding fuel and port charges divided by (summer deadweight/1.016 for long tons x months on hire (12 x on-hire days/365». 23. Appropriate for volume-limited trades such as light grain or packaged timber, although in this case, the order of merit is not changed. 24. Solution for i in formula for CR. 25. Annual surplus x SPW - First cost. Thus in both mass-limited and volume-limited trades, the slow speed diesel offers a freighting cost about 2% less, largely due to its lower specific fuel consumption. On some voyages, the ships may not be fully loaded to capacity, and therefore payloads equal, in which case the advantage increases slightly. On timecharter, where freight is paid per ton deadweight per month, the slow speed ship requires a slightly higher rate to compensate for its higher first cost. A change in the assumed oil fuel price would not affect the results significantly, as both designs have much the same specific fuel consumption. If however the designs had much


different sfc' s, a lower fuel price would have benefi tted the design with the higher sfc, e.g. steam or gas turbine, and vice versa. Since the designs are so close in economic performance, it would be desirable to make a full discounted cash flow calculation, over the full lives of the ships, especially if there was a definite proposal to build. This would take into account the various practical financial factors such as loans, taxation and escalation, as well as any anticipated differences in long term performance, e.g. loss of speed and increase in maintenance and repair costs and time with increasing age. Furthermore, actual shipyard quotations may show a different variation in first cost than that assumed, depending on market conditions at the time. Different assumptions on for example, fuel price differential, 380 vs 180 cSt, or round trip distance or draft limitations may have a small influence. If propeller diameters and r.p.m. are not equal, there may be a benefit to the lower r.p.m. ship. There may also be other less tangible factors to take into account such as experience of the company's engineering staff and compatibi li ty wi th exi sting ships in the fleet. The results of the economic evaluation are useful in reducing the area of uncertainty where judgement has to be applied in making the final decision, rather than in automatically determining that decision.

Sensitivity, Uncertainty and Trade-oHs The previous examples indicate that the results may be sensitive to changes in the data, because there may be uncertainty about many of the technical and economic parameters. For example, it is not possible to predict exactly over the life of a ship fuel prices, maintenance costs, port time etc. The simplest way of investigating such uncertainties is to repeat the calculation wi th different values of key parameters, and assess how sensitive the resul ts are to such changes. Figure 23 shows a typical presentation of such calculations (which might be for alternative fuel saving designs), with the economic measure of merit plotted against the key parameters (see page 117 for the most important parameters). Where the curves for alternative designs do not cross, the ranking is not changed, but where there is a crossover, the decision to be made is whether the operating situation is likely to' be to the left or right of the crossover.


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DAYS AT SEA PER UNUM

FIRST COST

Typical Presentation of Results

It is also possible to use the results of sensitivity calculations to make trade-offs, e. g. how much extra in first cost can one afford to pay to obtain a reduction of fuel consumption. The decrease in NPV from say a 10% increase in first cost can be compared with the percentage decrease in fuel consumption needed to generate a corresponding increase in NPV. The second edition of thi s book gives some examples of such trade-offs, for example whether better materials with lower maintenance costs justify higher first cost. There are more elaborate techniques for incorporating uncertainty into technical and economic calculations. Ref. 2.30.2 reviews such techniques which take account of probabi li ties. These may be at a basic level of assigning mean values and variances to, for example, costs or weights, or more complex simulation models, using either Monte Carlo methods or analytical functions. The more complex methods require more data, time and effort for analysis, and are therefore better reserved for later stages of development, once the simpler methods have indicated that the proposed design looks economically promising. The advantage of such techniques is that point value results are no longer produced (e.g. implying 100% certainty that the internal rate of return will be, say, 12.5% in money terms), but a range of values, e.g.


that there is 15% probability that the IRR will be between 10 and 11%, 22% between 11 and 12% etc., which gives a better feel for the uncertainty inherent in all techno-economic problems.

3.

THE OPTIMAL SH IP

The position has now been reached when the factors involved in selecting the optimal size and speed for a ship can be examined. Optimal Ship Size for a Given Speed

For a bulk cargo trade where there are no restrictions on ship size or cargo availability, the economies of scale in building and operating costs indicate that the optimal ship is in general the largest possible, offering the lowest transport costs. The si tuation is shown diagramatically· in Figure 24. The top half shows a typical curve of freighting costs per tonne, FC, against ship size; one particular freight rate, FD, is shown. The lower half shows the annual cost (or present worth), i.e. multiplying the unit cost curve by the payload at each ship size. MaximumNPV is obtained at CD wi th the maximum permissible size of ship for the trade. Thi s size may be determined by a number of physical restrictions, particularly depth of water, such as:Loading or discharging ports

e.g. harbour entrances, locks, turning basins, berth limitations, air draught, storage facilities, cargo handling equipment.

Shallow water en route Canals Repair dry docks Shipbuilding berths and docks There may also be limitations on cargo availability. In this case, an upper bound is set on freight income, G'E ' , after all the cargo has been lifted. Here the maximum return occurs at A I B I ; any increase above this optimal size merely increases expenditure (which includes capital charges), while income remains constant along B' El.


C.OST

FER TONNE

1 0 I

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0

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Fig.24

SWI~

SIZE

w

~ ~ 1: tIl i ~ c %

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r III ;: 0. a % Ott)

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Optimal Sh ip Size

A similar effect is obtained if the loading or discharging rate is slow compared with the size of ship. Port time increases with size, reducing the number of voyages per annum and hence restricting income. Figure 7 illustrates this effect, and also shows how the optimal size reduces if shore costs increase with size of ship. The effect is also seen with tankers where the 'shore cost' line might include dredging costs, tankage costs, addi tional tugs or special anti-pollution measures (Reference 3. 13. land 2.22) . The more general case of limited cargo availability is well illustrated by Benford in Ref.3.2.3. Ship size depends on forecasts of cargo tonnage offering, inbound and outbound. Physical limitations may apply as above, e. g. entrance lock sizes. The value of the cargo may also be significant in relation to the ship: e. g. general cargo at £500-5000 per tonne cargo, ship £600-1200 per tonne d.w. (Compare bulk cargo £15-150 vs. £200-400). Hence optimisation should be based on economic calculations of ship plus the cargo in transit, unless the operation is such that inventory costs do not fall on the shipowner, e.g. timechartered ship (Ref.3.2.2).


Maj or factors and their effect on ship size include:Greater annual flow of cargo: Faster cargo handling or port turnaround: Anticipated port improvements: Longer voyage distance: High frequency of service: Higher value cargoes: Reduced cargo handling and stockpiling costs: Cargo available one way only: Increasing long term availability of cargo: Large seasonal fluctuations: High interest rates: Increased unit costs of building ships:

larger larger larger larger smaller smaller larger larger larger larger smaller smaller

The influence of several of these factors can be seen when comparing the large size of container ships with break-bulk cargo vessels. The first seven factors are the most significant. A dynamic view should be taken of physical restrictions, weighing up the possibility of changes during the ship's life. This is particularly so in the case of draft: it may be worth paying a little more for a deeper drafted ship, even though it may not be able to use all this draft on more than a small proportion of the voyages in its life. If there are no restrictions on length or breadth, a larger ship at reduced draft may well have a greater payload and offer lower freighting costs per tonne than a smaller ship down to her marks. Choice of optimal size is then a trade-off between the known costs of greater size against the chances of being able to use the size sufficiently often over the ship's life to justify this cost. Optimal Speed for Ship Size

In transport situations, there is often demand for the greatest practicable speed to be adopted. Figure 25 illustrates diagramatically the effect of ship speed on total costs and total income. Broadly speaking, increasing ship speed does not have a great effect on hull first cost (apart from an influence through reducing the block coefficient, so increasing dimensions to keep payload constant). Likewise, crew costs, and many of the other operating costs are not much affected by speed. Installed power does, however, increase roughly as the cube of speed, so total fuel consumption and fuel cost go up roughly as the cube, while machinery first cost goes up roughly as the square of the speed. Meantime, however, transport capability, even with zero port turnaround time, can only increase directly proportional to the speed. Thus as indicated in Figure 25, there is an optimal speed for ships, which is a function of both technical and economic factors: at what point the increased capital and operating costs outweigh the increased revenue. It is possible to show, making simplifying assumptions, that speed is in theory an optimum when fuel costs amount to half the total of other operating costs, excluding cargo expenses, but in practice more detailed calculation is necessary.


(05'1'5.

FuEL.

-+_------

I

-- --

--------.+---I

- ----------, I SPE£C.

C .APIT ... L

C>lAe.r.El>

MAC.HINEltv.

-

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CR.""", 1.. ~\lIt ... NC( ETC.

- --

' ... PlT ... L C ...... C.caES

HULL.

OPTIMUM

!>PiEO.

Fig.25

Optimal Speed of a Sh ip

The case of ships is complicated by practical effects of port time and machinery performance at reduced powers, as well as by the relationship between hull fullness and speed-length ratio. Bulk carriers have relatively low speed, partly because of the need for large deadweight and high block coefficients, but mainly because of the low value and "repeatability" of the cargo, i.e. they can often be considered as interrupted pipelines delivering to buffer stores. General cargoes, particularly manufactures, are of much higher value, implying high interest charges and are often uni~ue consignments which are needed for specific use on delivery (inventory costs). Freight costs are only around 5-10 per cent of c.i.f. costs, and thus general cargo not only needs higher speed, but can afford to pay for it without increasing delivered price relatively as much as wi th bulk cargoes. The heavy lines in Figure 26 illustrate the typical case. The optimal speed occurs where there is the greatest difference between the annual income and annual expenditure. The 'lens' shape indicates that the curve of maximum profi t is shallow in the region of the optimum; 'flat laxity' is a phenomenon frequently found in such situations. The effect of three other factors is also illustrated: increased freight rates increase the slope of the income line, so increasing the optimal speed; similarly, reduced fuel costs (or reduced power requirements) swing the expenditure line down, increasing optimal speed; while increasing cargo value and inventory costs also increase optimal speed.

Part 111 -Application To Ship Design - 99

Fig.26

Factors Influencing Optimal Speed

Some general factors which encourage higher speeds of ships are summarised below. The converses are also generally true.

Economic High value cargoes as described above. Note the converse: low value cargoes cannot afford to travel at high speeds. High freight rates: the ship carries greater amounts of high-earning cargo over a period. Note the converse: when freights are low, ship speeds are often reduced, e. g. tankers in times of surplus. Cheaper fuel (or fuel costs rising slower than other items of income and expendi ture ) . Short port turnaround time: increasing the proportion of time at sea when the higher speed can be used. Competi tion: especially where freight rates are fixed, e.g. liner conferences, so non-price factors become more important. High interest rates: so that high capital charges on the ship are spread over more voyages. High daily operating costs, e.g. crew: increasing productivi ty per uni t tim~. Increased trade: but larger ships would be a better solution, which themselves permit higher speeds (speed-length ratio). Shortage of building funds or building capacity: greater transport capabi li ty per uni t investment.


Technical Lower specific fuel consumption: fuel weight and cost reduced. Availability of machinery of requisite high power. Reduced cost of main machinery: e.g. from economies of scale in manufacturing, improved materials etc. Reduced volume or weight of machinery plant or bunkers: effect not very marked. Improved hull form design: reduced power requirements. Improved propulsive performance: reduced power requirements. Smoother hulls: both when new and in service, e.g. better coatings. Improved sea performance: reduced speed loss due to ship motions, weather routing etc. Studies of nuclear-powered container ships demonstrate a number of these points; their optimal speed will be higher than conventionally-powered container ships, although their maximum rate of return may be lower depending on assumptions about building costs, fuel prices, etc., as indicated in Figure 27. As the curves such as those in Figure 27 are usually quite flat in the region of the optimum, in many cases practical and commercial considerations may be allowed to dictate the selection of exact size or speed, e.g. the stepwise availability of diesel engines. Thus the penalty for departing from the true optimum may be quite small. The optimum may, of course, move during the ship's life, e.g. with changing fuel prices, so it is generally preferable to err on the side of sizes and speeds somewhat greater than the theoretical optimum; this tendency is often reinforced by competi tion and the desire to offer potential charterers an attractive ship, and a general desire to reduce capi tal investment per annual tonne-mile, even at the cost of increased operating expenses over the ship's life.

RUluIR£O

'UTE

,OlL' FIRED I tOW'TAI"'~.

; SI4I" I I

I

SPEED

Fig.27

Comparison of Diesel and Nuclear Propelled Cargo Ships

Part 111 - AppUcation To Ship Design - 101

,

The optimal speed for an existing ship under various conditions of fuel price and freight rate is different from and may well be higher than that of a new ship. In comparison with Fig.25, the capi tal charges on both hull and machinery are fixed (' sunk costs' ), whi le there is al so an upper limit, of course, on maximum speed. In general, it can be said that the optimal speed for an existing ship is its design speed, unless fuel prices are very high and/or freight rates very low - a si tuation common over many of the years 1974-85. Reference 3.10 discusses these factors in more detail. Speed, as such, may not always be the appropriate design parameter, especially on short distance scheduled services, when transi t time may be used, in association with port turnaround time, e.g. 24-hour frequency may be required for ferries. Nevertheless, it is still possible to calculate the schedule giving the optimal speed, but usually in the context of a fleet of vessels providing a service, as discussed on page 107. Overall Optimisation of a Single Ship

The separate optimisation of ship size and speed has been discussed to illustrate some general points, but in practice they must be combined to yield an overall optimal design. Figure 28 illustrates the general situation where ship size and speed can vary over a wide range. A section through AA would indicate the effect of optimal speed for a given size. Closing the contours as shown in the dotted portions normally requires that some increasing constraints are placed as ship sizes increase, e. g. that load factors decrease as large vessels find it increasingly difficul t to obtain full cargoes, or that shore costs ri se steeply - the effects shown in Figs. 24 and 7 respectively. Figure 28 also shows contours of equal transport capacity, so it can be seen that the line of minimum cost for any specified cargo quantity follows this tangent line rather than the lowest points of the equal cost contours. Reference 2.19 di scusses thi s aspect in more detai 1.

11<'• • '2£

Fig.28

Optimal Combination of Size and Speed


The simplest case to consider in overall optimisation is that of a single ship, particularly participating in general worldwide trading where the ship does not have to be too closely tailored to cargo availability and fleet requirements. The majority of bulk carrying vessels fall into this category, where a design is sought which maximises return at any given level of freight rates. In general, this is achieved by the design offering minimum RFR, given a particular sector of the market and an assumed range of trades in which the ship might participate, and where the addi tion of one single ship is not sufficient to influence the transport requirements of any particular trade. The problem is then one of unlimi ted cargo availability as far as any particular shipowner is concerned, or an open competi ti ve system rather than a closed system. (Ref. 2.34). Of course, before thinking about an actual ship design, an operator will have decided on the general market within which he assesses the best prospects to lie, e.g. because of increasing demand and limited supply. In effect he decides from his market research to operate in one particular sector of Fig. 28 with constraints associated with that trade, e.g. large combination carriers, reefers, or offshore supply vessels. Optimisation of any particular ship type, especially well-defined types such as bulk carriers or tankers, then involves the finding of that combination of design variables which gives the highest value of the selected economic measure of meri t, e. g. RFR, subj ect to various constraints such as dimensional limitations, strength and stability standards. For most specific ship types, carrying or earning capacity, whether deadweight, cubic capacity or deck area, is largely a function of the principal dimensions, length, breadth, depth and draft. The last two are usually closely related through the freeboard rules. In addition, block coefficient and speed are required to define the ship more exactly, even though speed, length and block coefficient are often closely related (maximum block coefficient is usually a function of Froude number) . Thus, for any given ship type, there are only a few primary design variables which very largely define the size and speed, as shown below, although a rather greater number of secondary and tertiary variables.

1.

Primary Design Variables Number of ships in fleet Length Breadth Draft Depth to principal deck Speed Block coefficient

2.

Secondary Design Variables Number and arrangement of cargo and equipment spaces Number and height of decks Type and capacity of cargo handling gear Machinery type and location Number and type of propellers and r.p.m. Fuel, if not oil Structural configuration and material


Hull form characteristics Superstructure arrangement Tankage allocation: water ballast, oil fuel etc. 3.

Tertiary Design Variables

Number, dimensions and type of hatches Crew number and accommodation Auxiliary machinery Location and arrangement of specific equipment Appendages Manoeuvring devices Extent of automation Types of coatings. Note that other important features of the design depend on the above variables. These include: Maximum and cargo deadweight or payload Cargo cubic capacity Fuel consumption, at sea and in port Lightship masses Hydrostatics Longitudinal strength Trim and intact stability Damaged stability Freeboard Tonnage Vibration. Thus 'check' calculations are made of these features and if a deficiency is found, one or more of the design variables must be altered. There are a number of mathematical techniques for finding the minimum of a function of several variables, e. g. RFR as a function of some of the above design variables. Reference 3.26 discusses techniques of non-linear optimisation for use in computer-aided ship design whi le References 3.9, 3.13.1, and 3.15 are examples of their application. Most of the practical techniques of constrained optimisation work best with a moderate number of variables. Therefore, it may sometimes be desirable to separate some of the secondary and tertiary variables to later stages of the optimisation process (multi-stage optimisation). In some cases, the range of choice of the variable itself is smalli the conclusions from a separate study are therefore likely to be valid over all the range of choice of the variables being studied, e.g. choice of machinery type or coatings. In such cases, the coupling between primary and the other design variables is small, and sub-optimisation is valid. Of course, such alternatives still need to be evaluated economically by the normal methods. Other variables may be more subjective in their choice, and not easily quantified, so that the currently preferred solution can simply be adopted as standard, e. g. superstructure arrangement. The general approach then is to interpret the ship's trading pattern in terms of cargo volumes, distances and port or other restrictions, and select ranges of possible dimensions, block coefficients and speeds for the first cycle of the design spiral.


Several hundred designs may be generated either by automatic search routines or by straightforward parametric studies. Some of the designs are likely to be eliminated on purely technical grounds, e.g. inadequate stability, but most will require the use of an economic criterion to reduce the number of possible designs. If freight rates can be predicted, the criterion would normally be maximum NPV, but it is often found that minimum RFR is more realistic if comparing different sizes and speeds, as actual market freight rates vary with the ship size and speed in a not very predictable manner. The optimal region of combinations of length, breadth, depth, draft, speed and block coefficient may then be 'magnified' on the second and third cycles of the spiral by increasing the level of complexity of design, using the initial resul ts as first approximations. The final cycle based on perhaps a single ship is, primarily, to develop the technical design and cost estimate in more detail, but economic evaluations can be applied to make detai led trade-offs of, say steelmass against fabrication cost, or additional equipment against reduced operating costs. '00

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Selection of Optimal Design Draft

It is undesirable to apply too many absolute constraints on variables in the early cycles~ as it is usually found that the most economic solution is simply to build to that constraint. This particularly applies to draft limitations in the bulk trades, but also to breadth limitations, e.g. for any large ship using the Panama Canal. Unless a vessel is being designed to operate all its life on a given route with fixed limits (e.g. canals or locks), it is essential to recognise the probabilistic nature of ship operations; there is always a chance that extra dimensions may be usable at some stage in a ship's life. The distribution of available depths of water in ports throughout the world where the


ship is likely to call might be as shown in Figure 29A. A very deep draft ship will only be able to call at very few ports, while a shallow drafted ship may not be taking full advantage of the water depths available. With planned port improvements, it might be postulated that the 1995 situation may be different, as shown by the broken line. Either distribution may be converted into a cumulative probability curve as shown in Fig.29B. The corresponding load factors are shown in Fig.29C; very deep draft ships are likely to have longer ballast steaming times and more part cargoes than smaller ships which are more flexible. Fig.29D shows' how the economies of scale in operating costs (including capi tal charges) may be offset by declining income per tonne cargo resulting from lower load factors. The optimal draft for a range of port and cargo availabilities can then be estimated (higher for 1995 as indicated) by simulating the operation of a range of possible ship designs through a chosen spectrum of possible ports and cargoes. The selection of design draft therefore requires an assessment of the probabilities of being able to use the extra draft sufficiently often to pay for its extra cost. Figure 30 shows the results of one such study, which takes into account both port and cargo availabili ty. It can be seen that the optimal ship is not neccessarily the biggest deepest draft vessel. The limited depths of water available and some high stowage factor cargoes combine to reduce the value of extra deadweight and draft.

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Optimal Deadweight with Limited Cargo Availability and Water Depth

The incorporation of such probabilistic considerations in a practical design process requires a broader approach - the systems approach as discussed in Section 4.


4.

THE WIDER SCENE

Fleet Transport Capabilities While many ships are designed to trade to a wide range of ports with a wide range of cargoes, e.g. vessels such as bulk carriers likely to be chartered out for most of their lives, others can be designed for a more specific trade, especially owner-operated ships. In such situations, the quanti ties and types of cargo moving on particular route(s) can usually be estimated at the design stage. The problem is then of limited cargo availability. It is then possible to explore the range of:ship types number of ships in fleet ship cargo capacities ship speeds terminal facilities which will together provide the required transportation capability. There is a very large number of potential solutions, even before considering the range of detailed design characteri stics of individual elements, e. g. ship dimensi ons. There will however usually be a number of considerations which wi 11 limit the range of practical solutions. For example, technical and economic factors usually combine to limit speed to a range of about 10 to 25 knots, while frequency of service may be an important marketing factor, limiting the possible combinations of speed and size of ship. Furthermore, the possible number of ships may only take an integer value - usually identical ships (or nearly so) will be required - and operational flexibility may demand a certain minimum number, e.g. not a single ship. It is therefore often not too difficult to define a more limited spectrum of feasible fleets which all have the required transportation capaci ty, in terms of, say, tonne-mi les per annum, and to select a smaller number of them for more detailed study. E:mmple

It is required to find the nwnber, capacity and speed of the various fleets of bulk carriers which could transport 2.5 million tonnes of mineral ore 1500 mi les between mine and smelter, with no return cargo. Annual transportation capacity

.

= 2.5 x 1500 = 3750 million

tonne-miles.

A quick appreciation of the possible range of ship sizes and numbers can be gained by using an approximate annual producti vi ty figure from Table 11 which relates to typical ship voyages and speeds. The potential producti vi ty of a bulk carrier is say 45,000 tonne-miles per annum per tonne deadweight. (Note that actual productivi ties may be appreciably less in poor markets, when less cargo is available). Approximate tonnage of fleet required =

37;~O~Ol06

'"' 83,300


This might be made up of: one ship of about two ships of about three ships of about four ships of about five ships of about six ships of about seven ships of about

84,000 42,000 28,000 21,000 17,000 14,000 12,000

dwt dwt dwt dwt dwt dwt dwt

etc.

It might therefore be decided to investigate in more detail fleets of up to eight ships, with speeds ranging from say 10 to 18 knots (the cargo is implicitly of low value so very high speeds are likely to be uneconomic). It is also necessary to take into account the terminal facilities for loading and discharging, and if these do not already exist, the cost of their construction relative to ship size. Each ship's capability can now be investigated in greater detail. Page 84 shows that: Annual cargo per ship

=2

x Maximum cargo payload x Average load factor x Round trips per annum

Assuming no return cargo, cargo payload deadweight and N ships in the fleet:-

as

95%

of

maximum

Annual capacity, tonnes = 2 x (0.95 x DW) x 0.50 x RTPA x N 2,500,000 = 0.95 x DW x RTPA x N or DW = 2 630 OOO/(N x RTPA) ... (1) RTPA = (365-offhire days)/(sea days + port days) Assuming 15 days offhire and speed V, RTPA

= 350/(1500 x 2/(24 x V)

+

port days)

As a first step to estimate port days, either a typical value for bulk carrier time in efficient ports could be assumed, say 2-3 days per call, or more realistically a possible cargo-handling rate, say 1000-2000 tonnes per hour for bulk cargo. Such rates would correspond to about 1 day in port for the smaller ships and about 3 days for the larger. ' Assuming for simplicity that loading and di scharging port time are each 2 days, ship size can now be recalculated for a range of possible number of ships and speeds. Only three combinations are shown to indicate the process, but Figure 31 shows the range of possible fleets. Number of ships Speed, knots Sea time 3000 miles, days Port time, 2 calls, days Round trip days RTPA (350 days) Ship DW from (1) Frequency of service, days


2

16 7.8 4.0 11.8 29.7 44300 5.9

4 16 7.8 4.0 11.8 29.7 22100 3.0

4 12 10.4 4.0 14.4 24.3 27000 3.6

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Note that for fixed annual cargo capacity and fixed port time. frequency and capaci ty are related and independent of speed, because: Frequency (days)

• Round trip days Number of ships

Annual capacity in one direction Average ship capacity

= Average

ship capacity x Number of ships x RTPA

_ Annual capacity Round trip days Number of shIps x 350

•

Annual capacity x frequency 350


It might be considered too risky to have a single ship fleet, and operationally inconvenient to have less than one ship per week (7 day frequency). Similarly a frequency of less than 2 days would require more than one berth, as port time is 2 days. The remaining combinations of size, speed and number of ships all look feasible, with between 2 and 6 ships, 15,000 to 50,000 dwt, 10 to 18 knots, frequency 2 to 7 days. More detailed studies would then be put in hand for exploring the design parameters of ship and shore installations for fleets of 2, 3, 4, 5 and 6 ships, at an appropriate level of detail, evaluating the comparative economics and finding the overall optimum of ships plus shore installations, usually in terms of minimising transport cost per tonne cargo (RFR).

TABLE 11 Average Voyages and Potential Productivities of Typical Ships

Ship type

La rge ta nke r BUlk carrier Products carrier Conta Iner ship Cargo II ner RoRo ferry Coa ster

1- Summer deadwelght. tonnes 250 000 244 000 2. Maximum cargo payload. tonnes (crude 011) 3. Ave ra ge speed. knots 4. Total IIllles per round tr Ip 5. Total lIli les per annum 6. Port calls per round trip 7. Average days per cal I 8. Port days per round trip 9. Per cent port time 10. Sea days per round trip 11- Sea days per annum 12. Tota I days per round trip 13. RTPA (350 days) 14. Average per cent miles loaded 15. Per cent full of cargo 16. Overa 1I load factor per cent 17. Tonnes ca rgo pe r annum 16. Tonnes per annum per d~t 19. Tonne-miles per annum (H) 20. Tonne-miles per d~t Line (17)

60 000 57 000 (dry bul k)

40 000 37 000 ( ref Ined products) 15 5 000

36 000 26 000 (2300 conul nars) 21 12 000

17 000 12 000 (general ca rgo) 16 15 000

6000 4000 ( 100 t ra I le rs) 16 2 000

2500 2300 (bul k)

1211 000 6 1.7 10 29 211 2117 311 10.3 lOO

70 000 9 11.0 36 46 39 182 75 4.67 95

97 000 2 1.0 2.0 26 5.2 253 7.2 46.6 100

115 000 2 2.0 4.0 51 3.6 171 7.6 44.9 60

11 1000

14 16 000

15 11 000

106 000 2 2.5 5 9 116 317 53 6.60 50

79 000 3 6.0 18 31 221 49 7.14 60

37

88 000 3 2.0 6 30 111 245 20 17.5 50

96 116

90 54

90 45

70 70

75 71

50 50

90 54

1 546 000 6.2 12 370 49 500

440 000 7.3 2420 40 300

583 000 14.6 1460 36 400

375 000 10.4 2250 62 500

80 000 4.7 600 35 200

194 000 32 194 32 300

112 011 45 56 22 300

= 2x(2)x(13)x(16)/100

Line (19)

(17)x(4)/2


General Cargo Ships

The position wi th general cargo ships is similar in principle, but there are more considerations to take into account. In particular the performance of fleets of unitised cargo ships is markedly different from that of break-bulk ships. Unless there is a clearly defined type appropriate for the trade, it may thus be necessary to compare fleets of one or more of the following types:Container ships Roll-on/roll-off ships (RoRo) Pallet carriers Barge carriers Break-bulk ~ulti-deck cargo vessels Combination types, e.g. container/RoRo, multi-purpose tween-decker, containerjbarge carrier. As most cargo liners operate in Conferences, there may be restrictions' on the number of a company's ships or minimum frequency of port calls for a particular service. Furthermore as freight rates are fixed within each Conference, competition tends to take the form of higher speeds or better performance in handling particular cargoes. I

Higher speeds are also encouraged by the higher average value of general cargo compared with bulk, which adds potential inventory costs. The cargo movements will also fluctuate with the state of trade, as well as seasonal effects. Even with unitised cargo, there are nearly always more than two ports served. An adequate margin is therefore necessary in fleet capacity, taken in conjunction with an appropriate load factor. Where cargoes of a wide range of stowage factor are being carried, allowance must be made to provide adequate cubic capacity, and if necessary deck stowage. Figure 32 shows how sea transport cost per container varies for a particular trade route wi th number of ships, size and speed. Since several combinations all offer virtually the same freighting cost, other factors would be then considered before undertaking detai led design studies e.g. competition, physical limitations on ship dimensions, machinery requirements etc.


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CONTAINERS PER ANNUM. 8,200 MILES EACH WAY

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The Systems Approach Much has been written on the subject of the systems approach to design but, in essence, it can be regarded as an integrated quantified approach to problem solving using appropriate tools. It reduces the complexity of a real-life system to manageable proportions, yet still retains the essential features which affect performance and economics.

Systems Analysis is used to define the problem: The system under study, e. g. crude oi I transport system The relevant sub-systems, e. g. machinery system The objectives of the system, e.g. to minimise transport costs The gathering of basic information.


System Design is concerned wi th: Forecasting, e. g. the demand for oi 1 Model building, i.e. a simplified representation of the real system, such as a mathematical model Simulation of the system or replication of the essential features of operating a complex system Optimisation of the system, e.g. selection of the design variables, i.e. those under the control of the designer, such as ship main dimensions. At the ship design level, the systems approach encompasses stages such as set out in Table 12. At the supra-system level, the problem of looking at alternative transport concepts rather than conventional tankers might be studied, e. g. pipelines, towed flexible containers etc. At the sub-system level, al ternati ve cargo handling systems might be studied - the results of which could be fed back at the ship design level. System boundaries need to be considered, particularly by reference to financial and contractual cornrni tments at various stages.


TABLE 12 The Systems Approach to Ship Design

STEP

EXAMPLE

1.

Formulate problem and objective.

Find optimal design of bulk carrier for a given trade route with minimum transportation cost.

2.

Construct conceptual model showing logical relationships

Sketch flow diagram: e.g. R.F.R. Cap. charges + op. costs annual cargo

=

AC: cargo DW, RTPA, load factor etc. CC: first cost, req'd rate of return CC: daily, fuel, port etc. costs 3.

Identify independent variables

Cargo quantities and characteristics, port facilities, route restrictions, fuel price etc.

4.

Identify dependent variables

First cost:

+I ~POt., steel,

outfit,

mach1y cost

t

· lmenSl0ns d·

spee d

Op. costs: power, crew number, DW etc.

4.1

L, B, D, T, CB' V, type of machinery,

Design variables

hold geometry, etc.

5.

Co" ect data

Cargoes, ports, costs, masses etc.

5.1

Establish constraints

Canals, berth depths, cargo handling rate, freeboard, stability etc.

6.

Construct mathematical model

6.1

Technical design

-

usually computer program Set up relationships, equations etc. Power

= f(dimensions,

Steelmass 6.2

Economic aspects

V, CB etc.)

= f(dimensions,

arrgt. etc.)

First cost, operating costs, annual cargo R.F.R. = annual costs/annual cargo

6.3

Cptimisation procedure

Search process to find combination of design variables giving min. R.F.R.

7.

Test model

Check. results against actual ships

8.

Adjust model

As necessary

9.

Run model for real

Given route, unit costs etc.

10.

Mak.e decision

Choose final design parameters, L, B, T, V e tc .


Some Other Techniques

In addition to optimisation techniques and sensitivity analysis, other techniques which have applications in systems engineering (broadly, concerned with inter-relationships between elements of new systems) and operational research (broadly, concerned with improving the performance of existing systems) include:

Forecasting:

Estimating the demand for some product, for example ship types such as product carriers, or trade flows, such as iron ore. A range of techniques may be used, ranging from canvassing expert opinion, e. g. the Delphi technique, to trend analysis (perceived relationship between demand and time), to economic analysis, and to model-building. These techniques are listed in the order of movement away from judgement towards quantified techniques (Refs.2.13 and2.36).

Allocation: Assigning resources to jobs by matching supply and demand points to minimise total costs, e.g. which ships to use on which trades. Such transportation problems can be solved via linear programming (Ref. 2.41) . Scheduling:

Sequencing and routing, by allocating not only ships to transport demands, but the sequence in which the demands are met using what route. Can be applied to find optimal allocation of ships in a fleet to a number of contracts of affreightment, to lift the required cargoes in the required time at minimum cost (Ref.2 .42) .

Probability concepts:

Many of the aspects of ship design exhibit uncertainty, in the sense that the probabili ty of the actual value equalling the predicted value is rarely unity, e.g. steelmass, speed on trial, outfit manhours etc. Where it is possible to establish mean values and variances, probability theory can be used to estimate the likelihood of the actual value being within some acceptable tolerance of the predicted (Refs .1.7.1 and 3.43) . The Taylor series approach and hybrid method are extensions of the concept (Refs.2.30.2 and 2.31).

Simulation: A process of replicating the operation of a system over time. Particularly useful for transport problems which are too complex for mathematical expression, where a 'motion picture' of variation in performance with time is required (e.g. to identify bottlenecks), and where stochastic variables are present, e.g. variation in cargo handling time. Random influences may be such that deterministic (steady state average) values do not give sufficient insight into the range of possible outcomes. The probabili ty of delays may need to be quantified so that the probability of attaining the specified performance can be assessed. Simulation is a powerful tool, but generally requires appreciable effort to develop a model and collect data (Ref.2.43).

Queueing theory:

Some systems may be simple enough to calculate directly the probability of delays to minimise the cost of providing some service, e. g. number of berths required to handle a given flow of ships, knowing the arrival rate of ships and service time requi red to handle them (Ref. 2.44) .


Inventory:

The problem of evaluating usable but idle resources, such as stockpiles or goods in transit. Inventory cost can comprise: interest on stock held, plus cost of providing a stockholding facility, plus risk of obsolescence, plus cost of re-order and delivery. Only the first item is usually applicable to cargoes carried on ships, when it can be added to ship transport cost or RFR in determining the best design features, such as speed (Ref. 3.2.2) .

Replacement analysis:

Addresses the problem of the best time to replace equipment, whether now or to defer the decision to a later date. In the ship context, the problem compares the improved performance and lower operating costs of a new ship wi th declining performance and increasing costs of an old ship (Ref. 3.2.4) .

Decision theory:

Attempts to assess the risks associated with alternative courses of action, e.g. buying, selling, leasing different vessels. Decision making under risk may be aided if probabilities can be assigned to expected (monetary) outcomes of different policies. Utility analysis takes account of such considerations, as well as the decision maker's propensity for ri sk taking (Ref.l. 8) .

Problems with multiple objectives:

Not all problems can be assigned a single measure of merit to indicate the 'best'. If several objectives have to be satisfied, e.g. reducing the transport cost and minimising amount of foreign exchange and maximising employment, one method using linear models is goal programming, assuming that priori ties can be assigned to the goals and penal ties for deviating from them (Ref. 2.45) .

Ill-defined problems or fuzzy sets: Techniques have been developed for choosing amongst a range of possible design alternatives; where both objectives and constraints cannot be precisely defined. For example, speed should be much larger than 12 knots, but available engines are such that speed should be between 10 and 18 knots. The set which satisfies the various goals and constraints and maximises some 'membership value' or measure of merit is deemed optimal (Ref.2.46). Each of such techniques has an economic dimension, in that they can be used to investigate various aspects of establishing the best choice of ship or design feature. The economic evaluation techniques already described may be used in conjunction wi th them, for example, RFRs in allocation problems, NPVs of alternative designs in replacement analysis or decision theory. Broadly speaking, such techniqu'es, e. g. simulation, should be deferred to later stages of analysis, particularly if the simpler methods do not model the real life situation well enough, or give sufficient insight into problems of the design concept under consideration. There is a trade-off between the generality of a method, and the complexity and need for quantification of uncertainty. Not all are necessarily applicable to every design problem, but an awareness of the existence of a technique, its potential usefulness and availability of further information or computer programs is important.


One feature implici t in the systems approach is the trade-off - the extent to which improvement in performance of one element can be attained at the expense of either increased cost, or decreased performance of another element. Figure 33 illustrates some examples in the case of two variables.

UNI'T

COSl.

CI-I"'~"'C 'TERISTIC

EXAMPLES

CHARACTERISTIC Ship Size Specific Fuel Consumption Frame Spacing Fuel Quality

Fig.33

B

A

Shore Cost Fuel Cost Material Cost Fuel Cost

Ship Cost Machinery Cost Labour Cost M&R Cost

Examples of Trade-offs

Some techniques used in the systems approach are described in References 1.8 and 2.23, while References 2.7 to 2.11,3.2.3,3.7, 3.15 and 3.21 are examples of their application.

The Relative Importance of Technical and Economic Features Analysis of the results of the ECEVAL program for typical ships enables the relative importance of different features of a ship's performance to be evaluated. Table 13 shows the economic benefit accruing to a lOO-ship fleet representative of twelve types in the Bri ti sh merchant navy, ranging from VLCCs to offshore supply vessels. The increase in NPV resulting from a 10% improvement in various design, building or operating features has been calculated, while holding other features constant, except those directly related. For example, if installed power requirements could be reduced by 10%, say from improved hull forms or higher propulsive efficiency, the overall benefit from the 100 ships would be a sum of money wi th a present worth of f.S9. SM. That is, up to this amount could be afforded if a 10% gain could thereby be achieved. Even if only, say, 1% gain is considered attainable, up to f.S.9M could be spent - on research and development (in areas such as hydrodynamics, propulsion devices and coatings technology) and increased first cost - and still yield a net benefi t for the 100 ships.

Part 111 - AppUcation To Ship Design - 117

TABLE 13

Relative Importance of a 10% Improvement in Different Features of Ships' Performance FEATURE

/ Freight rate Load factor Steaming distance First cost Port turnaround time Dry cargo handling cost per tonne Power requirements Fuel cost per tonne Specific fuel consumption Crew costs .Building time Lightship displacement Hull steelmass Port charges Upkeep costs Hull construction labour cost Other running costs Steel cost per tonne Time out of service

ORDER OF MERIT 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

NPV fM

NPV CHEAP FUEL

336.8 206.4 187.6 87.0 68.3 65.9 59.5 59.2 55.2 49.7 36.4 35.6 34.5 32.3 26.5 19.4 14.4 10.4 9.8

316.1 187.7 167.1 87.0 66.2 65.9 44.1 38.6 36.3 49.7 36.4 28.0 29.4 32.3 26.5 19.4 14.4 10.4 9.8

Increasing freight rates by 10% shows the greatest improvement because it applies to the entire income side of the economic calculations, but of course it is outside the control of the shipowner and shipbuilder. Increasing load factor is also valuable, obtainable by greater versati li ty of design (e. g. multi-purpose ships) or better management of operations (e.g. computerised ship scheduling). The effect is less than that of freight rate, as cargo handling costs and port time will also be increased, and offset some of the gain. While reducing steaming distance appears very worthwhile, 10% reductions in practice are not possible overall. Fractional gains are, however, possible from better course-keeping or more accurate navigation or the opening of short-cut channels. With capital charges forming such a large element in freighting costs, reduced first cost is always worthwhile, providing that performance is not jeopardised. Reduced power requirements, resulting in both reduced machinery cost and reduced fuel consumption, are well worth striving for, especially because of the rapid rise in oil prices since 1973, despi te the reduction in 1986. The table is based on a heavy fuel price of f100 per tonne, escalating at 5% p.a. Substituting a cheap fuel price of f50 escalating at 8% p.a. moves crew costs above power requirements in order of merit. Compared wi th the 1971 table published in Ref.1.12, all items concerned with fuel costs have moved up in importance. Reduced building time from contract to delivery is only assessed by its effect in bringing forward in time all the cash flows, and


is therefore influenced by the assumed discount rate (12%). The competi ti ve advantage to owner or bui lder of shorter delivery times is not easily quantified as it depends on the current market si tuation. Reduced port turnaround time benefi ts all ships, while reduced cargo handling costs are also of great benefit, particularly in the general cargo business. In the dry bulk trades, typical cargo handling costs have been included even though not paid by the shipowner, but by the shipper or receiver. Liquid cargo handling costs are not usually separately identified. Reduced hull steelmass has become relatively less important than in 1971, owing to more ships becoming volume-limited rather than mass-limited, e.g. segregated ballast tankers. Reduction in ship running costs are, of course, worth striving for; crew costs show up as the single most important factor. Al though important to the shipbuilder, 10% reductions in steel prices or hull labour costs do not have a very large effect on the overall ship, as they only contribute together in the region of one-third of ship first costs. The apparently poor showing of reduced time out of service (off-hire) is largely due to the basis of the calculation. The 10% improvement relates to the difference between the theoretical maximum and the actual, not to the absolute value, i.e. 365 days per annum in service and, say, 350 days, when 10% improvement is only 1.5 days. Table 13 assumes a standard improvement of 10%, but clearly gains of this amount are not equally attainable for each feature in the table. It would be far more difficult and costly to reduce, say, first cost by 10% than, say, time out of service. The figures in the table can be scaled for attainability, for example a 5% reduction in power requirement (f29.7M) is more valuable than a 15% reduction in hull labour cost (f29.1M) taken over the fleet's life. The benefit for a specific ship can be estimated by running the ECEVAL program with full sensitivity output. However, because Table 13 relates only to existing ship types, it does not highlight the potential benefits from improved transportation methods and novel configurations of marine vehicle. Furthermore, it does not identify unquantifiable benefi ts, e. g. in safety or environmental protection. Some Concluding Comments

Most engineers will use engineering economics as a tool for comparing alternative designs. For comparisons to be realistic, it is essential to compare like with like, to compare any 'challenger' design, not with poor old designs, but with the best of current developments of the present designs, and to the same required standards of performance. For preliminary calculations, when simplicity is important, the use of Series Present Worth and Capital Recovery factors wi 11 indicate whether it is worth pursuing the economic calculations in any depth. If the designs appear promising economically, it is usually necessary to take account of the economic complexities described in Part 11 before any actual investment decision can be made. The essential nature of design is a compromise as reflected in the summation of performance curves giving flat optima overall,


as shown in Figure 33. Flat laxity has the advantage that the subsequent application of step functions will not be crippling, whether technical (such as machinery selection) or operational (such as scheduling). It also means that factors difficult to quantify, such as vibration or safety, or intangible factors such as appearance, can be allowed to influence final decisions wi thout excessively distorting the results. The engineer is more concerned with relative than absolute values, so that lack of precise information does not prevent economic calculations from being attempted as long as the relative orders of magnitude are realistic. Any analysis is only as good as the data input. The wise engineer will build up not only a personal database of technical information, but also of economic information. Well presented technical recommendations have a better chance of acceptance, when there are many competing alternatives. It is also important for engineers to appreciate the various definitions, e. g. costs are not the same as prices (at least not if you wish to remain in business), and depreciation is not an item of expenditure, but a bookkeeping and tax calculation device. The manager's problem is rather different, especially the capital budgeting decision of allocating resources to different projects (or none at all). In this case, absolute values are crucial, insofar as ri sk and uncertainty permit reasonable calculations to be made. Broader problems, especially those involving the wider transport scene, are increasingly requiring the use of more sophisticated models, including stochastic variables, e.g. in simulation. It is now widely appreciated that designs with minimum first cost are not necessarily those with minimum life cycle costs. It may well be worth paying appreciably more in first cost to obtain continuing savings in maintenance and improved performance over a ship's life, e.g. high duty coatings, despite the difficulty of convincing some decision makers. The effects will usually be different between mass or volume-limited ships, and between constant speed or constant power ships, and between good markets and bad markets. The competitive conditions in shipbuilding and ship operation highlight the differences between those designs which are merely adequate and those which have the highest standards of technical and economic performance ,over the widest range of operating conditions.


A SELECTED BIBLIOGRAPHY R

*

Contains useful reference material Recommended reading

1.

MARITIME ECONOMICS

1.1*

COUPER, A.D. 1972.

The Geography of Sea Transport.

Hutchinson

1.2

BRANCH, A.E. Economics of Shipping Management. Chapman & Hall, 1982.

1.3

CHRZANOWSKI, I. An Introduction to Shipping Economics. Fairplay Publications, 1985.

1.4.1

GOSS, R.O Studies in Uni versi ty Press, 1968.

1.4.2

GOSS, R.O. Economic Criteria for Optimal Trans. R.I.N.A., VoJ.107 (1965) pp.581-600

1.4.3

GOSS, R. O. Advances in Maritime Economics. Collected papers of Goss. Cambridge University Press, 1977. (Includes 2.5.1 & 2.5.2).

1. 5.1

BENFORD, H. Principles of Engineering Economy in Ship Design. S.N.A.M.E., 1963.

1. 5.2

BENFORD, H. Fundamentals of Ship Design Economics. University of Michigan, Dept. Nav. Arch. & Mar. Eng., 1970.

1. 5.3

BENFORD, H. Of Dollar Signs and Ship Designs. STAR Alpha, 1975.

1.5.4

BENFORD, H. Standards for Engineering Economics Notation. Marine Technology. July, 1968.

1.5.5

BENFORD, H. A Second Look at Measures of Merit for Ship Design. University of Michigan, Dept. Nav. Arch & Mar. Eng., Rpt. No.223, Aug 1980.

1.5.6*

BENFORD, H. The BI acksmi th Ship Econorni st. Universi ty of Michigan, Dept. Nav. Arch. & Mar. Eng., Rpt No.270, Jan.1983.

1.5.7

BENFORD, H. A Naval Architect's Introduction to Engineering Economics. Uni versi ty of Michigan, Dept. Nav. Arch. & Mar. Eng., Rpt. No. 282, Dec .1983.

1. 6

WALSH, W. R. Own or Charter - A Suggested Method of Analysis for Oil Companies. Marine Technology, October 1966.

1. 7.1*

KLAUSNER, R. F. Evaluation of Risk in Marine Investment. Marine Technology, October 1970.

Practice

Maritime Economics. (Includes 1.4.2)

and

Cambridge

Ship Design.

S.N.A.M.E.,

Capital

A Selected Bibliography - 121

1. 7.2

KLAUSNER, R. F. What an Engineer Should Know About Capi tal Budgeting. University of Michigan, Dept. Nav. Arch. & Mar. Eng., Rpt. No.083, 1970.

1.8

LORANGE, P. and NORMAN, V. D. (Edi tors) . Shipping Management. Inst. for Shipping Research, Bergen, 1973.

1. 9*

IHRE, R., GORTON, L. Chartering Practice. Press, 1984.

1.10

PACKARD, W.V. Sea Trading. 3 volumes: The Ships; Cargoes; Trading. Fairplay Publications, 1985.

1.11

METAXAS, B.N. Press, 1971.

1.12

BUXTON, I.L. Engineering Economics Applied to Ship Design. Trans. R.I.N.A. Vol.114 (1972) pp.409-428. (Also the Naval Archi tect, October, 1972).

1.13

HETTENA, R. Economics of Liquid and Dry Bulk Shipping. Shipbuilding in the U.S. Seminar, Webb Institute, July, 1972.

1.14

ALDERTON, P.M. Sea Transport - Operation and Economics. Thomas Reed Publications Ltd., 3rd Edi tion, 1984.

1.15

SLOGGETT, J . E. Shipping Finance. Financing Ships and Mobile Offshore Installations. Fairplay Publications, 1984.

1.16

NERSESIAN, R. Ships and Shipping: A Comprehensive Guide. Pennwell Books, 1981.

1.17

BETH, H. L., HADER, A. and KAPPEL, R. 25 Years of World Shipping. Fairplay Publications, 1984.

1.18

WALSH, R.G. Estimated Return-on-investment Tankers. Marine Technology, Jan. 1978.

1.19*

SWIFT, P.M. A Shipowner's View of Engineering Economics. West European Graduate Education in Marine Technology. (WEGEMT) First School. Advances in Ship Design Techniques course notes. Module El. University of Newcastle upon Tyne, Dept. Naval Architecture & Shipbuilding, 1978.

1.20

EIDE, E. Engineering Production and Cost Functions for Tankers. Elsevier Press, 1979.

1.21*

Ships' Costs. Special issue of Maritime Policy and Management. Taylor and Francis, January 1985. Includes:

1.21.1

BENFORD, H. Ships' Capital Costs: The Approach Economists, Naval Archi tects and Business Managers.

and SANDEVARN, A. Shipbroking and (2nd Edition). Lloyds of London

The Economics of Tramp Shipping.


Athlone

of

Oil

of

1.21.2

BUXTON, LL. Fuel Costs and Capi tal and Operating Costs.

1.22*

STOPFORD, R.M. Maritime Economics. AlIen & Unwin 1987.

1.23

GRAHAM, M.G. and HUGHES, D.O. Containerisation in the Eighties. Lloyds of London Press, 1985.

2.

their Relationships with To be published by

MARITIME TRANSPORT

Ship Demand to 1985. 6 volumes published by

Maritime Transport Graham & Trotman,

2.1.R

Dry Cargo Research. 1975-77.

2.1.1

Introduction.

2.1.2

Food and Drink

2.1. 3

Raw Materials

2.1. 4

Manufactures

2.1.5

Chemicals

2.1. 6

Ship Demand

2.2

International Symposium on Middleterm and Longterm Forecasting for Shipbui Iding and Shipping. Stichting Maritime Research, The Hague. (Now MARIN). June, 1970.

2.3.1

Uni tization of Cargo.

2.3.2

Coastal Shipping, Feeder and Nations, ST/ECA/134. 1970.

2.3.3

The Maritime Transportation of Iron Ore. TD/B/C.4/105/Rev.1. 1974.

2.4

HEAVER, T.D. The Cost of Large Vessels - An Examination of the Sensitivity of Total Vessel Costs to Certain Operating Conditions. National Ports Council T & R Bulletin No.7, 1970.

2.5.1

GOSS, R.O. and JONES, C.D. The Economics of Size in Dry Bulk Carriers. Government Economic Services, Occasional Paper No.2. H.M.S.O., 1971. (See 1.4.3.)

2.5.2

GOSS, R. O. The Cost of Ship's Time. Government Economi c Services, Occasional Paper No.10. H.M.S.O., 1974. (See 1.4.3. )

2.6

HUBBARD, M. Comparative Costs of Oil Transport to and within Europe. J.Inst.Petro1., London. January, 1967.

2.7

J. Iron Steel Inst., London, November, 1966:-

United Nations TD/B/C. 4/75. Ferry

Services.

1970. United

United Nations,


2.7.1

NIJMAN, D.G. Optimum Size of Ore Carriers.

2.7.2

MEREDITH, W. G. and WORDSWORTH, C. the New Port Talbot Harbour.

2.7.3

KELLEY, D.H., SHIPP, P.J. and RIGBY, D.A. Optimum Size of Iron Ore Carriers.

2.8

HILLING, D. Barge Carrier Systems: Prospects. Benn Publications, 1977.

2.9

ENGVALL, L-O and ENGSTROM, H. A Method for Selection of an Optimum Fishing Vessel for Investment Purposes. F.A.O., Rome, 1969.

2.10

CHAPLIN, P.D. and HAYWOOD, K.H. Operational Research Applied to Stern Freezer Trawler Design. Inst. of Marine Engineers, Miscellaneous Section, March, 1968.

2.11

KENDALL, P.M.H. and TAYLOR, R.J. Theory of Optimum Ship Size. Journal of Transport Economics and Policy, May, 1972.

2.12

TINSLEY, D. Short Sea Bulk Trades. Dry Cargo Shipping wi thin European Waters. Fairplay Publications, .1984.

2.13

WING, J.F. and HI LLMAN , J.F. S.N.A.M.E. Spring Meeting, 1972.

2.14

McCAUL, J.R., ZUBALY, R.B. and LEWIS, E.V. Increasing the Productivity of U.S. Shipping. S.N.A.M.E. Spring Meeting, 1972.

2.15

MOORE, C.G. and POMREHN, H.P. Technological Forecast of Marine Transportation Systems, 1970 to 2000. S.N.A.M.E. Los Angeles Section, February, 1971.

2.16R

FRANKEL, E.G. and MARCUS, M.I.T. Press, 1973.

2.17

KOENIGSBERG, E. and LATHROP, D. S. Systems. A Conceptual Study. Corporation, 1970.

2.18

LAING, E . T . Containers and thei r Competi tors. Transport Centre, University of Liverpool, 1975.

2.19

KUVAS, J. Transport Capacity and Economics of Container Ships From a Production Theory Point of View. Trans. R.I.N.A. Vol.l17 (1975) pp.107-120. (Also the Naval Archi tect, April 1975).

2.20

OVREBO, Europe.

2.21

BIRD, J. 1971.

Size of Ore Carriers for

H.S.

Calculating the Inventory

Trade

and

Forecasting.

Ocean Transportation. Transocean Tug-Barge Matson Research Marine

S.H. Short Sea and Coastal Tramp Shipping in Institute for Shipping Research, Bergen, 1970. Seaports

and

Seaport Terminals.


Hutchinson,

2.22

HARDING, A.S. and YOUNGER, M.J. Ship Operations Viewed from the Quayside. Trans N.E.C.I.E.S. Vol.88 (1971-1972) pp.145-150.

2.23

DATZ, I.M. Planning Tools for Cornell Maritime Press, 1971.

2.24

FOSS, B. 1983.

2.25.1

Transport and Handling in the Pulp and Paper Industry. Vol.l. Proceedings of First PPI Symposium. Miller Freeman Publica~ions, 1974.

2.25.2

Ditto, Volume 2, 1976.

2.25.3

Ditto, Volume 3,1979.

2.26

AVI-ITZHAK, B. Speed, Fuel Consumption and Output of Ships. Ship Repair and Maintenance International, January, 1975.

2.27

ELSTE, V.H., SWIGART, J.E. and SWIFT, P.M. Overseas Trade: Great Lakes and Seaway Analyses. Marine Technology, January, 1976.

2.28

SWIFT, P.M. & BENFORD, H. Economics of Winter Navigation in the Great Lakes and St. Lawrence Seaway. Trans. S.N.A.M.E. Vol.83, 1975, p.229.

2.29

GALLIN, C. et al. New Standard Ships or Secondhand Ships? An economical evaluation using computer techniques. International Conference on Computer Applications in Shipbui lding (ICCAS). North Holland Pub., 1976.

2.30.1

SEN, P. Optimal Ship Choice Under Uncertain Operating Conditions. Trans R.I.N.A. Vo1.120, 1978, p.137.

Coastal Shipping.

Ocean

Transportation.

Norwegian Shipping Academy,

Seaway and Transport

2.30.2* SEN, P. Methods for Incorporating Uncertainty in Preliminary Ship Design. Trans. N.E.C.I.E.S. 1985-1986. 2.31

WOLFRAM, J. Uncertainty in Engineering Economics and Ship Design. Trans N.E.C.I.E.S. Vol.96, 1979-80, p.77.

2.32

CARACOSTAS, N. Deci sion-making 1979, p.353.

2.33

LIND, O. & ERICHSEN, S. Economics of Technological Development of Tankers and the Competition between Laid-up and New VLCCs. Trans. R. I.N.A. Vo1.120, 1981, p.145

2.34*

BUXTON, I.L. Matching Merchant Ship Designs to Markets. Trans. N.E.C.I.E.S. VoI.9B, 1982, p.91.

Containership Economics for Effective Analysis. Marine Technology, October


2.35

BUXTON, I.L. The Influence of Ship Operation on Design. WEGEMT, 8th School. Ship Design for Fuel Economy, course notes. Gothenburg; Chalmers Technical University, 1983,

Vol.3. 2.36

Medium to Long Term Analysis of the Shipping Market. Japan Maritime Research Institute, Tokyo, October, 1984.

2.37

PEARSON, R., and FOSSEY, J. Shipping. Gower Press, 1983.

2.38*

WAAGE-NIELSEN, E. Problems Facing Operators of Ro-Ro Systems. Included in "Progress in Cargo Handling" Vol.6, 1976. I.C.H.C.A.

2.39"

GARRATT, M. The Economics of Short Sea Freight Ferries. Marine Transport Centre, Uni versi ty of Liverpool, 1980.

2.40

Port Development: A Handbook for Planners in Developing Countries. United Nations Conference on Trade & Development (UNCTAD) 1978. TD/B./C./175.

2.41

HILLIER, F. S. and LIEBERMAN, G. J. Holden-Day, San Francisco, 1974.

2.42

DANTZIG, G.B. and FULKERSON, D.R. Minimising the Number of Tankers to Meet a Fixed Schedule. Naval Research Logi sties Quarterly, 1954-55.

2.43

Terminal Operations: Enter a New Generation Planning Tool. Cargo Systems, May 1983.

2.44

BUHR HANSEN, S. Optimising Ports through Computer Simulation Sensitivity Analysis of Pertinent Parameters. O.R. Quarterly, 1972.

2.45

SEN, P. and BARI, A. Inland Waterway Fleet Replacement: Evaluation with Multiple Objectives. Trans. R.I.N.A., 1985.

2.46

NEHRLING, B. Fuzzy Set Theory and General Arrangement Design. LC.C.A.S., Trieste. 1985. North Holland Publishing.

3.

World Deep Sea Container

Operations Research.

DESIGN OF SHIPS

3.1*

WATSON, D.G.M. and GILFILLAN, A.W. Some Ship Design Methods. Trans R.LN.A. Vo1.119, 1977, p.279. (Also in the Naval Archi tect, July 1977. )

3.2.1

BENFORD, H. General Cargo Ship Economics University of Michigan, 1968.

3.2.2

BENFORD H. Bulk Cargo Inventory Costs and their Effect on the Design of Ships and Terminals. Marine Technology, October 1981, p. 344.


and Design.

3.2.3*

BENFORD H. The Rational Selection of Ship Size. S.N.A.M.E. 1967.

3.2.4

BENFORD H. Optimal Life and Replacement Analysis for Ships and Shipyards. Trans. R.I.N.A. Vol.114 (1972). (Also the Naval Architect, October 1972) .

3.3

FARIDANY, E.K. LNG Review. A Study of Marine Cargo Operations, Ship Technology, Project Finance, LNG Prices & Market Prospects for LNG. Energy Economics Research Ltd, Wokingham, 1977.

3.4

CHRISTOPHE, J.P. et al. Optimisation of LPG and LNG Carrier Projects. Gastech Conference, Hamburg, October 1982.

3.5

BUXTON, 1. L. and SNAITH, G. R. The Development of the Bulk Carrier. Institution of Civil Engineers Symposium, November, 1969.

3.6

SCHONKNECHT, R. et al. Ships and Shipping of Tomorrow. MacGregor Publications, 1983.

3.7

GETZ, J.R., ERICHSEN, S. and HEIRUNG, E. Design of a Cargo Liner in Light of the Development of General Cargo Transportation. S.N.A.M.E., Jubilee Meeting, 1968.

3.8

MEEK, M. Operating Experience of Large Container Ships. Trans. Inst. Engrs. Shipbldrs in Scotland, Vol. 118 1974-1975, pp.55-76.

3.9*

ERICHSEN, S. Optimi sing Containerships and Terminals. S.N.A.M.E., Spring Meeting, 1972. version: Uni versi ty of Michigan Report 123) .

3.10

ZACHARIADES, A. What Influences Marine Engineers Review, May 1983.

3.11

VOSSNACK, E. Aspects of Cost from the Shipowner's Point of View. Symposium on "Developments in Merchant Shipbui lding". Delft Universi ty, May, 1972.

3.12

GALLIN, C. et al. Ships and their Propulsion Systems: Developments in Power Transmi ssions. Lohmann & Stolterfoht Gmbh, 1981. 419 pp.

3.13.1

FISHER, K.W. Economic Optimisation Procedures in Preliminary Ship Design. (Applied to the Australian Ore Trade). Trans. R.I.N.A. Vo1.114., 1972 pp.293-320. (Also the Naval Architect, April, 1972.)

Optimal

Ship

Trans.

Their (Full Speed?

3.13.2* FISHER, K.W. The Relative Costs of Ship Design Parameters. Trans. R. I.N.A. Vol. 116, 1974, pp. 129-155 . (Also the Naval Architect, July 1974) . 3.14

UNIVERSITY OF MICHIGAN. Computer Lecture Notes, published 1970.

Aided

Ship

Design


3.15*

NOWACKI, H., BRUSIS, F. and SWIFT, P.M. Tanker Preliminary Design - An Optimisation Problem with Constraints. Trans. S.N.A.M.E., Vol.78, 1970.

3.16

LAREDO, A. et al. Design of the First 550,000 dwt Tankers. Trans. S.N.A.M.E. p.209.

3.17

LAMB, T. A Ship Design Procedure. October, 1969.

3.18

HOLTROP, J. Computer Programs for the Design and Analysis of General Cargo Ships. International Shipbuilding Progress, February, 1972.

3.19

HERBERT, R.N. Design of the SCA Special Ships. Technology. October, 1971.

3.20

JOHNSON, R.P. and RUMBLE, H.P. Determination of Weight, Volume and Cost for Tankers and Dry Cargo Ships. Clearinghouse AD 669 568, April, 1968. (Newer version of paper in Marine Technology, April, 1965).

3.21

KRAPPINGER, o. Great Lakes Ore Carrier Economics Preliminary Design. Marine Technology, April, 1967.

3.22

SNAITH, G.R. and PARKER, M.N. Ship Design with Computer Aids. Trans. N.E.C.I.E.S., Vol.88, 1971-1972.

3.23

FEMENIA, Plants.

3.24

THORVALDSEN, S. Computer Aided Ship Design and Evaluation of Sea Transportation. Norwegian Maritime Research, No.2, 1975.

3.25

COLLIN, L.T. and BERGSTROM, K. Comparison of Power Plant Performance. WEGEMT 8th School, Gothenburg. Chalmers Technical University, 1983, Vo1.2.

3.26

PARSONS, M. G. Optimization Methods for Use in Computer-Aided Ship Design. S.N.A.M.E. STAR Alpha, 1975.

3.27

COUCH, J. C. The Cost Savings of Multiple Ship Production. International Shipbuilding Progress, August, 1963.

3.28R

FETCHKO, J.A. Methods of Estimating Investment Cost of Ships. University of Michigan, Dept. Nav. Arch. & Mar. Eng. Rpt. No.79. 1968.

3.29

KOMOTO, M. & YABUKI, S. The Effect of Higher Fuel Prices on the Design of Ships. International Marine and Shipping Conference, 1976. Institute of Marine Engineers.

3.30*

CARREYETTE, J. Preliminary Ship Cost Estimation. Trans. R. I.N.A. Vol.120, 1978 p.235-258. (Also in the Naval Architect, July 1978.)

Generation of Vol.8S, 1977,

Marine Technology,

Marine

and

J. Economic Comparison of Various Marine Power Trans. S.N.A.M.E., Vo1.81, 1973.


3.31.1

GALLIN, C. Fuel Economy, Propul sion Efficiency and Diesel Engine Installations. Motor Ship, Sept 1980.

3.31. 2

GALLIN, C. Al ternati ves for Economical Diesel Propul sion. Motor Ship, May 1981.

3.31.3* GALLIN, C. &: HIEDERICH, O. Economical and Technical Studies of Modern Ships. Shipbui lding and Marine Engineering International, April, 1983, p.157. 3.32

International Symposium on Advances in Marine Technology. June 1979 Trondheim. University of Trondheim, 1979, 2 Vols. (general papers on ship design aspects) .

3.33

CZIMMEK, D.W. &: JORDAN, C.H. Optimization of Segregated Ballast Distribution and its Impact on Tanker Economics. Marine Technology, April, 1981.

3.34

REINERTSEN, W. Economic Trends Ship, May 1982, p.77.

3.35

HAKKINEN, P. Evaluating the Economics of Main Machinery: An Integral Approach. Motor Ship, Aug 1982, p.38. (see Ref. 5.5) .

3.36

Nedlloyd Group's Roro Concept for Middle East Trade. Holland Shipbuilding April, 1979. Shorter version in: Motor Ship, July 1979.

3.37

BARBER, p.23.

3.38

Ship-Trans-Port, Rotterdam, Sept 1982. Netherlands Maritime Research Institute &: Port of Rotterdam, 1982. (includes SWIFT, P. Next Generation of Energy Carriers. pp.227-258)

3.40

MILCH, S. &: BORGE, L. Fuel Saving Vessels: A Case Study. Norwegian Maritime Research (No.4) 1981.

3.41

SHIPSHAPE: A New Ship Design Program from Norway. Ship, Dec. 1983.

3.42*

KERLEN, H. How Does Hull Form Influence the Building Cost of Cargo Vessels? Second International Marine Systems Design Conference, Danish Technical University, Lyngby, May 1985.

3.43*

HUTCHINSON, B. Application of Probabilistic Methods to Engineering Estimates of Speed, Power, Weight and Cost. Marine Technology, October 1985.

3.44

ERICHSEN, S. and JAEGER, A. be published 1987.

N.

Box, Wheel or Carton?

in Ship Design.

Motor

Motor Ship, Feb 1982,

Motor

Handbook in Marine Design.

To


4.

MARITIME STATISTICS

4.1.1

FEARNLEYS,

Oslo.

World Bulk Fleets (Half-yearly Series) .

4.1.2R

FEARNLEYS,

Oslo.

World Bulk Trades (Annual Series) .

4.1. 3R

FEARNLEYS,

Oslo.

Review

4.2.1R

Shipping Statistics. A wide variety of collected tablesj published monthly. Institute for Shipping Research, Bremen.

4.2.2R

Shipping Stati sti c s Yearbook.

4.3R

LLOYD'S REGISTER OF SHIPPING. Series) .

4.4

GENERAL COUNCIL OF BRITISH SHIPPING. British Shipping Statistics. Published annually, and included in Annual Reports pre-1973 (then the Chamber of Shipping).

4.5

FAIRPLAY. World Ships on Order (arranged by ship type). (Quarterly insert in magazine) .

4.6.1

MOTOR SHIP. Ships on Order (arranged by country of bui Id) . (Quarterly) .

4.6.2

LLOYDS SHIP MANAGER. type). (Quarterly).

4.7R

BRITISH PETROLEUM. (Annual Series).

4.8.1R

UNITED NATIONS. Monthly Bulletin of Statistics. issues contain speci al annual tables) .

4.8.2R

UNITED NATIONS. Maritime Transport Study. Commodi ty Trade by Sea Statistics. 1975-78. UN. Statistical Paper Series D, Vol. 27-30. Geneva, 1983.

4.8.3R

As 4.8.2 but for 1979-82.

4.8.4

UNITED NATIONS.

4.9

BRITISH PORTS AUTHORITY. Port Statistics. (Annual series, formerly published by National Ports Council).

4.10.1

NETHERLANDS MARITIME INSTITUTE . Maritime Research Statistics 1979. (Details of sources of national trade and other statistics)

4.10.2

NETHERLANDS MARITIME INSTITUTE. Employment of the Deepsea Conventional and Specialised General Cargo Fleet. 1979.

4.11

MARITIME TRANSPORT RESEARCH. publi shed in Ref. 2.1.

4.12R

O. E. C. D.

(Annual Series).

Bi - annual summary of 4.2.1. Statistical Tables (Annual

World Order Book (arranged by ship BP Statistical Review of World Energy (Various

UN, 1986.

Review of Maritime Transport (Annual).

Statistics

Maritime Transport (Annual Series).


up

to

1972

4.13

Fairplay World Ports Directory (formerly called Port Dues, Charges, and Accommodation) Fairplay Publications (Annual) .

4.14

Lloyds Ports (Annual) .

4.15R

DREWRY, H.P. Shipping Statistics and Economics. (Monthly report on the freight markets etc) .

4.16R

DREWRY, H.P. Shipping Studies. Series of consultants reports. Over one hundred published from 1972, covering a wide variety of topics such as Combined Carriers, World Grain Trade, VLCC Ports etc.

4.17R

CALVERT, J. and McCONVILLE, J. The Shipping Industry: Statistical Sources. Ci ty of London Polytechnic, 1983.

5.

CONFERENCES

of

the

World.

Lloyds

of

London

Press

London.

The subject of economic evaluation of alternative designs, particularly machinery, fuels and ship performance, has resulted in a number of papers, mostly to conferences. Conferences are numerous, though many of the papers have a strong salesmanship emphasis. However among the following conferences, papers may be found which make a useful contribution and/or provide background for the application of engineering economics. 5.1

First International Coal Fired Ships Conference. April 1980. Shipping World and Shipbuilder.

5.2

Shipboard Energy Conversion Symposium. S.N.A.M.E., New York, Sept 1980.

5.3

Symposium on Wind Propulsion of Commercial Ships. R.I.N.A., London, November, 1980.

5.4

Conference on Priorities for Reducing Fuel Bills. Marine Media Management, London, February 1982. Trans.I MarE, 94C Conf.No.12, 1982, 86 pp. (includes SVENSEN, T.E. Techno-economic reasons for selecting fuel saving priori ties) .

5.5

Fourth Marine Propulsion Conference. Motor Ship, London, March 1982. (includes HAKKINEN, P. Evaluating the economics of main machinery: an integral approach). (See Ref.3.35) .


5.6

Theory and Practice of Marine Design. RINA, London, April 1982. First International Marine Systems Design Conference (includes: MEEK, M. The effect of operational experience on ship design. LANGENBERG, H. Methodology and systems approach in early ship design in a shipyard. KEIL, H. Methods covering the technical and production costwise optimization of a shipbuilding project and their effects on the planning work of the shipyard) .

5.7

Ships Cost Symposium. S.N.A.M.E., New York, Sept 1982. (includes HOWARD, J.L. & KVAMSDAL, R.S. Energy efficient LNG carriers) .

5.8

Roll-on/Roll-off Conferences: RoRo-76 to RoRo-86. Conferences every 1-2 years on aspects of roll-on/roll-off ships and operation. (1984 includes: HE I RUNG , E. and BRETT. P.O. Aspects of Optimising RoRo Designs). Business Meetings Ltd., Rickmansworth.

5.9

First International Handling Conference.

5.10

Fourth International Handling Conference. Publications, 1986.

Grain Trade, Transportation and Cargo Systems Publications, 1982. Coal Trade, Transportation and (CoalTrans 86). Cargo Systems


APPENDIX ESTIMATING COSTS

The engineer is often concerned with evaluating al ternati ve designs. The alternatives will usually differ not only in performance, but in their first costs and operating costs. It is, therefore, useful for him to obtain quickly an indication of relative costs, before setting in train more detailed studies which may involve work by other organisations. Cost estimates may be broadly divided into three main categories: (i) (ii) (iii)

Feasibi li ty study cost estimate (or preliminary or budget estimate) for general investigations. Design study cost estimate, associated with detailed exploration of a few al ternati ves. Fully detailed cost estimate, usually for tendering purposes.

The expected level of accuracy increases with detail, as does the amount of data and effort required. This Appendix will be concerned only with category (i), because cost estimating is more likely to be applied at this level by ship operators, consultants, equipment suppliers, regulatory bodies, researchers, etc., rather than at the more detailed levels, which are largely the preserve of professional cost estimators, e. g. in shipbui lding companies. It is not possible in this publication to suggest more than very simple cost estimating relationships for 'ball-park'-type estimates; nevertheless, these can still be useful in establishing the potential feasibility of a project, and in ranking the principal al ternati ves for more detai led study. In the ship design context, the need to estimate the following principal costs to carry out an economic evaluation is indicated on page 83:

(i) (ii) (iii) ( iv) (v)

(vi) (vii)

Ship first cost Daily running costs Fuel costs Port charges Cargo costs Capital charges Freight rates (unless RFR is the criterion)

The following notes will· assist in producing approximate estimates, but are not a substitute for more detailed methods or more accurate data where these are available. References 1.21, 2.16, 3.2.1, 3.9, 3.20, 3.28, 3.30 and 3.42 may also usefully be consul ted for methods and data.

Appendix - 133

Ship First Cost At the simplest level, the first cost of a ship is influenced mainly by its type, size, and speed. Where the range of possible specifications is small, e.g. in straightforward vessels such as tankers, size alone is often a fair guide to approximate first cost. Maritime journals such as Fairplay and Lloyds Ship Manager, and References such as 4.15 include published prices of recent contracts, and graphs can be plotted to give an indication of expected prices, at least when market conditions are reasonably stable. Such graphs may indicate whether a simple cost relationship of the form: Cost = k (size)x may be derived. The slope of such a curve, if plotted on log-log graph paper is given by x, typically about 0.7; that is, cost increases less rapidly than size, as would be expected. Regression analysis can be used where there may be more variables, e. g. speed. Care needs to be taken to keep the data as consistent as possible, e.g. untypical ships must be eliminated and data from the same time periods should be used, as well as a relatively stable currency, such as U. S. dollars. Vossnack of Nedlloyd suggests that cost per tonne lightship may also be used, with typical prices being $1800-2000 per tonne for deep-sea container and RoRo vessels in 1985 (when market prices were low). Bulk carriers would be 80% of this, VLCCs 75%, and products/chemical tankers 108%. Where the alternatives differ in other respects, e.g. speed, machinery type, hull material, etc. a more detailed process is required, unless the cost of the differences can be easily identified and simply added to the basic price, e. g. more powerful deck cranes. The total cost of a ship may be divided into about eight principal categories, as indicated in Table 14 which gives an indication of the breakdown of shipbuilding costs into those categories for three types of ship. The following relationships give an indication of how the main components may be estimated at the feasibility study level based on typical U.K. experience. It is assumed that the ship technical data will already be available from other design procedures, e.g. steelmass and machinery power.

(0 Steelwork Materials Cost The floating steelmass is taken from the lightship estimate. The scrap percentage (typically 10% but 20% or more for small vessels), is added to give the invoiced steelmass in tonnes. The corresponding average price per tonne of steel material can usually be obtained from a steelmaker, e.g. British Steel Corporation who publish a price list for each main type of steel, heavy plates, sections, etc. Current prices for mild steel are around £250 to £350 per tonne. Extra may have to be added for high-tensile steel, or a preponderance of very thin or very thick plates, etc.


TABLE 14 Approximate Percentage Breakdown of Shipbuilding Costs

Item

Cargo Li ner 12-20000 dwt

1 Steelwork materials 2 Steelwork labour 3 Outfit materials and sub-contractors 4 Outfit labour 5 Main propulsion machinery

10 } 22

13

12

13

19 } 26 7

16

13

12 } 1: 27

-

6 Other machinery 7 Machinery installation labour 8 Overheads 9 Total building cost Sub-total materials Sub-total labour, including overheads

10 Approximate 1985 selling price, fM

Bulk Carrier 25-50000 dwt (geared)

15

}31

7

}26

}23

3

Tanker 20D-300000 dwt

20) 34 14 18} 26 8

:}a

21

24

22

100

100

100

57

53

53

43

47

47

8-14

10-17

35-45

Notes:

1 Includes plates, sections and welding materials. 2 Oirect labour only, excluding overheads. 3 Includes semi-fabricated materials, e.g. timber and plplng, items of equipment like hatch covers, winches, anchors, galley gear, and subcontractors such as insulation and ventilation. Electrical equipment outside machinery space. 4 Shipyard outfit trades only including electrical, excluding overheads. 5 Slow-speed diesel or equivalent, e.g. boilers, turbines, gearing, condenser. 6 Auxiliary machinery, generators, shafting, pumps, piping, controls, in machinery space. 7 Shipyard trades only. 8 Includes variable overheads, e.g. social security and holiday expenses, supervision and power supplies, and fixed overheads like plant maintenance. 9 Profits not included, so percentages of selling price should be slightly lower.

Appendix - 135

(ii)

Steelwork

LabOlU'

Cost

At the simplest level, from: S

steelwork labour cost can be estimated

1 manhours x wage rate tee work tonnes x tonne steel manhour

Manhours per tonne depend, not only on the general level of productivity in a particular shipyard, but also on the size and type of ship. Large vessels, such as tankers, have greater steelmass per unit area of structure, i.e. thicker plating, as well as more repetitive components, than smaller ships, e.g. ferries. Manhours per tonne for complex regions, e.g. ends and superstructures can easily amount to two or three times that for parallel mid-body construction. As a first approximation, Carreyette in Ref. 3.30 suggest that steelwork manhours may be estimated from: Manhours • 227 x

where

W L CB

= invoiced steelmass, tonnes = length b.p., metres = block coefficient

This suggests that manhours per tonne can vary from below 50 for large ships, to over 200 for small ships. Substantially higher figures are appropriate for warships and structures offshore. Wage rates per manhour excluding overheads vary from yard to yard and country to country. In the U.K. the rate at present is approximately £5 per manhour; but allowance should be made for inflation if delivery dates are a long way ahead. (iii)

Outfit Materials and Labour Cost

The outfit cost of a ship can vary markedly with ship type and specification; for example, variations in cargo handling gear, accommodation and equipment. At the simplest level, a cost per tonne of outfit mass could be assumed for material plus labour, say around £3000 to £4000 for fairly straightforward ships. At a slightly more detailed level, material and sub-contractors' costs could be separated into a small number of items where information can often be obtained from manufacturers, e.g. hatch covers and cargo handling equipment, plus an aggregation of other remaining items based on their total mass, say around £2000 to £3000 per tonne. Labour costs including machinery installation will depend on the .manhours, which for any given type of ship may be approximately related to ship size or outfit mass, e. g. : where and

Manhours = kLIB B breadth mld., metres k 200 to 300 for straightforward ship types

= =


Wage rates for outfit - workers are generally similar to steelworkers. Carreyette suggests that outfit labour can be estimated from: Manhours = 2980 x (outfit mass)2/3 and outfit material from: Cost = D x (outfit mass)0.95 where D was 2011 in pounds in 1977. This figure can be updated by the use of a price index such as "Price Index Numbers for Current Cost Accounting" published by HMSO. This suggests that the 1986 coefficient would be about 4000. (ivJ

Machinery Cost

Economic studies comparing alternative machinery are common. In general, each different type of machinery has a different first cost, both of the basic prime mover, and as installed as a complete system. Broadly speaking, the cost of reciprocating machinery rises faster with increased power than that of rotating machinery, i. e. i t has a larger exponent in the cost relationship. The exponents are, however, less than unity, indicating that cost per uni t power falls wi th increasing power. Machinery cost

= k(Power)n

Type of Machinery

n

Relative cost at 15 MW

Slow speed diesel

0.70-0.75

100

Geared medium speed diesel

0.75-0.80

85-95

Geared steam turbine

0.50-0.60

110-115

Industrial type geared gas turbine

0.50-0.60

115-125

The above are total machinery costs, including auxiliaries. The exponent for slow-speed diesel engines alone is about 0.8, taken over a wide range of powers, but for a particular model and cylinder size, about 0.9. Derated versions (e. g. to reduce specific fuel consumption) are almost the same price as the maximum rating model, despite the lower output. Currently, k is about f700 000 to 900 000 with power in MW for a slow-speed diesel installation, of which the main engine comprises about f200 per kW in the 15 MW range. Coefficients for the other types may be derived after selecting an appropriate exponent. .

Appendix - 137

The relative first costs at a maximum continuous rating (MCR) of about 15 MW are shown; the ratios will be different at other powers because of the different slopes of the curves. It should be noted that these costs are per unit at MCR. Because different machinery types may require different installed powers to achieve the same ship speed (different transmission or propulsive efficiencies and service ratings), the ratios of absolute costs may not be the same as the relative costs. For twin-screw propulsion, about 15% can be added for diesel or gas turbine, and about 25% for steam turbine. For electric transmission, compared wi th gearing / 15 to 20% can be added. It is often possible to obtain an estimate for the price of a slow-speed diesel from a manufacturer. Total machinery cost may thus be estimated by multiplying this figure by about 2 (high powers) to 2.5 (low powers). Approximately 80% of total machinery costs is contributed by the ten most significant items of equipment. Broad corrections may be applied for maj or changes, such as: ship type machinery aft or midships propeller type and r.p.m. steam conditions and number of boilers difference in major auxiliaries alternative fuels, e.g. coal. Beyond this level, a more detailed specification and quotations from sub-contractors would be required for a full cost estimate. (v)

Overheads

Overhead costs (sometimes called establishment charges) are costs which cannot be allocated to any particular contract, such as supervisory staff, training, power supplies, capital charges on plant, insurance, local taxes, maintenance, research and development, and marketing. Overheads are often expressed as a percentage of total direct labour costs as calculated previously, typically about 60 to 150%. (vi)

Profit

In a shipyard, it is the j ob of management and not the cost estimator to decide on an appropriate profit margin to add to the estimated building cost. The decision will be influenced by the experience of the yard with the type of work in question (and the associated uncertainty of the cost estimate), the yard's order book, the state of the shipbuilding market and competition, and the standing of the customer. A figure of about 10% of estimated costs is aimed at, but rarely achieved in the present competitive world of shipbui lding. In simple cost estimates, it is possible to aggregate both overheads and profit together by adding about 30 to 35% to the sum of steelwork plus outfit plus machinery costs.


(vii) Total First Cost and Selling Price

The total price estimated from summing the above i terns can then be compared with current market prices to assess whether the results appear to be reasonable. However, over recent years, many shipyards have quoted prices below cost to obtain work, assisted in some cases by subsidies. Small reductions are possible for production of multiple ships. It is estimated that by doubling the number of ships produced in a batch in Europe, their average cost can be' reduced by about 2 to 3%, i.e. the slope parameter of the progress curve (or learning curve) is about 0.975. This means that the average cost of each of N ships is N-o~0365 times the cost of one ship, because 2-0-0365 = 0.975 (see Reference 3.27). The cost of labour on repeat ships falls faster than material costs.

Operating Costs (i)

Daily Running Costs

Daily running costs include such items as crew costs, upkeep costs and insurance. Crew costs depend on the number of the crew and their nationality. Figure 34 gives an indication, where high cost flags include U.S., Australian, Japanese; medium costs Europe and South America; and low cost Asia generally excluding Japan. Since most of the other elements are related to ship size and type, it is possible to relate daily running costs to a ship parameter. Figure 35 shows how other daily costs vary with size for typical ships. The band indicates that for any given size and type of ship, there will be a variation between older and newer ships, between those wi th different types of machinery and equipment, between different owners and between those wi th different operating patterns.

Appendix - 139

DAlll

UHUll

tom

tom £ mo

/ /

Il

2000

1100

.000

V

1600

/

1400

4000

/

1200

V

/

tOSl / ."w FlA V IDOO

/

J

IDI

/ I /V '/V

iCO

400

2DC

~

I

/

IILl

1000

--===;

4000 HOD

::

2000

~ ;; .,

1500

MH ITS

la. COSl

-----

~ 30

20

...... -... ... .....

..

DAILY COSl S

£

2

• OW

3 4 3 4

• IW

'0000

• OW

e000

·.1

• .1

. ./'l IIllJ

./1.

HO SOD

/"'J

110

: ;[

/ 1

~

V

VV 1-5

./

f-(

l,.VV

l/

l,.)--

; /'" ~

~

~

&000 4000

3000 7000 1500

~

1000 .00

I,Y

& 00

4 DO

4

5

&

'10

15

211

10

40

SIZE t TMOISUOS ).

Fig.35

r-r ~ ...,.. --' ..... IL. ~ ~ V V ~~

1// ~

~

V1" ~

,....,. "7

~

.A'f"

400

100

70

ADO MAUII' COSTS FROM flliH

O· 7 0 OW O·ISoOW 1·0 ·OW 1·7 • OW 1·4 • OW

1000

----.. 7. .,

1Doe

BOARD

c

%

'0

so

40

NUMBER ON

-

...-

fOR SIZE SCALE

CllMllIU110I CAUIERS. lAIHRS MULil- DEtl fIEIIiKiERS. CKOII tAL TAHlERS FAST tAHO L1IERS CUI AlHER SHI~. IEEfERS lOLL-OH /ROLL-OH SKI"'. L.' li. CURIE RS L.ft Ii. CURl ERS .

5000 SOOO

~

2000

Manning Costs 1985. (Including Wages, Benefits, Victualling).

10000

::;

/ -""

V

/

CREW

Fig.34

./

MEOI NM tOSl

HA IS

~

10

1000

Range of Ship Running Costs - 1985.


50 ill

10 100

150

700

300

400

&111

100 1000

Table lS shows running costs broken down by maj or category for four vessel types. Crew costs include not only wages, but victualling, leave and reliefs, training, benefits, and travel. Upkeep includes maintenance, repair, stores and lubricating oil, while miscellaneous includes administration, equipment hire, etc. TABLE 15

Percentage Breakdown of Daily Running Costs

120 000 dwt bulk carrier Typical crew number

2000 TEU container

30000 dwt tanker

3000 dwt coaster

22-30

18-26

14-22

7-12

Crew %

47

48

46

61

Upkeep

30

27

32

20

Insurance

16

19

14

10

7

6

8

9

100

100

100

100

18

14

24

34

Miscellaneous Total % Approx % of total cost incl. capital, fuel, port and cargo handling

Maintenance and repair costs vary with ship size, machinery and age. Analysis of actual M & ~costs suggest that they are roughly proportional to (ship size)O· and that they increase with age in real terms (i.e. before allowing for inflation) at about 3 to S% per annum. Insurance depends on a number of factors: ship type, size and value, plus the shipowner's record. As a proportion of first cost, annual total premiums covering all categories of insurance carried vary between about 1 and 3%. Where data is available from different time periods, the escalation rates given on page 51 may be used to adjust them to a common basis. Such rates may also be used to estimate future cash flows if calculations are being made in money terms. (ii)

Fuel Costs

Daily fuel consumption at sea and in port will already have been estimated from the technical calculations via service power and specific fuel consumption (Ref. 1. 21. 2) . Although fuel prices vary throughout the world, such differences are often small enough to ignore in feasibility studies. The prices published in journals

Appendix - 141

such as The Motor Ship, Lloyds Ship Manager or Lloyds List (Wednesday edition) may be taken as a good guide. After several years when heavy fuel prices were in the range $140 to $190 per tonne (diesel oil about $220 to $300), they fell dramatically in 1986 to about half those levels. Until some degree of stability emerges in fuel prices, it would be wise to investigate a range of prices in economic evaluations. (Ui)

Port Costs

Port costs comprise a miscellany of expenses, such as port dues, lighthouse dues, pilotage, tugs, port agents' fees - even bribes! They vary enormously from port to port around the world. The lowest costs per gross or net (registered) tor. are usually found for large ships in ports with few facilities, e.g. tanker loading jetty ports, while the highest tend to apply to small ships in ports with an extensive range of facilities. Total costs per net ton per port call can therefore be as low as 40p or as high as f4. Many ports now charge on a gross ton basis rather than net. Usually, however, great accuracy is not necessary at the feasibili ty study stage as port costs in total amount to less than 10% of total annual costs including capital charges, and the same rate is likely to apply to all the alternatives being studied. Canal dues must be added where applicable, calculated per net ton, al though the rules for measuring NT are different for both the Suez and Panama Canals. Dues per transi t per NT are approximately $1.83 laden and $1.46 ballast for Panama. For Suez there is a sliding scale based on Suez net tons and Special Drawing Rights, which range for laden ships from about $6 for small ships up to 5000 tons, to about $4 at 20000 tons to about $2 for the largest ships; ballast rates are 80% of laden. (iv)

Cargo Handling Costs

Cargo handling costs also vary widely between ports, especially for break-bulk general cargo. For the latter, loading or discharging in a port with low labour costs (e.g. in the Far East) may cost as little as f4-f5 per tonne cargo ship-to-guay or vice versa, rising to as much as f30-f40 in high cost areas such as North America. A realistic average to use for feasibility studies will depend on the range of ports served, and also the range of cargoes carried - low stowage factor cargoes such as steel costs less to handle than high stowage factor cargoes such as wool. Unit load cargo handling costs are more uniform throughout the world. A container can vary between about f50 to f120 ship-to-guay, or vice versa, i. e. about f5 to flO per tonne average cargo (multiplied by two for 'loading and for discharging). Stuffing and stripping the container itself will cost extra, but is not included in the sea freight charge. Bulk cargo handling costs are not usually paid by the shipowner. However, loading costs are usually small for cargoes such as coal or grain (which are often sold f.o.b.) say, 30p to f1 per tonne, while discharging is more expensive, around fl to f2 per tonne for mineral or granular type cargoes. Liquid cargo handling costs are


largely pumping costs which are absorbed by the ship (discharging) or shore terminal (loading). (v)

Capital Charges

Capi tal charges to cover the investment and a return on capi tal are a large element in annual ship costs, around 30 to 50% excluding cargo costs if a good rate of return is to be achieved. At their simplest, they are calculated as a direct proportion of first cost via the capital recovery factor. In more complex situations, where taxation and loans arise, the processes outlined in Part 11 are required to incorporate the acquisition cost into the economic calculations. In poor markets, shipowners will accept freight rates making no contribution to capital charges; but this cannot be sustained indefinitely, especially if there are loans outstanding on the ship. (vi)

Freight Rates

All of the categories mentioned previously are items of expendi ture. Income is generated from the product of cargo carried per annum times average freight rate. The derivation of annual cargo is discussed on page 83. Freight rates, especially in the bulk trades, vary widely with supply and demand. Past and present rates for particular cargoes and trade routes are published in References 4.1.3, 4.2.1, 4.2.2, 4.8.1, 4.12 and 4.15 and in the shipping press, from the trends of which an assessment can be made regarding possible future long term levels (unless RFR is the criterion). Some realistic escalation rate should also be applied as, in the long run, freight rates increase wi th inflation. Such references often also give freight rates dating back for several years, which can help in estimating possible escalation rates. Cargo liner freight rates are not usually published, varying widely between routes and different types of cargo. However, shipowners and cargo agents are usually willing to provide some current freight rates for particular cargo liner services quay-ta-quay. By selecting an 'average' cargo, e.g. machinery, paint or hardware, and allowing for stowage factor if weight/measurement rates are quoted (see page 25), a reasonable estimate can be made. On some routes, especially' short sea, 'freight all kinds' rates are quoted for containers, i.e. a rate per box irrespective of contents. Liner freight rates on a route do not fluctuate as widely as bulk rates, but remain constant for some months before any percentage change (overall or for special factors like bunker charges) is applied. The German cargo liner freight index' publi shed in Reference 4.8.1 can be used to give some guidance on escalation. . For all freight rates, the shipowner does not receive the full revenue. For bulk cargoes, brokers' fees will amount to typically 2.5 to 5% of the gross freight, while for liner cargoes within Conferences, rebates of typically 10% are granted to shippers who use only Conference ships. Most freight rates are now quoted in U.S. dollars; the appropriate conversion must be made if calculations are carried out in other currencies.

Appendix - 143

Engineering Economics and Ship Design - Buxton

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