Engineering Economics and Ship Design - Buxton

FOREWORD

I am very pleased to send on its way this third edition of DrBuxton's "Engineering Economics and Ship Design" in the hope thatit will continue to be of service to those interested in shipdesign and operation. The fact that there is still such a demandfrom both indu stry and from students for thi s work which was firstpublished in 1971, shows how close is the link between design andeconomics. The designer is today being called upon more than everto justify his decisions commercially. At the same time thecommercial background is, I believe, more uncertain than it usedto be, because of the variable nature of fuel price trends, orlabour costs; or because of the particular political environmentswhich can affect ship trades.

Under these conditions, the designer finds he needs to producealternative designs and then carry out the economic evaluation ofthem. It may involve al ternative propulsion systems, or differentmanning levels, or some other variable, but the guidance availablein this Volume should prove to be valuable. The basic format isstill arranged in the same way as found in the earlier editions,but figures have been updated; and the experience of ten more yearsof application since the second edition appeared has beenincorporated.

MARSHALL MEEKDEPUTY CHAIRMANBRITISH MARITIME TECHNOLOGY LTD

October 1986

Foreword - 3

CONTENTSPage

SUMMARY AND INTRODUCTION

PART I. SHIPPING'S ECONOMIC ENVIRONMENT

7

1. The Demand for Marine Transport 9

2. The Supply of Marine Transport 15

3. The Freight Markets 20

4. Operating Economics 26

PART 11. 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 . . . . . . . . . . . . . . . . . . . . . . . .. 65

7. Application 72

PART Ill. APPLICATION TO SH IP 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 beentreated in a general way as the intention is not to include anyextensive coverage of formal economics or detailed ship design,but to show how the two are related. The standpoint is that of thepractising designer who needs sufficient information to evaluatethe technical and economic performance of alternative designs ofships and their equipment. While many of the techniques may beused by shipowning management, it is not the primary purpose ofthis book to assist decisions about whether to build, when tobuild, or where to build, but rather what to build.

It is only in the last decade or so that rigorous economicevaluations have been seriously applied to ships. There wouldappear to be three principal reasons for thi s change:

(i) The' scope for making the wrong decisions in ship designhas increased greatly with expansion in ship sizes andtypes, together with novel concepts. Until recently, thedecision depended more on whether to build rather thanwhat to build, as each succeeding ship design was usuallya modification of an earlier one. Now, as one design ofocean-going ship can be 100 times larger than another, thescope for poor investment mul tiplies correspondingly.

(ii) It is axiomatic that a ship design must be the best for thejob, but technical criteria such as minimum resistanceare not enough. It is widely recognised that the maincri terion must be of an economic nature, giving fullweight to technical factors in its calculation. Theoptimal design is that which is most profitable, in thesense described in Part I I.

(iii) There has been increasing complexity in the financialconditions surrounding ship procurement. Traditionally,new ships were largely financed out of retained profits,but now cheap loans, accelerated depreciation, subsidiesand tax relief all add greatly to the difficulties ofestimating ship profi tabili ty.

The principles of 'engineering economy are straightforward, andengineers 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'seconomic environment.

I I The detai led mechanics of making engineering economycalculations

I I I Application of the principles to ship design.

An Appendix includes information on estimating building andoperating costs.

8 - Engineering Economics and Ship Design

PART I. SH IPPING'S ECONOMIC ENVIRONMENT

1. THE DEMAND FOR MARINE TRANSPORT

For centuries past, man has used boats and ships for commerce andtrade, but unti I the 19th century, the accent was on the transportof passengers and high-value cargoes - the present-day role of airtransport. Until the Industrial Revolution, local economies werelargely self-sufficient, so there was no demand for large scaletransportation. With the harnessing of steam power based on coalcame the demand for raw materials, especially for the textileindustry. Distant lands supplied wool and cotton and, in turn,received manufactured goods.

The application of steam to ship propulsion in the mid-19thcentury enabled reliable shipping services to be provided,initially for short-distance trades. As telegraph networks andcoaling stations became established further afield, not only wereworld-wide shipping networks developed, but also an importantexport trade began in bunker coal, largely supplied from Britain.Thus British ships were able to carry full cargoes outwards, andoffer real economies in the homeward transportation of rawmaterials such as iron ore and grain. The parallel development ofrailways opened up hinterlands to ports, but trains could notcompete with ships over large distances. The alliance of steampropulsion and iron shipbuilding proved an unbeatable combinationcompared with sail and wood, especially with continuous technicalprogress in hulls and machinery. Although steamships had higheroperating costs than sailing ships, their annual transportationcapacity and regularity, and hence revenue earning ability, werevery much greater, and by the end of the century they had displacedthe latter in deep-sea trades almost entirely.

The world's surface area is 71% water and Britain, with its great19th century empire, was roughly at the centre of the global landmass. Thus geography, politics and technical innovation allserved to make Britain the dominant nation in maritime transport,a position which was held well into the 20th century. The presentcentury has seen a massive increase in the demand for marinetransport of both raw materials and manufactured goods, althoughtemporarily interrupted by depressions. Freight, rather thanpassengers, dominate the shipping scenei indeed, moretonne-miles* of international freight are carried by sea than byroad, rail, and air put together throughout the world.

In terms of both cargo tonnage and tonne-miles, bulk cargoes aremore important than general cargoes (typically manufacturedgoods), although the position is reversed when cargo value isconsidered. As statistics of international and seaborne trade arenot as good as they might be, any analysis inevitably containsestimates 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:

FoodstuffsBasic MaterialsFuelsManufactures

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

These divisions are not very convenient for marine transport, asone class may contain both bulk and general cargoes (e.g.foodstuffs) or dry and liquid cargoes (e. g. fuel). Various bodiesattempt to produce more meaningful statistics for shipping, one ofthe more successful being the Norwegi an shipbrokers Fearnleys, whoregularly publish figures for major bulk commodities(Rei. 4.1. 2) * . Thp.i r fi gures are derived both from publi shed tradestati stics and from tracking individual shiploads. Individualnations publish extensive statistics on their seaborne trade, theU.K. figures being particularly detailed (Ref.4.9) while there areuseful guides to sources of mari time stati stics (e. g. Refs. 4.10.1and 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 nowextending their coverage of seaborne trade statistics generally,for example Ref.4.8.2, updated in Ref.4.8.1 with an annual specialtable containing 12 commodities and 19 regions; more detail isgiven in Rei. 4.8.3, although not as up-to-date.

Figure 1 shows the trends for dry and liquid cargo tonnages sincebefore World War 2. Al though tanker cargoes grew steadi ly at about10% per annum compound until the 1973 oil crisis, there has beeneffectively no growth since then, owing to increased pricesrestraining consumption and stimulating supplies nearer the pointof consumption, e.g. North Sea. Dry cargoes have grown almostcontinuously wi th minor fluctuations and now outweigh oil cargoesin tonnage terms. Figure 1 also shows the growth in the value ofworld trade in money terms, i.e. which includes the effect ofinflation. In real terms, i. e. money of constant purchasingpower, the pre-war figure would have been about the same as theimmediate post-war figure. Most of the increase in the 1970s hasbeen due to inflation; the real annual growth rates post-war havebeen between -5% and 10%.

* See bibliography on page 121 for references.


40

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Fig.l Growth of World Trade


Table 1 shows an approximate breakdown of world seaborne cargoesin 1984. The liner trades are more important for shipping demandthan the figures for general cargoes indicate, as general cargounit values and stowage factors are considerably higher than forbulk cargoes. The divisions between bulk and general cargoes andbetween deep-sea and short-sea cargoes are not easily defined.

TABLE 1

APPROXIMATE TONNAGES OF PRINCIPAL SEABORNECARGOES IN WORLD TRADE IN 1984

CARGO

Crude oilIron oreOil products (deep-sea)CoalGrainForest productsIron and steel productsChemicalsCementLiquefied gasesPhosphatesBauxite and aluminaRefrigerated cargoMinor bulk cargoes, deep-seaOther general cargoes, deep-seaShort sea cargoes

Total

MI LLION TONNES

950310300230210130100

705050404030

150200450

3310

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


Table 2 shows that most of the freight moving on deep-sea routes islow value bulk cargo, which will only be traded if transport costscan be kept to a reasonable proportion of the value of the cargo.Bulk transport by sea offers the lowest possible transport costover long di stances, i. e. less than 1% of air transport costs I

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 cargotransport costs by sea are about ten times higher than those ofbulk transport owing to the particular nature of the wide range ofcargoes, the careful stowage and expensive and slower cargohandling required, the limitations of exploiting the economies ofscale with the smaller quantities moving and high overheads, andthe higher speeds which higher value cargoes intrinsically demand,due partly to inventory costs, i.e. the capital tied up whiJ.e thecargo is in transit. Nevertheless, the inroads which air freightcan make into sea transport are clearly limited, for the simplereason that the low or medium value cargoes which predominatecannot afford high-cost transport. Air freight will continuetherefore to be the medium for those cargoes, small in tonnage buthigh in value, where the advantages of speed and inlandpenetration are worth a high premium, i.e. urgent, perishable, andvaluable commodities.

TABLE 2

APPROXIMATE UNIT COSTS IN DEEP SEA FREIGHT TRANSPORT

Typical Approx Typical Typical Freight Approxtransport annual cargo freight as % of pencemode tonnage, value cost value per

millions f./tonne f./tonne tonne-mile

Bulk Tanker, bulk 2500 15-200 4-15 10-30 0.1-0.3cargoes carrier

General Cargo liner 400 200-10000 50-200 5-15 2-4cargoes

High value Aircraft 5 over 10000 300-1000 5-20 30-50cargoes

Tonne-miles are a better guide to transportation requirements thantonnes. Of the estimated 13.5 x 10 12 tonne-miles for world tradein 1984, over 80% was composed of the following seven main cargotypes:

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 andWest 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. 4450 billiontonne-mi les, average haul 4680 nautical mi les.

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 billiontonne-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 billiontonne-miles, average deep-sea haul 3840 nautical miles.

Coal

Principal routes:U.S.E.C. - Japan, Australia - Japan, U.S.E.C. - Europe, CanadaW.C. - Japan, S. Africa - Europe, Intra-European. 1270 billiontonne-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. andCanada - 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 nauticalmiles.

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 1100billion tonne-miles, average haul 5500 nautical miles. Notethat the above areas include the most highly developedcountries of the world.

Al though marine transport dominates the shipping scene in terms oftonnage of ships in the world, mi li tary vessels are as significantin terms of construction cost. Ocean resourceexploration/exploitation vessels (e.g. for oil recovery andfi shing) are important in terms of numbers, though not of tonnage.Economic forces are seen at their clearest when applied totransport vessels, so that application of engineering economics isbest understood in that context. However the basic principles


apply wherever an economic cri terion can be developed as a measureof 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 asshown in Figure 2. Estimates have been made of number, grosstonnage and replacement cost for the world seagoing fleet ofvessels over 100 tons gross to give an indication of the relativeimportance of different categories.

CarrierDestroyerEscortSubmarinePatrol craftMine craftLand ing craftSupport craft

TugDredgerIcebreakerDrill shipSupply vesselCrane shipCable shipSur\ll!Y vessel

Figures refer to percentage ofwork! fleet OV!!,r 100 tons 9"055

NumbersiG. R.T./Replacement c

100%' 90 000 sh,ps447M G.R.T.860 x 109 pounds

CstchersFactoryvessels

INon·transport

55/11/63 I No' IiSlod inI- Lloyds RegIS'" ..

rl---'1- ------,.1------,'Fishi,.,. Service craft Military Other25/3/5 15/2/5 14/5149 marine craft

I 1/'1'Offshore(Self propell,multi-hull)Large yacht

ISEAGOING

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I

SELF PROPELLED MARINE VEHICLES

II

INLAND WATERWAYS(GREAT LAKESI

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19

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_T'u '''I' !Liquid Oil tanker BUlk- - -M:I~il ded< Cargo liner Container Igas (crude carrier freighter Reefer Ro-Ro - - - JChemicals products) Sill\!le ded< Heavy lift Car carrier

Combination (roasterl ship Barge carriercarrier (O.B.O.)

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 bybulk carriers and unit load ships, the latter having growntenfold in that period) .

Small tonnage of passenger vessels: 2%.

Large numbers but small tonnage of fishing vessels: 25% and3% respectively.

Large value but small tonnage of military vessels: 49% and5% respectively.

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

The offshore sector is understated, since non-propelledcraft such as barges are excluded.

A more detailed breakdown of the world merchant fleet over 100 tonsgross 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 thegrowth of world trade at about 8% per annum compound, but theoversupply of tonnage has not yet worked itself out, especiallyfor tankers. The increasing average size of ships can be deducedfrom the fact that until about 1950 the actual number of shipsremained virtually constant at around 30,000 while the fleettonnage quadrupled.

Figure 4 illustrates the growth in size of the larger vessels usedfor carrying the most important bulk cargoes over an even longerperiod. The logari thmic scale reveals the steady growth up toabout 1910, the relative stagnation between the wars, and thedramatic expansion as bulk carriers took over from multi-deckfreighters in the late 1950s. The curve has now caught up wi th its1860-1910 trendline, as there now are appreciable numbers of bulkcarriers in the 200,000 dwt (deadweight tonnes) size range.

The rapid increase of ship size was seen even more dramatically inthe case of tankers, where the typical larger vessels went from30,000 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 oftankers ordered since then has fallen sharply, as economies ofscale are now less available owing to the fragmentation of theinternational oil industry, and the reduced role played by the oilmajors like Exxon and Shell who are now less able to integrateexploration, production, transportation and refining.


TABLE 3

WORLD MERCHANT FLEET STATISTICS - MID 1985

Ships over 100 gross tons

Type of Ship Number Gross Tonnage Deadweight1000 ·000

Tankers:Over 30,000 GT (ca 50,000 dwt) 1377 110188 } 268355Under 30,000 GT 5213 28260

Liquefied gas carriers 776 9965 15.04M m3

Chemical and other tankers 1012 3696

Total: 8378 152109

Combination carriers 384 23726Dry bulk and ore carrriers

Over 20,000 GT (ca 32,000 dwt) 2054 684526000-20,000 GT 2953 41805

Total: 5391 133983 237312

Dry cargo ships:Cellular container & barge carriers 1011 18364Rc-Ro vessels (est. over 2500 dwt) 807 7000Multi-deck cargo (estimated) 10041 53225Single deck cargo 10774 19446

Total: 22633 98035

Total cargo carrying fleet 36402 384127

Other vessels (service craft):Fish catchers 21251 9447Fish factory 872 3732Passenger vessels & ferries 3815 8331Tugs 7737 2601Dredgers (self-propelled) 769 1560Supply ships 2146 1400Miscellaneous 3403 5071

Total: 39993 32142

Total world fleet: 76395 416269 673692

Mid 1975 63724 342162 553379

Source: Lloyd's Register of Shipping Statistical Tables 1985


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Fig.3 Growth of World Fleet


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3. THE FREIGHT MARKETS

The supply and demand for marine transport are matched in the shortterm through the mechanism of the freight markets, and in thelonger term through newbuilding and scrapping of ships. Themarket is international and the open competition provides a goodexample of the laws of supply and demand. Figure 5 illustratestypical supply and demand curves, which may apply to, say, thetanker market.

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Fig.S Supply and Demand Curves

Three levels of demand are illustrated and for any given level, theintersection with the supply curve determines the equi libri urnfreight rate and tonnage required and available. Each level of thedemand curves depends on the state of world trade as influenced byeconomic developments, weather, harvests, and political crises,but however high demand goes, there is a limit to supply in theshort term, so that the available tonnage is directed to thehighest bidder. At lower levels of demand there will be someunused capacity, either ships laid up, or encouraged to bescrapped, or slow steaming, or loading part cargoes, or spendinglonger in port (waiting for or handling cargo, or under repair).The supply curve shows that the supply of ships will dry up beforezero freight rate is reached, because ships are generally laid upwhen freight rates regularly fail to cover direct costs, excludingcapi tal charges. The equi libriurn point moves continuously asdemand changes, and as ship operators' perceptions of markettrends change, influencing decisions on buying, selling andchartering ships.

The actual matching of shipowners' supply of tonnage andcharterers' demand is mostly done by shipbrokers operating onshipping exchanges such as the Bal tic Exchange in London. OVer thecenturies, the shipping business has evolved standard practicesfor 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 "smallprint" clauses found necessary by years of hard-won experience,


but these may be modified by addi tions and deletions. Thefollowing is only a brief summary of the principal features whichaffect ship design; there are many finer points. For more detai ledinformation, consult a standard reference, such as Ihre (Ref. 1.9) .

Ships may ei ther be chartered (i. e. hired to someone wi th cargo totransport) or operated by the owner in his own business.

A. Chartered Ships

(i) Single Voyage Charter CVIC)

The shipowner undertakes to provide a vessel for the carriage ofspecific cargo(es) for a single voyage between two (oroccasionally more) ports. The charterer pays freight pe":t:"toIlC?;cargo actually loaded wi thin specified limits. "Tons" may be longtoris~ {"-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 theowner 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 drybulk cargoes. Freight rates are usually expressed as dollars perton of cargo for dry cargo, or sometimes as a lump sum for ashipload. Worldscale rates are used for tanker cargoes (see page25). Rates fluctuate appreciably wi th supply and demand as can beseen from the "fixtures" which are publi shed in the shippingpress, such as Uoyds Ust. The voyage charter market is sometimescalled the "spot" market. In each fixture, a certain number ofdays will be allowed for loading and discharging the cargo(" laydays"). If the port time is less than anticipated, theshipowner pays the charterer "despatch money", if longer, thecharterer 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 toRotterdam 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/ballast32 tonnes high viscosity fuel per day plus 1.5 tonnesdiesel oil at sea or in port. Daily running coSts £2900excluding 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 knLoading New Orleans 28,000/7,000BunkeringHomeward loaded 4,800 miles at 14.5 knWaiting for berthDischarging Rotterdam 28,000/4,000

Total voyageSay

= 12.9days= 4.0= 0.5= 13.8= 1.5= 7.0

39.740 days

BUNKERS HVFDO

26.7 days x 3240. ° days x 1.5

854 tonnes60 tonnes

PORT DISBURSEMENTS

Total port disbursements

U.K. port, leaving f7000 x 1.3New Orleans: Harbour dues

Cargo charges 1.00 xMiscellaneous

Rotterdam: Harbour duesCargo chargesMiscella.'1eous

$

20 00028000 28 000

6 000

30 000Nil

2 000

$9 000

54 000

32 00095 000

OTHER DISBURSEMENTS

Total Other Disbursements

TOTAL DISBURSEMENTS

Running costs: 40 x 2900 x 1.3HVF at SlOO/tonne: 854 x 100DO at $170/tonne: 60 x 170Commission 5 per cent of 28 000 x 16.00

FREIGHTSURPLUS

28 000 x 16.00Total over 40 daysPer day

150 80085 40010 20022 400

268 800

363 800

44.8 00084 2002 105

Note: Surplus has to cover loan interest and repayments, and provide a returnon shipowner's own capital. If actual loading and discharging times differfrom the assumed rates, demurrage or despatch money will be payable. An ownerwill make similar calculations, often us ing computers, for other voyagecharters being offered, and will usually select the one shOWing the highestdaily surplus, unless there are complications such as ship positioning beforeor after the voyage. Voyage charter freight rates fluctuate appreciably withsupply and demand.


(ii) Consecutive Voyage Charter

As above, but two or more voyages in succession may be contracted,e.g. oil companies may charter three consecutive voyages to coverpeak demand in winter.

Over a year, the owner's income from ei ther type of voyagechartering wi 11 be:-

Average cargo tonnage per voyage x Number of loaded voyagesper 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 timefor use by the charterer on the latter's business. Timecharteringis sometimes called period chartering. The period may either befixed in time, say three months, one year or even 20 years, or for around voyage ("trip" charter). The latter is sometimes used byliner companies to supplement their existing fleet for peakperiods, the former generally for bulk cargoes. The charterer isthus responsible for arranging voyages and cargoes during thisperiod; the shipowner provides the ship and crew and maintains thevessel. He is thus only responsible for:

Daily running costsCapital charges.

All voyage expenses, fuel, port charges, canal dues, cargohandling charges, are to the charterer's account, but in practicemay 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 perday, especially by offshore companies. Hire is payable only fortime in service, i. e. it ceases during repair or breakdown("off-hire") but it continues to be paid even if the ship sailsempty or is delayed in port.

Timecharters, especially the longer term ones, l1,aye_El_sj:§.):)ilisingeffect_ 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, giveslong term stability of transport costs, provides flexibility andmarginal tonnage, and a yardstick to measure the efficiency of thecharterer's own fleet (if any). Market fluctuations with supplyand 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 operatedentirely by the charterer for a specified period. The charterer


provides the crew, maintenance and generally uses the ship as if heowned it, merely paying a hire for the "bareboat". Sometimescalled demise charter. Not used as much as voyage or timecharters,but is the usual method when a ship operator leases a ship from afinancial institution like a bank. Hire is usually paid per tondeadweight per month, or a lump sum per month. There may be anoption for the charterer to purchase the ship at the end of orduring the charter.

(v) Contract of Affreightment

The contractor undertakes to provide a specified transportationcapability over a period. Although usually no ships are named,there will be maximum and minimum limits on the cargo quantitiesavailable, and possible restrictions at loading and dischargingports. The ships may not actually be owned by the contractor,whose skills lie in matching a number of charters to his availablefleet, to minimise ballast time. If not already owned, thenecessary ships may be obtained by chartering by any of the abovemethods. Sometimes used for large scale transport of minerals,e. g. iron ore South America to Japan. Freight is usually paid perton of cargo actually carried.

N. B. For all types of charter, the brokers' commi ssion must also bepaid out of freight income, typically 2.5%-5%, so that net, ratherthan gross, freight rates should be used to determine income.

B. Owner Operated Ships

( i) Industrial Carriers

Vertically integrated industrial concerns may operate their ownships to transport raw materials or finished goods, e.g. oil,steel, sugar, aluminium, paper companies. About 30% of the worldtanker fleet is owned by oil companies. Sometimes the actualmanagement of the fleet is subcontracted to a ship managementcompany which may own other ships itself. Freight as such is notnecessarily earned: the object may be to minimise transport costsof the overall industrial process, or occasionally to takeadvantage of favourable tax and other allowances.

Other advantages of ownership include: greater control of designand 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 anyquantity of cargo, usually general cargo, at published freightrates. Manufacturers exporting goods c. i. f. (cost, insurance,freight) require a regular service at predetermined rates, so thatthey can guarantee delivery time and cost. Cargo liners carry amiscellany of general cargoes, none large enough to justifychartering a whole ship. Occasional parcels of bulk commoditiesmay be taken to fill ships on a return voyage. Because fixed


expenses are high in providing a regular service where ships sailwhether full or nearly empty, and variable expenses are low,freight rates would tend to be depressed to this latter low levelif competition were not regulated, eventually resulting in theservice becoming uneconomic and being abandoned. Most cargo lineroperators 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 isusually "Liner Terms", i.e. the shipowner pays for all expensesquay shed to quay shed including cargo handling. Commission ispayable to cargo agents, as well as rebates to shippers who useonly Conference ships.

Liner freight rates do not always reflect the cost of carriage, asthe value of each commodity, the inward and outward imbalance oftrade, seasonal factors and the high cargo handling charges,especially for break-bulk cargoes, all influence the rate, whilethe effect of distance is not very marked. The general level offreight rates is usually set so as to give a 'reasonable' rate ofreturn to a Conference operator, and may be negoti ated on thi sbasis with shippers' organisations and independent accountants.Competition between operators in a Conference is on quality ofservice, not freight rates, e. g. offering faster ships, betterrecord in respect of cargo damage and pi Ifering, etc. Independentliner operators ('outsiders') provide competition on some routes,offering slightly lower freight rates. Cargo liners tend to carrycargoes both ways (unlike most bulk carrying vessels) but areusually limited by cubic capacity rather than deadweight.Consequently many rates are expressed per "measurement ton" of onecubic metre (or formerly 40 cu. ft.) or as weight/measurementwhere freight is charged either per ton weight or per tonmeasurement (i.e. volume), whichever is the larger. On somecontaineri sed routes, commodi ty box rates may be used, i. e. a rateper container, irrespective of the quanti ty inside. Al thoughConferences have been criticised as inefficient cartels, no-onehas yet come up wi th an al ternati ve which provides long termregular services at freight rates acceptable to both shipper andshipowner.

Over a year, the owner's income wi 11 be:

Maximum cargo capacity avai lable x Average proportion ofcapaci ty fi lled x Round voyages per annum x Average netfreight rate per ton x 2. (The 2 derives from the ability tocarry one cargo outward, and another homeward on a roundvoyage) .

Worldscale

Al though most freight rates specified in the above methods ofoperation are expressed as money terms per ton of cargo, togetherwith qualifications as to loading rates etc., the tanker businessis sufficiently homogeneous for a freight rate scale to haveevolved. By this means current freight rates are expressed as apercentage of a basic figure for each route, without detai ledreference having to be made to the exact voyage and conditionsduring negotiations.


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

W100 via Cape = $28.00W80 = 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 = $1,223,000W100 via Suez loaded and ballast = $17.00 + 3.00 canal duesW80 = 0.80 x 17.00 + 3.00 = $15.50 (or t12.77) per ton cargoActual 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 themoney freight is less going through Suez, the net daily earningswill be more or less the same owing to the shorter voyage. Cargodeadweight via the Cape would be about 1,000 tons less than viaSuez owing to larger bunkers required. The recent enlargement ofthe Suez Canal now permits vessels of up to about 150,000 tonnesdeadweight fully loaded or about 380,000 tonnes in ballast.

4. OPERATING ECONOMICS

The shipowner's responsibilities for the various items ofexpenditure are illustrated in Figure 6. Capital charges coveri terns such as loan interest and repayments, and profit, allrelated to the capital investment in the ship. The fullcalculation of effective capital charges can be complex, asdescribed in Part 11. Voyage costs cover fuel, port and canaldues, and sometimes cargo handling charges. Daily running costsare those incurred on a day-in, day-out basis whether the ship isat 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 totrade, while daily running costs are largely a function of shiptype, size and flag. Some guidance on estimating ship first costsand 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. N REPAVMENT S. t"E"" E"PEo<S£S ....£~ CO~TS C,,2.(Oo H .... o"'''' CO.

La....... I .. T£R£ST. lo'o"'NTE", ..",c.£ &- I<tP",1l': ?""T C ..... 2.<:O£ S. C.. R,"O Ci.. .. lMS.

T..,,£s. 5r="'£5. C......... ~ CI..li.S .

R£Tulr; N A.FT£1It TA,c l .. sUIl.ANc.e.

(DII"It":"Ar.o,", \. AQ"'INI~TRAT\ON.

(P"O",'T.!

OWNEIl': C"'AR"E~ER

•

•

•

OWNER OPE;<'AiED

•

rlt.llC.~" I"'C.OME (AFTE'l O .. OUC.,.'ON DF B;z,QKact.'S CO""'....,I.SION)

UNO~Q. AN"" T..... ~E O~ C."",,,,."Ea Mus.T Co~tsz. T ....~ OWN£Iit..'S,

R.i.I...E.V'&'""-iT E)f~i.N~E.5a I ..... T"", .. L01'ooJG ~'W .... , A""c P'02o...."OE AN

AC.c.£P""dl,LE R ...re 0 .. RtTU2..... 0 ..... H,s CAPIT'AL...

Fig.6 Division of Responsibility for Operating Costs

•

The type of charter and the divi sion of responsibi li ty for cost andship's time between shipowner and charterer can influence somefeatures of the design of the ship and its equipment, e. g.timechartered tankers may be designed to oil companyspecifications. With bareboat charters less than the life of theship, the charterer has less incentive than an owner-operator toreduce fuel consumption, while time in port is more significantfor owners of owner-operated or voyage chartered ships than fortimechartered ships. Owner operators may thus be expected to bemore forward-looking in fitting fuel saving devices or betterequipment to keep port turnrounds short, e. g. bow thrusters ormore elaborate cargo handling equipment. Owner operators oftenhave the highest standards of equipment and maintenance,especially if ships are partly self-insured.


From estimates of the components of ship operating costs and thecorresponding transport performance, it is possible to calculatefreighting costs for a variety of ships, bui 1t up in a mannersimilar to that shown in Part Ill, pages 82-84. Figure 7 showscalculated freighting costs for bulk carriers, excluding cargohandling costs. I f relying on shore gear having a constanthandling 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 arecommensurate with size of ship - compare rates of 1,000 and 10,000tonnes per day. Shore costs per tonne may increase wi th ship size,as deeper dredging, more powerful tugs, faster cargo handling gearand bigger stockyards are required. An indication of such effectsis shown in Figure 7 where the optimal size for 10,000 tonnes perday handling rate is correspondingly reduced.

i\\ 12000, MILES IROUND IVOYAJ I

,1- VI 151<N( TO, i i I

~O TOHHESPROAI

II I

CAito HAI(LiHC!RATE I ! !

I

\\ I I

!i I

I !0

~1

II

I I II

I

I

I

I

"" Ii

&I\\: i

Ir--- I 3000 Tpl'\ i I

I I

i i!

2

i ":::~II I i

I ~L- r:------ 10 1Di, TPO IHI,! Pl US IHO [.!O~ ~ __ 1_ - - - - i - -~i~ ---- ----

1000e lPO IHI com Ol~ I I

I I lO ooe! IPOII --....:

I 100 1Di: 1 PO I

,.'.lR_l~Hf- - -I

SHORE COS 1S 1--- -- - -- --I

---- - -- --- !- - - - --

=z==~

32

20 &0 &0 100 120

TONHES OEAowmHl I 1000

HO 1&0 1~0 200 220 HO 21[

Fig.7 Bulk Cargo Freighting Cost.

Actual bulk cargo freight rates are regularly published in theshipping press, shipbrokers' reports, etc. They vary with supplyand demand, and can be regarded as oscillating about a level offreighting cost which gives the average efficient operator anacceptable rate of return in the long run. However over-supply ofships leading to long periods of low freight rates can occur owingto, for example, very attractive shipbuilding loan terms. Suchinfluences are discussed in Ref .1.22, as is the background tomaritime economics generally. Table 5 indicates that differenteconomic forces apply to bulk as opposed to liner shipping.


TABLE 5

SOME DIFFERENCES BETWEEN DEEP SEA LINER AND BULK SHIPPING

Ship Size(deadweight)

Ship Speed

Area of Operation

Type of Carrier

Organisation/Ownership

Consignments

Nature of Cargo

Freight Rates

Competition

Scheduled Service

Mass or VolumeLimited

Ports Serviced

Day at Seaper Annum

Own Cargo HandlingGear

Penultimate Sourceand Destination

LINER

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

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

Specific trade routes

Common

Conference of member lines

Large number of smallparcels

Heterogeneous (general)(Medium unit value)

Administered (level setto cover costs)

Market sharesQuality of serviceNon-conference lines

Yes(constant speed ship)

Volume

Range of ports nearmajor cities

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

Yes (multi-deck)Sometimes (unit load)

Warehouse/depot

BULK

Medium - Large(15000 - 550000)

Medium(12 - 17 k.nots)

World-wide

Contract

Independent orindustrial carrier

Sma 11 number oflarge parcels(often one only)

Homogeneous (bulk)(Low unit value)

Negotiated (setby supply &demand)

Price and delivery

No(constant powership)

Usually mass exceptcertain cargoes andSBT tankers

Usually one porteach end nearproducing/consumingplant

230-320

Usually noneexcept tankers,and small erbulk carriers

Stockpile



PART 11. MAKING ENGINEERING ECONOMY CALCULATIONS

1. INTRODUCTION

The general economic environment within which shipping operateswas discussed in Part I. Before considering how to integrate therelated economic factors into the technical design of ships, themethods of making economic calculations which can be used toevaluate alternative designs of freight earning vessels must betaken into consideration. Note that the voyage estimate examplein Table 4 is not an evaluation of the design, but an evaluation ofthe profi tabi li ty of one particular voyage for an exi sting ship atone moment in time, as a basi s of compari son wi th others currentlyoffered on the market. Engineering economy calculations need totake account of performance over longer periods.

2. THE BASIC INTEREST RELATIONSH IPS

Money has an appreciable time value. flOO to spend right now is ofmore use than flOO not available for, say, ten years. A.rent orreward must be paid if money is to be lent, to compensate thelender for postponing spending it. The reward, or interest, isfundamental to all economic calculations, whether or not money isactually borrowed. Even if one has the cash in hand to buy, say, aship, one is foregoing the interest that could be obtained byinvesting it in, say, a bank deposi t account.

Interest may either be contracted, e.g. the nominal rate paid onbank loans, or a rate of return, which is the effective equivalentinterest rate generated by the excess of income over expenditure.Interest may either be simple or compound, but nearly always thelatter.

The basic relationships are shown below using the followingnomenclature (standard notation of American Society forEngineering Education with acknowledgements to Professor H.Benford's publications and Ref. 1.5.4) .

A Annual return (e.g. income minus expenditure) or annualrepayment 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 per annum, decimal fraction(percentage rate/lOO).

(Note that capi tal letters are used for absolute values, and lowercase 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 apresent sum into a future sum:

F = (CA) P

CA - ~ - (1 + i)N

F

R£PA,O.

oN

INTEREST.

PItINC.IPAL.

TIMe I YEARS.

BOR.R.OWEO. P

Fig.S Compound Amount Factor and Present Worth Factor

The corresponding cash inflows and outflows over time can beconveniently shown as in Figure 8.

Very occasionally, but rarely in the marine industries, interestmay be compounded at less than annual intervals. If interest iscompounded T times per year wi th the interest rate expressedannually as i, then

For continuous compounding

CA = e iN

(The compound amount factors for annual and continuous compoundingdo not differ very much:-

At 10% over 5 years,At 10% over 20 years,

1.611 and 1.649 respectively6.73 and 7.39 respectively)

The reciprocal of the compound amount factor is the Present Worthfactor (PW), and is the multiplier to convert a future sum into apresent sum. It is also called the discount factor.

P = (PW) F

py - ~ - h '"' (1 + i)-N


PRINCIPAL.

The "present worth" of F (which includes accumulated interest) isexactly the same as P, i. e. they are effectively eguivalent. Owingto its formulation, CA is always greater than 1; similarly PW isalways less than 1. Note that the present worth and compoundamount factors only apply to single future payments, not to aseries.

If a loan is repaid by regular (e.g. annual) instalments ofprincipal plus interest, there are two common arrangements:-

(i) Principal repaid in equal instalments, and interest paidon the declining balance: which is the usual method withshipbui lding loans.

(ii) Uniform payments: which is the usual method for housepurchase 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 presentsum of money to be converted into an equivalent amount repaiduniformly over a number of time periods, usually annual. Hence wehave a Capital Recovery factor (CR) which enables an ini tialcapital investment (say in a ship) to be recovered as an annualcapital charge, which includes both principal and interest. CR isthe ratio between this uniform annual amount (A) and the principal(P) i.e. A = (CR) P. It can be shown from compound interestrelationships and the sum of geometrical progressions that:

A i (1 + i)N ieR = w • or rewritten asr (1 + i)N - 1 1 - (1 + i)-N

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

N

p

Fig.9 Capital Recovery Factor and Series Present Worth Factor

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


P = (SPW) A

P 1 (1 + i)N - 1SPI.J' .. or = ~ =

ft ",r-. i(1 + i)N

The recommended notation for capital recovery factor (or any ofthe other factors) at i per cent for N years is (CR - i% - N). Itmay be followed by the numerical value of the factor, e. g. i = 8 percent, N = 15 years:-

(CR - 8% - 15) 0.1168

Note that the series present worth factor is numerically equal tothe sum of the individual annual present worth factors over thelife of the investment, so is very useful for dealing wi th uniformcash flows, which can be used for many marine problems, at least inpreliminary evaluations.

Less commonly used in the marine industries, is the Sinking Fundfactor (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 iSF • Y = (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

1 F (1 + i)N - 1SCA .. 'SY = A • -'---""i~--

Note that SF = CR - i

SCA can also be used to find the total cash involved in a series ofregularly increasing amounts / e. g. the total of crew wages over 20years, rising at 5 per cent compound per annum, is 33.1 times thefirst 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 atypical range of years and interest rates:

Table 6

Table 7

Table 8

Present Worth factor (PW)

Capi tal Recovery factor (CR)

Series Compound Amount factor (SCA)

All the other factors may be easily calculated therefrom using thebasic relationships:-

Compound Amount factor (CA)

Series Present Worth factor (SPW)

Sinking Fund factor (SF)

1a-

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 9 101 0.990099 0.980392 0.970874 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.9090912 0.980296 0.961169 0.942596 0.924556 0.907029 0.889996 0.873439 0.857339 0.841680 0.826:'463 0.970590 0.942322 0.915142 0.888996 0.863838 0.839619 0.816298 0.793832 0.772183 0.7513154 0.960980 0.923845 0.888487 0.854804 0.822702 0.792094 0.762895 0.735030 0.708425 0.6830135 0.951466 0.905731 0.862609 0.821927 0.783526 0.747258 0.712986 0.680583 0.649931 0.6209216 0.9'2045 0.887971 0.837484 0.790315 0.746215 0.704961 0.666342 0.630170 0.596267 0.5644747 0.932718 0.870560 0.813092 0.759918 0.710681 0.665057 0.622750 0.583490 0.547034 0.5131588 0.923483 0.853490 0.78H09 0.730690 0.676839 0.627412 0.582009 0.540269 0.501866 0.4665079 0.914340 0.836755 0.766417 0.702587 0.644609 0.591898 0.543934 0.500249 0.460428 0.424098

10 0.905287 0.820348 0.744094 0.675564 0.613913 0.558395 0.508349 0.463193 0.422411 0.38554311 0.896324 0.804263 0.722421 0.649581 0.584679 0.526788 0.475093 0.428883 0.387533 0.35049412 0.887449 0.788493 0.701380 0.624597 0.556837 0.496969 0.444012 0.397114 0.355535 0.31863113 0.878663 0.773033 0.680951 0.600574 0.530321 0.468839 0.414964 0.367698 0.326179 0.28966414 0.869963 0.757875 0.661118 0.577475 0.505068 0.442301 0.387817 0.340461 0.299246 0.26333115 0.861349 0.743015 0.641862 0.555265 0.481017 0.417:65 0.362446 0.315242 0.274538 0.23939216 0.852821 0.728446 0.623167 0.533908 0.458112 0.393646 0.338735 0.291890 0.251870 0.21762917 0.844377 0.714163 0.605016 0.513373 0.436297 0.371364 0.316574 0.270269 0.231073 0.19784518 0.836017 0.700159 0.587395 0.493628 0.415521 0.350344 0.295864 0.250249 0.211994 0.17985919 0.827740 0.686431 0.570286 ·0.474642 0.395734 0.330513 0.276508 0.231712 0.194490 0.16350820 0.819544 0.672971 0.553676 0.456387 0.376889 0.311805 0.258419 0.214548 0.178431 0.14864421 0.811430 0.659776 0.537549 0.438834 0.358942 0.294155 0.241513 0.198656 0.163698 0.13513122 0.803396 0.646839 0.521893 0.421955 0.341850 0.277505 0.225713 0.183941 0.150182 0.12284623 0.795442 0.63 .. 156 0.506692 0.405726 0.325571 0.261797 0.210947 0.170315 0.137781 0.11167824 0.787566 0.621721 0.491934 0.390121 0.310068 0.246979 0.197:47 0.157699 0.126405 0.10152625 0.779768 0.609531 0.477606 0.375117 0.295303 0.232999 0.184249 0.146018 0.115968 0.09229630 0.741923 0.552071 0.411987 0.308319 0.231377 0.174110 0.131367 0.099377 0.075371 0.057309

YEAR 11 12 13 14 15 16 18 20 25 301 0.900901 0.892857 0.884956 0.877193 0.869565 0.862069 0.847458 0.833333 0.800000 0.7692312 0.811622 0.797194 0.783147 0.769468 0.756144 0.743163 0.718184 0.694444 0.640000 0.5917163 0.731191 0.711780 0.693050 0.674972 0.657516 0.640658 0.608631 0.578704 0.512000 0.4551664 0.658731 0.635518 0.613319 0.592080 0.571753 0.552291 0.515789 0.482253 0.409600 0.3501285 0.593451 0.5&7427 0.542760 0.519369 0.497177 0.476113 0.437109 0.401878 0.327680 0.2693296 0.534641 0.506631 0.480319 0.455587 0.432328 0.410442 0.370432 0.334898 0.262144 0.2071767 0.481658 0.452349 0.425061 0.399637 0.375937 0.353830 0.313925 0.279082 0.209715 0.1593668 0.433926 O• .. 03883 0.376160 0.350559 0.326902 0.305025 0.266038 0.232568 0.1677i2 0.1225899 0.390925 0.360610 0.332885 0.307508 0.284262 0.262953 0.225456 0.193807 0.134218 0.094300

10 0.352184 0.321973 0.294588 0.269744 0.247185 0.226684 0.191064 0.161506 0.107374 0.07253811 0.3172n 0.287476 0.260698 0.236617 0.214943 0.195417 0.161919 0.134588 0.085899 0.05579912 0.285841 0.256675 0.230706 0.207559 0.186907 0.168463 0.137220 0.112157 0.068719 0.04292213 0.257514 0.229174 0.204165 0.182069 0.162528 0.145227 0.116288 0.093464 0.054976 0.03301714 0.231995 0.204620 0.180677 0.159710 0.141329 0.125195 0.098549 0.077887 0.043980 0.02539815 0.209004 0.182696 0.159891 0.140096 0.122894 0.107927 0.083516 0.064905 0.035184 0.01953716 0.188292 0.103122 0.141496 0.122892 0.106865 0.093041 0.070776 0.054088 0.028147 0.01502817 0.169633 0.1 .. 5644 0.125218 0.107800 0.092926 0.080207 0.059980 0.045073 0.022518 0.01156018 0.152822 0.130040 0.110812 0.094561 0.080805 0.069144 0.050830 0.037561 0.018014 0.00889219 0.137678 O. 116107 0.098064 0.082948 0.070265 0.059607 0.043077 0.031301 0.014412 0.00684020 0.124034 0.103067 0.086782 0.072762 0.061100 0.051385 0.036506 0.026084 0.011529 0.00526221 0.111742 0.092560 0.076798 0.063826 0.053131 0.044298 0.030937 0·021737 0.009223 0.00404822 0.100669 0.082643 0.067963 0.055988 0.046201 0.038188 0.026218 0.018114 0.007379 0.00311323 0.090693 0.073788 0.0601 .. 4 0.049112 0.040174 0.032920 0.022218 0.015095 0.005903 0.00239524 0.081705 0.065882 0.053225 0.043081 0.034934 0.028380 0.018829 0.012579 0.004722 0.0018 .. 225 0.073608 0.058823 0.047102 0.037790 0.030378 0.024465 0.015957 0.010483 0.003778 0.00141730 0.043&83 0.033378 0.025565 0.019&27 0.015103 0.011&48 0.00&975 0.004213 0.001238 0.000382


TABLE 7

CAPITAL RECOVERY FACTOR

DlSCOUIIT lATE P.C.

TEAl 1 2 J 4 5 6 7 8 9 101 1.010000 1.020000 1.030000 1.040000 1.050000 1.060000 1.070000 1.080000 1.090000 1.1000002 0.507512 0.515050 0.522611 0.530196 0.537805 0.545437 0.553092 0.560769 0.568469 0.5761903 0.340022 0.346755 0.353530 0.360349 0.367209 0.374110 0.381052 0.388034 0.395055 0.4021154 0.25b281 0.262624 0.269027 0.275490 0.282012 0.288591 0.295228 0.301921 0.308669 0.3154715 0.206040 0.212158 0.218355 0.224627 0.230975 0.237396 0.243891 0.250456 0.257092 0.2637976 0.172548 0.118526 0.18'0598 0.190762 0.197017 0.2033b3 0.209796 0.216315 0.222920 0.2296077 0.148628 0.154512 0.160506 0.166610 0.172820 0.179135 0.185553 0.192072 0.198691 0.2054058 0.130690 0.13b510 0.142456 0.148528 0.154722 0.161036 0.167468 0.174015 0.180674 0.1874449 0.116740 0.122515 0.1284)4 0.134493 0.140690 0.147022 0.153486 0.160080 0.160799 0.173641

10 0.105582 0.111327 0.117231 0.123291 0.129505 0.135868 0.142378 0.149029 0.155820 0.16274511 0.096454 0.102178 0.108077 0.114149 0.120389 0.126793 0.133357 0.140076 0.146947 0.15396312 0.088849 0.0945b0 0.100462 0.106552 0.112825 0.119277 0.125902 0.132695 0.139651 0.14676313 0.082415 0.088118 0.094030 0.100144 0.10645b 0.112960 0.119651 0.126522 . 0.1335b7 0.14077914 0.076901 0.082602 0.088526 0.094669 0.101024 0.107585 0.114345 0.121297 0.128433 0.13574615 0.072124 0.077825 0.083H7 0.089941 0.090342 0.102963 0.109795 0.116830 0.124059 0.13147416 0.067945 0.073b50 0.079611 0.085820 0.092270 0.098952 0.105858 0.112977 0.120300 0.12781717 0.064258 0.069970 0.075953 0.082199 0.088699 0.095445 0.102425 0.109629 0.117046 0.12466418 0.060982 0.066702 0.072709 0.078993 0.085546 0.092357 0.099413 0.106702 O. 1142 j 2 0.12193019 0.058052 0.063782 0.069814 0.OH139 0.082745 0.089621 0.096753 0.10412R O. 111730 0.11954720 0.055415 0.061157 0.067216 0.073582 0.080243 0.087185 0.094393 0.101852 0.109546 0.11746021 0.053031 0.058785 0.064872 0.071280 0.077996 0.085005 0.092289 0.099832 0.107617 0.11562422 0.050864 0.05b631 0.062747 0.009199 0.075971 0.0830106 0.090406 0.098032 0.105905 0.11400523 0.048886 0.054668 0.060814 0.067309 0.074137 0.081278 0.088714 0.096422 0.104H2 0.11257224 0.047073 0.052871 0.059047 0.065587 0.072471 0.079679 0.087189 0.0949H 0.1030:3 0.11130025 0.045407 0.051220 0.057428 0.064012 0.070952 0.078227 0.085811 0.093679 0.101806' O. 110168)0 0.0J8748 0.044650 0.051019 0.057830 0.065051 0.072649 0.080586 0.088827 0.097336 0.106079

n:AR 11 12 13 14 15 16 18 20 25 301 1.110000 1.120000 1.130000 1. 140000 1.150000 1.160000 1.180000 1.200000 1.250000 1.3000002 0.583934 0.591698 0.599484 0.607290 0.615116 0.622963 0.638716 0.654545 0.69444" 0.7347833 0.409213 0.416349 0.423522 0.430731 0.437977 0.445258 0.459924 0.474725 0.512295 0.5506274 0.322326 0.329234 0.336194 0.343205 0.350265 0.357375 0.371739 0.386289 0.423442 0.4616295 0.270570 0.277410 0.284315 0.291284 0.298316 0.305409 0.319778 0.334380 0.371847 0.41058~

6 0.236377 0.243226 0.250153 0.257157 0.264237 0.271390 0.285910 0.300706 0.338819 0.3783947 0.212~15 0.219118 0.226111 0.233192 0.240360 0.247613 0.262362 0.277424 0.316342 0.3568748 O. 190~1 0.201303 0.208387 0.215570 0.222850 0.230224 0.245244 0.260609 0.300399 0.3419159 0.180602 0.187679 0.194869 0.202168 0.209574 0.217082 0.232395 0.248079 0.288756 0.331235

10 0.169801 0.176984 0.184290 0.191714 0.199252 0.206901 0.222515 0.238523 0.28007) 0.3234631 1 0.161121 0.1&8415 0.175841 0.183394 0.191069 0.198861 0.214776 0.231104 0.273493 0.31772912 0.154027 0.161437 0.168986 0.176669 0.184481 0.192415 0.208!>28 O. 2~5265 0.268448 0.31345413 0.148151 0.155677 0.163350 0.171164 0.179110 0.187184 0.203686 0.220620 0.264543 0.31024314 0.143228 0.150871 0.158667 0.166609 0.174688 0.182898 0.199678 0.216893 0.261501 0.30781815 0.139065 0.146824 0.15"'42 0.16lS09 0.171017 0.179358 0.196403 0.213882 0.259117 0.30597816 0.135517 0.143390 0.151426 0.159615 0.1f>7948 0.176414 0.193710 0.211436 0.257241 0.30457717 O.1!2"1 0.140457 0.148608 0.156915 0.165367 0.173952 0.191485 0.209440 0.255759 0.30350918 0.129843 0.137937 0.146201 0.154621 0.163186 0.171885 0.189639 0.207805 0.254586 0.30269219 0.127563 0.1357&3 0.144134 0.152663 0.161336 0.170142 0.188103 0.20&462 0.253656 0.3020H20 0.125576 0.133879 0.142354 0.150986 0.159761 0.168667 0.186820 0.205357 0.252916 0.3015872 I 0.123838 0.132240 0.140814 0.149545 0.158417 0.167416 0.185746 0.204444 0.252327 0.30121922 0.122313 0.130811 0.139479 0.148303 0.157266 0.166353 0.184846 0.203690 0.251858 0.30093723 0.120971 0.129560 0.138319 0.147231 0.156278 0.165447 0.154090 0.203065 0.251485 0.30072024 0.119787 0.128463 0.137308 0.146303 0.155430 0.164673 0.183454 0.202548 0.251186 0.30055425 0.118740 0.127500 0.136426 0.145498 0.154699 0.164013 0.182919 0.202119 0.250948 0.30042630 0.115025 0.124144 0.133411 0.142803 0.152300 0.161886 0.181264 0.200846 0.250310 0.300115

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

TABLE 8

SERIES COMPOUND AMOUNT FACTOR

DISCOUNT lATE P.C.

YEAR I 2 3 4 5 6 7 8 9 101 1.000 1.000 1.000 1.000 1. 000 1. 000 1.000 1.000 1.000 I. 0002 2.010 2.020 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2. 1003 3.030 3.060 3.091 3. 122 3. 153 3.J84 3.215 3.246 3.278 3.3104 4.060 4. 122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4. b4 I5 5. 101 5.204 5.309 5.416 5.526 5.637 5. 751 5. 867 5.985 1>. 1056 6. 152 6.308 6.468 6.633 6.802 6.975 7. 153 7.33!> 7.52 J 7. 7 1 b7 7.214 7.434 7.662 7.898 1.142 1.394 8.654 8. 923 9.200 9. 4878 8.286 8.513 8.892 9.214 9.549 9.897 10.260 10.637 I 1.02 A II.43b, 9.369 9.755 10.159 10.583 11.027 11.491 11.978 12.4Jl8 13. 021 13.579

10 10.462 10.950 11.464 12.006 12.578 13.181 13.816 14.487 15.193 15.9371 1 11.567 12.169 12.808 13.486 14.207 14.972 15.784 1&.645 17.560 18. 53112 12.683 13.412 14.192 15.026 15.917 16.870 17.888 18.977 20. 14 1 21.38.13 13.809 14.680 15.618 11>.627 17.713 18.882 20.141 21.495 22. 953 210.52314 14.947 15.974 17.086 18.292 19.599 21.015 22.550 H.215 H.019 27,97515 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 !9. 30 I 31.77216 17.2H 18.639 20.157 21.825 23.657 25.673 27.888 30.324 33.003 35.95017 18.430 20.012 21. 762 23.698 25.840 28.213 30.840 33.750 36.974 40.54518 19.615 21.412 23.414 25.645 %8.132 30.906 33.999 37.450 41.301 45.59919 20.811 22.841 25. 117 27.671 30.539 33.760 37.379 41.446 46.018 5LI5920 22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.2752 I 23.239 25.783 28.676 31.969 35.719 39.993 44.865 50.423 56.765 64.00222 24.472 27. 299 30.537 34.248 38.505 43.392 49.00b 55.457 62.873 71.40323 25.716 28.845 32.453 36.618 41.430 46.996 53.436 60.893 69.532 79.54324 26.973 30.422 34.426 39.083 44.502 50.816 58.177 66.765 76.790 88.49725 28.243 32.030 36.459 41.646 47.727 54.865 63.249 73.106 84.701 98.34730 34.785 40.568 47.575 56. 08 5 66.439 79.058 94.461 113.283 136.308 164.494

YEAR 11 12 13 14 15 16 18 20 25 301 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.0002 2. 110 2. 120 2. 130 2.140 2. 150 2. 160 2.180 2.200 2.250 2.3003 3.342 3.374 3.407 3.440 3.472 3.506 3.572 3.640 3.812 3.9904 4.710 4.779 4.850 4.921 4.993 5.066 5.21 5 5.368 5. 766 6.1875 6.228 6.353 6.480 6.610 6.742 6.877 7. 154 7. 442 8. 207 9.0436 7. 913 8. 1 1 5 8.323 8.536 8.754 8.9" 9.442 9.930 11.259 12.7567 9.783 10.089 10.405 10.730 11. Ob 7 11.414 12. 142 12.916 15.073 17,5838 11.859 12.300 12.757 13.233 13.727 14.240 15.327 16.499 19.842 23.8589 14. 164 14.776 15.416 16.085 1 &. 786 17.519 19.086 20.799 25.802 32.015

10 16.722 17.549 18.420 19.337 20.304 21.321 23.521 25.959 33.253 42.6191 1 19.561 20.655 21.814 23.045 24.349 25.733 2A. 755 32.150 42. 56b 56.40512 22.713 24. 133 25.b50 27.271 29.002 30.850 H. 931 39.581 54.208 74.32713 26.212 28.029 29.985 32.089 34.352 36. 786 42.219 48.497 68.760 97,62514 30.095 32.393 34.883 37.58 I 40.505 43.672 50.818 59.19b 8b.949 127,91315 34.405 37. HO 40.417 43.842 47.580 51.660 60.965 72.035 109.687 167.2Rb16 39.190 42.753 46.672 50.980 55.717 60.925 72.939 87. 442 138.109 218.47217 44.501 48.884 53.739 59.118 65.075 71.673 87.068 105.931 173.636 285.01418 50.396 55.750 61.725 68.394 75.836 84.141 103.740 1H. 117 218.045 37L51819 56.939 63.440 70.749 78.91>9 8lI.212 98.603 123.414 154.740 273.556 483.97320 64.203 72.052 80.947 91.025 102.444 115.3H0 146. 628 181>.688 342.945 630.16521 72.21>5 81.699 92.470 104.768 118.810 1H.841 174.021 225.026 429. b81 820.215

22 Ill. 214 92.503 105.491 120.436 137.&32 157.415 206. 345 271.031 538.10 I 10b7.2AO23 91.146 104.603 120.205 136.297 IB.27& 183.&01 244.487 32&.237 673.626 1388.4b424 102.174 116.155 136.831 158.&59 184.1 lIB 213.978 289.494 392.484 843,033 180b.00325 114.413 133.334 155.620 181.871 212.793 249.214 342.603 471.961 1054.791 2346.80330 199.021 241.333 293.199 356.787 434.745 530.312 790.948 1181.882 3227.174 8729.985


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

40 '2·5

36

332

~ 283·5

w ...,,~"~u "a: ~

.f-

W -: 4u

l1. ~a: 2lo0 ...,,~" :cl- f-U \ looS a:~

0.~

~

~ 20 5 I-

W Z

~ ".~"WIII

U ..." WW .....~ a:a: l1.

~ 6..J 16 III~ ".~'"' W

...<,; -lr ,,", 7 a:< wu ~ -- III",,,,.

B12 ...<C0;:'.. '"' • 9

~ ...,,'i-'"10':'or::,

"H- . 128,.

--.... ---+---- "-----''~ 5

... 20

]32

i284o

!8' 12 16 20 24

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 aninvestment (e. g. cost of a ship) into an annual amount which, whenadded to the annual operating costs, may be used to determine thenecessary level of income to give any required rate of return.Al ternatively, where annual cash flows are known, therelationships can convert them into present worths, which may be


added together to give Net Present Worths (or Values) (NPV), forcompari son wi th the amount of the investment. The future cashflows are discounted (the converse of 'compounded'), hence thecommon name of Discounted Cash Flow calculations (DCF). For aninvestment to be worthwhi le, the present worth of the cash flows ofincome minus expenditure should be greater than the investment,taking inflows as posi tive, and outflows as negative, i. e. NPVshould be positive, as discussed in more detail on page 44. Cashflow 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 toillustrate the basic interest relationships, but such an approachis still useful, both for general understanding, and as a tool atthe preliminary stage of evaluating alternative investments, e.g.to eliminate the least promising candidates. It is useful tosketch the cash flow patterns as shown in Figure 12.

Example (i)

A package of control equipment for an i tern of ship's machinerycomes in two models: a heavy duty model costing £40,000 which willlast the 16-year life of the ship and a standard model costing£26,000 which lasts 8 years. Which model offers the lower costover the ship's life, if maintenance and operating costs are thesame for both models? Assume 12 per cent opportunity cost ofcapi tal, i. e. the owner wants as good a rate of return as isavai lable to him in other investment opportuni ties.

Cash flows shown in Figure 12 (i) must be converted for both optionsto 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 yearsPresent 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 theship's life. The cost of the replacement standard model would haveto rise to over £34,660 before the heavy duty model has a lesserpresent worth, because:

26000 + 0.404 X ~ 40000X ~ £34,660

Example (ii)

In order to encourage initial sales, the manufacturer of a noveltype of deck crane offers a 'buy now, pay later' deal. Theequipment would cost £120,000 if purchased now, but themanufacturer 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? Doesit look a good deal financially? See Fig .12 (ii) .

Present sum P = 120000Future sum F = 130000

Compound amount factor =

= 1/SPW)46,000 = f339,000

= f300, 000= +f39,OOO

For N • 3

130000 3120000 • (1 + i)

1 + i = 1. 027i = 2.7%

This is appreciably less than the rate of interest likely to bepaid for borrowed money, so looks a good deal.

E:mmple (Hi)

In a new diesel propelled bulk carrier, fitting of an exhaust-gaswaste-heat generating plant to provide electrical power at sea isestimated to cost f300,OOO more than the equivalent system usingonly diesel alternators. The equipment reduces auxi li ary fuelconsumption by 1.0 tonne per day at sea, with fuel assumed to cost

f200 per tonne. If the ship operator expects the ship to spend230 days at sea a year, and is looking for a rate of return over the16-year life of the ship of at least 11% on the extra capi tal, doesthe equipment look a good investment? As a first approximation, itmay be assumed that differences in maintenance costs, weight andspace are negligible. See cash flow pattern in Figure 12 (iii).

Daily saving in fuel cost = 1.0 x 200 = 200Annual 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 CRPresent value of savings = 7.38 xPresent value of extra investmentNet present value

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 recoveryfactor:

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 7for a 16-year life, the actual rate of return is found to be about13.2%.

Part 11 - Making Engineering Economy Calculations - 41..

(eR - 10% - 15) •

It would also be wise to repeat the calculation with differentassumptions, e.g. fuel price or daily saving of fuel, to seewhether any likely change would greatly affect the profitabilityof the investment (lower fuel prices and/or fewer days at sea ayear would reduce the rate of return). It would thus be worthgoing ahead with an engineering evaluation of the technicalinfluence of such an installation on machinery space layout,weight, maintenance and reliability, to be followed by a finaleconomic evaluation when detailed costs and performance are known.

E:romple (iv)

A flag-of-convenience shipowner buys a 200,000 tonne d.w. bulkcarrier for f30M cash (i.e. no loans or taxes). He is offered a15-year timecharter by a steel company. What is the minimum hireper tonne deadweight per month that he would accept to obtain atleast 10 per cent rate of return? Assume 11.5 months trading perannum.

The income must be at such a level as to cover operating costs andcapital charges, the latter repaying principal plus interest.Fig.12 (iv) shows the cash flow pattern.

Assumed annual running costs =f2000000Capital recovery factor for 15 years at 10 per cent:

0.10 Cl + 0.10)15

(1 + 0.10)15 - 1

0.10 x 4.177 • 0.1315- 3.17,

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

For minimum rate, T. 5945000200000 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 2.50Annual expenditureNet annual cash flow, ACapital recovery factor = AjP


= £5750000= 2000000= 3750000= 3750000/29000000= 0.1293

Rate of return, i, is solution of

1 (1 + 1 )15

(1 + 1)15 - 1- 0.1293

By interpolation from Table 7, or Figure 11 or i terativesolution, i=9.7%.

(b) Maximum price payable for the ship to obtain the required ratereturn, say 10 per cent.

From (a), net annual cash flow = 3750000

The present worth of a series of uniform cash flows is given bySPW x A. Therefore an investment of this amount will provide a10% 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 1ZIoOOO t .. ooo

Ft" 12 I i)

"H"1.5

110000

(2)

f1U.12 Iii I

200000 ~ 11-1_ "t [At'" YIA&..

410000

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

••

)00000

o rl-++++++-H+1-+-H-+--

Z 000 000 EA~" 'ttA"

FlU 12 Ii ii)

Fig.12 Cash Flows in Examples

SO 1160 000Ft G12 (i,)


3. ECONOMIC CRITERIA

Examples (iv) and (v) on pages 42-43 showed that there was morethan one way of looking at a particular problem. These showed fourfactors, and having been given three, we had to calculate thefourth. The factors were:-

1. Rate of return2. Freight rate (timecharter rate in the example)3. Permissible price for ship4. Net present value (NPV)

The last was not stated explici tly, but in structuring the problemto find the minimum values, we were implying that the presentworths of income and expenditure were equal so that their NetPresent Worth or Value was zero. The numerical results weredifferent in each case depending on what information was beingprocessed, but if being used to compare alternative ship designsas in this case, all would have indicated the same optimal designif data were consistent, e.g. rates of return were commensuratewi th freight rates.

The most important economic criteria for marine problems can besummari sed as:-

(i) Net Present Value (NPV)

If we know the acquisition cost of a ship, the required rate ofreturn on the capi tal invested (or di scount rate), all theoperating costs each year, the cargo quantity transported eachyear and the corresponding freight rate (i.e. annual income), wecan calculate the present worth of each i tern of income andexpenditure and add them to find the Net Present Value. If cashflows are not uniform, the present worth of each annual cash flowcan be calculated for each of the N years of the ship's life, oftenin tabular form as shown on page 50.

The general form of calculating NPV for freight earning vesselsis:

NNPV - 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, attoday's prices. If the cash flows are uniform over the ship'slife, series present worth factors provide a useful short cut:-

NPV = SPW (annual cargo quantity x freight rate - annualoperating costs) - ship first cost.

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


(

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

(ii) Required Freight Rate (RFR)

The Required Freight Rate is the freight income needed per uni t ofcargo to cover all operating costs and provide the required rate ofreturn on the capi tal invested in the ship. I f we know theacquisition cost of a ship, the required rate of return, all theoperating costs and the annual cargo quantity transported, we canfind the level of freight rate which produces equal present worthsof income and expendi ture, i. e. zero NPV. In general:

N

RFR - Lo

[~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 canthen be compared wi th actual frei ghting price, i. e. market frei ghtrates. It is thus likely to have units such as pounds per tonne,dollars per cubic metre etc. For service vessels, RFR may becalculated in the form of necessary daily hire rate, e.g. foroffshore craft like crane barges. In general, the design wi th thelowest RFR is best. RFR can sometimes be referred to as a "shadowprice".

For non-uniform cash flows, an initial freight rate has to beassumed so that an initial NPV can be calculated as in (i) above.This NPV is unlikely to be zero, so an iterative procedure has tobe used to find the exact freight rate which gives zero NPV.

A rather similar cri terion is the Average Annual Cost (MC), whichexcludes 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 isgenerated, e.g. some service vessels, or for items of alternativeequipment 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 cancalculate the Internal Rate of Return, (also called DiscountedCash Flow Rate of Return, Yield, or Equivalent Interest Rate ofReturn, or Investor's Method), which is that discount rate whichgives zero NPV. Designs offering the highest IRR are sought. NPVis calculated as in (i) for an assumed di scount rate, and aniterative procedure used to find the rate giving zero NPV. Thereare also various extensions to the basic method to cater forspecial situations.


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

(iv) 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 (orfreight rate and cargo tonnage), it may be required to calculatethe maximum permissible price which can be paid for a ship (orpiece of equipment) and still yield a specified rate of return, orspecified NPV. Except for cases where the ship is purchased by asingle payment, an i terative solution is required.

Choice Of Economic Criterion

Net Present V~ue is widely used as a criterion especially whereinvestment funds are limited, but it is best used in those cases inwhich income can be predicted reasonably confidently, e.g.long-term timecharters. It has the computational meri t of being asingle calculation not requiring an iterative solution. Adrawback to its use is interpretation of the results. Oneinvestment may have a NPV of f400, 000 and another f100, 000 but theformer is not four times more valuable than the latter; it issimply f300,OOO higher. The differences are absolute, notrelative, and this can make comparison of widely differentalternatives difficult. This may be partially overcome by the NetPresent Value Index (NPVI) introduced by Benford (Ref .1.5.2) whichdivides the NPV by the investment, producing a ratio which can beused to compare investments differing greatly in absolute size,e. g. coastal tankers versus very large crude oil carriers.Al ternatively a Profi tabi li ty Index may be calculated: NPV of cashinflows/NPV of cash outflows. There still remains the problem ofcompari son when NPVs are c lose to zero or negative, and offorecasting income in a fluctuating business like shipping. NPVIused as a measure of merit is analogous to IRR, since it iseffectively a 'profi t' divided by first cost. See page 52 forchoice of discount rate in NPV calculations.

Required Freight Rate is useful in the many cases where incomes areunknown. In an internationally competitive business likeshipping, rates of return oscillate about a long-term trend, andover a ship's life it is not unreasonable to expect that freightrates will provide a return on an efficient ship tending to theaverage trend. If this did not occur, shipowners would notreinvest in new tonnage, demand would ul timately exceed supply andproduce 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 remainpermanently in peaks or troughs so it would be unwise to designships with, say, speeds based on extreme levels. RFR isparticularly useful when comparing alternative ship sizes, as asingle freight rate cannot be expected to apply to all sizes - themarket ensures that economies of scale are eventually passed on to


the consumer. RFR can be compared with predicted market rates tosee if the results appear realistic. Low discount rates may leadto over-design, e. g. ships faster than is 'economic', sincecapi tal cost is being assessed more 'cheaply' than operatingcosts. High discount rates may result in required freight rates sohigh as to be unattainable under normal market conditions, so thedesign is likely to be uncompetitive in the sense of being able tofind business.

Average Annual Cost is analogous to RFR where the alternativeshave equal transport capability, and can be also used for items ofequipment which do not affect a ship's earning potential.

Internal Rate of Return gives a more recognisable comparison betweenWidely different alternatives, especially where funds availablefor investment are relatively unrestricted, e.g. how do tankers,pipelines, refineries or filling stations compare as oil companyinvestments, and how do they compare with the return onalternatives like Government stocks or some other yardstick? Itis a useful method for additional pieces of equipment, especiallythose not significantly affecting a ship's income, where it can bemeasured against some target rate of return for the degree of ri skinvolved (see below) .

Like NPV, there is the problem of forecasting income, but inaddi tion, IRR is not related to the absolute amount of theinvestment. For example, is a 20% return on a f1M investment(f200,000) to be regarded as 'better' than a 15% return on a f2Minvestment (f300, OOO)? Are two investments of f1M feasible and ofequal ri sk to one of f2M? IRR is, however, not the same as theprofit on historic capital shown in a company's accounts, but ismore like the rate of return on a fixed interest rate investmentlike a government stock. In general, the design with maximum CRwill be that with the highest IRR, if lives are equal. In theory,there will be multiple solutions to the calculation of IRR wherecash flows alternate in sign, but this is not often a problem inmarine work. (See Ref. 1.15) .

Incremental rate of return is a variant which calculates the IRR on anaddi tional investment, e. g. an extra piece of equipment on a ship,or the difference between two projects' cash flows to show whetherthe rate of return on this' incremental' investment is at least ashigh as that on the basic ship. In this case, only the cash flowsand extra first cost associated with the 'increment' are used incalculating the rate of return, so simplifying the appraisal, as6A/6P -+ CR' -+ i' .

Permissible price can be used when assessing newbui lding prospects orthe purchase of second-hand ships, comparing this price againstcurrent ship prices and expected freight rates. It can also beused to assess new items of machinery or equipment, whoseoperational costs and savings can be estimated.


n.

Ne

h .. SU.'''IC.t(looJ1'

D4'1'/II.. FoR

C. ....C.ULATtOW

C AL t.1.IL..AT E

PI"""!~! I.L'[

~lR.'T CO!"

Fig.13 Decision Chart for Choice of Economic Criterion

Figure 13 shows the normal circumstances under which one of thecriteria may be selected for ships, according to the amount ofinformation known. The engineer's task is primarily that ofselecting the best alternative, leaving to management the problemof 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 ofa ship, the author's preference is for Required Freight Rate as abasic cri terion for comparing al ternative ship designs. In thecase of closely competing alternatives, a range of assumed freightrates may then be taken, so that NPVs and IRRs can be calculated tosee whether the order of merit of the al ternative designsindicated by RFR is changed. This can be useful where there is arange of designs, whose characteristics are gradually altered,rather than in discrete steps, e.g. selecting ship speed, ratherthan alternative machinery types. Where equipment, rather thanthe entire ship, is being considered, income may take the form ofcost savings,. and IRR (or incremental rate of return) is a usefulcri terion - especially where ship performance is not significantlyaffected, 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 ('paysback') the investment. While payback period is numerically equalto SPW for uniform cash flows, (PIA), the value of i should still becalculated for the appropriate N. A variant calculates the numberof 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, asall variation in income and expenditure for years beyond thepayback period is completely ignored, taking little account ofcost escalation or change in performance with time. Its use as aprimary criterion is therefore not recommended, but it can bepresented as a supplementary result or a simple shorthand forresults derived more rigorously, especially if the result isattractively small!


Even if non-economic factors are the primary reason for purchasinga ship in the first place, e.g. national prestige, technical andeconomic criteria still have their place in assisting theselection of the best of the alternative ship designs, machineryand equipment.

4. PRACTICAL CASH FLOWS

Although it is possible to make good use of the uniform cash flowrelationships in preliminary calculations and obtain results ofabout the correct order of magni tude, cash flows in most practicalcases of ship investment are not uniform. The most important ofthese irregular cash flows are:-

(i) Loans for less than the life of the ship

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

(iii) Tax allowances for (capital) depreciation and loaninterest

(iv) Subsidies.

Other variations occur but, although altering the absolute valuesin the economic calculations, are unlikely to change significantlythe relative values ('ranking') between alternative designs, asthey tend to affect all designs in a similar manner. Thevariations would have to be taken into account where thedifferences 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 overhaulsappreciable cost and time out of service

(viii) General decrease of speed wi th increasing age

(ix) Long term charters less than ship's life.

involving

Al though corrections may be applied to the uniform cash flow casesto cater for some of the items quoted, the more general procedureis to make complete year by year calculations. A table isconstructed to show for each year of life, the items of income andexpendi ture generating a before-tax cash flow. After makingallowances for tax, the after-tax cash flows are multiplied byeach year's present worth factor, and totalled to give thediscounted 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 bya flag-of-convenience shipowner, for a total of i18,OOO,000 cash.It is operated on a five-year timecharter at i9. 00 per tonnedeadweight per month after commissions, and then sold fori13, 000,000 cash. Assume that crew costs are i700, 000 in the firstyear, rising by 10% per annum and other operating costs are fixedat i600,OOO per annum. Calculate NPV at 10% discount rate toassess whether the investment is profi table.

Assume 11.5 months trading per annum:

Annual income = 40000 x 9.00 x 11.5= i4140000

Present worth factor = (1 + 0.10)-N

Year Ship Crew Other Income Cash PW DCFCost Cost Costs Flow 10%

0 -18000 -18000 1.000 -180001 -700 -600 +4140 +2840 0.909 +25822 -770 -600 +4140 +2770 0.826 +22883 -847 -600 +4140 +2693 0.751 +20224 -932 -600 +4140 +2608 0.683 +17815 -1025 -600 +4140 +2515 0.621 +15626 +13000 +13000 0.565 +7345

Total -5000 -4274 -3000 +20700 +8426 -420

(thousands of pounds) Net Present Value = -i420,OOO

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

Escalation

The previous example shows how increasing costs reduce theprofitability of an investment .. During the years of industrialexpansion of the post-war period, the price of every commodi ty andservice increased significantly, although previously, rapidinflation was a feature mainly of wartime periods. Up until about1970, there was an underlying rate of inflation of about 2-5 percent per annum in most developed countries, i.e. to maintain thepurchasing power of money in real terms, money prices had to riseby, say, 4 per cent. This was an average rate: some prices rosemore, some less (e.g. crew wages rose by about 8 per cent p.a. inmoney terms for many years, which was about 4 per cent p. a. in real


terms) . Oil fuel prices, however, generally remained roughlystatic, 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 itemconcerned with ship operation, at around 15-25 per cent p.a., butwith oil fuel going up tenfold in price. These high escalationrates have fallen back into low single figures in the 1980s in theworld's stronger economies.

Freight rates for a given ship and cargo have generally followed abroadly similar pattern, although the underlying trend has oftenbeen obscured by market fluctuations, increasing ship efficiencyand the reductions arising from the economies of scale as largerships have been introduced. Voyage charter rates do not includeescalation clauses, nor do the maj ori ty of timecharter rates,which cover short and medium periods, i.e. they remain fixed forthe duration of the charter. However, sometimes escalationclauses covering increases in certain operating costs are includedin the few long-term charters. Liner conference freight rateshave been adjusted regularly over the years as elements of runningcosts 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. theactual cash amounts moving through the company's bank account,including escalation), as this is the form usually used byshipowners in evaluating projects, whose cash flows from charterincome and loan repayments are expressed in money terms. Use ofmoney terms also forces attention on differential escalation rates(if all costs and income rose at equal rates, it would be easy towork in real terms), on secondhand values (ships are often soldlong before the end of their physical life), and on likely rates ofreturn, both before and after tax. It also makes hindcastingeasier, checking on the results of previous evaluations. Generalforecasts of inflation, plus analysis of past data, can be used toassist in estimating escalation rates, but if no such data areavailable, the following figures give some indications of theranges found at different times for Bri tish ships.

It is equally possible to work in real terms, i.e. in money ofconstant purchasing power, say 1986 dollars, but adjustments needto be made when some costs may be quoted in money terms, e. g.progress payments when bui lding ships, whi le others may beestimated in real terms, e. g. crew costs.

Average Escalation Rates, per cent per annum

1950 & 1960s 1970s

Maintenance and repair costs. of one ship,allowing for deterioration with age

Crew costsOther daily running costs including insuranceResidual oil fuel pricePort and canal chargesCargo handling costs per unitCargo liner freight ratesVoyage and short terms charters, applied as a

succession of charters for a single vessel.

8-12 12-255-8 15-203-6 8-150-3 20-303-7 5-155-8 10-203-5 10-15

0-3 6-12


Different countries have experienced different rates, not onlyexpressed in domestic currency, but also when converted viafluctuating 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 exchangerates and world competition, and indeed have been falling in the1980s.

Discount Rates and Rates of Return

Fundamentally, the discount rate applicable to DCF calculations isthe opportunity cost of capital, i. e. a rate of return at least asgood as the next best available investment. It may also becompared with the average cost of the company's capital,shareholders' and borrowed funds, though this is not always easyto determine. The discount rate should also be higher than theinterest rate on loans, as these are prior charges, and theinvestment should generate a higher rate of return to provide amargin. It should also be higher than the return of risk-freegovernment stock. High risk investments require higher discountrates; they are also necessary in periods of rapid inflation,otherwise real rates may be negative. The real rate of return inpercentage points is approximately equal to the money rate ofreturn minus the rate of inflation - more accurately, see page 53.

Shipping, in common with most other forms of transport, has formany years shown low~r rates of return than most other industries.Hence a realistic attainable discount rate applicable to shipcalculations tends to be relatively low. Until the early 1970s,actual long-term charter rates implied rates of return in moneyterms of 6 to 9%, the exact values depending on ship first cost,market situation, tax, credit terms and resale value. The rate ofreturn in real terms was thus only about 3 to 6%. The U. K.Government currently use about 5% in real terms before tax for newmajor 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 annualaverage between 1970 and 1984 to have fluctuated between about 3and 8% in real terms (although of course individual companiesexperienced a much wider variation). International competition,subsidies, flags-of-convenience, national prestige, cheap loans,and underestimates of escalation of running costs, all tend toincrease the supply of shipping and keep the rate of return belowwhat it should ideally be, and lower than many shore-basedindustries offering equal or less risk.

While it is the job of a company's management to specify theappropriate discount rate for any particular project (usually inthe form of a target or hurdle rate), it is useful for the engineerto have some appreciation of possible rates. For general shipinvestment problems, rates in the region of 10 to 15% in moneyterms after tax are suggested at present, which might be reduced bytwo or three points if long term inflation can be kept down to thelevels prevailing before 1970.


While these are not high in real terms, market conditions andcompetition do not usually allow significantly higher rates ofreturn to be obtained for long. other operators will move intothat sector of shipping and increase the supply and decrease thefreight rate. If a shipowner requires higher rates of return, ingeneral he will not find them in the shipping industry unless he isin a special situation.

Since many economic evaluations are made in money terms, it isimportant to use a discount rate higher than the assumed rates ofescalation of cost items, to represent a real rate of return. Ifuniform cash flow calculations are being made, the omission ofcost and freight escalation implies that the calculation is beingmade in real terms. In such cases lower discount rates areappropriate, 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 thedegree of risk associated with the equipment and its anticipatedperformance, a discount rate say 5 to 10 points higher in moneyterms might be used.

Combined Discount and Escalation Rates - Example

For uniformly increasing cash flow examples, discount andescalation rates can be combined for use in Series Present Worthtype calculations. In non-uniform cases, they need to be appliedseparately to the annual elements of the DCF calculation table.

What is the present worth of an annual freight income starting atf100,OOO and ~ising at 3% per annum over 10 years, discounted at10%?

Present Worth Factor after one year

Multiplier for actual income afterone year, escalation rate (e)

Present worth of first year's income

-1= (1 + i)

1= 1.10

= (1 + e)

.. 1.03

1.03--LlD

Effective discount rate (r) is given by the solution of theexpression:

J 1.03(1 + r) - T:"I'U'

1 + e1 + 1

(l + r) 1 + i .. ~·.5~" 1.068• 1 + e

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 - 10.068 x 1. 93

Present Worth

.. 7.08

... 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 SeriesCompound Amount factor as follows:

(SeA - 3% - 10) = 11.46 x 100000= £1.146.000

Thus, effective SPW may be calculated directly from theexpression:

SPW =

1_(1 + 1-)N1 + e

(1 - e)/(l + e)

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

1 + 11 + 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 yearescalation.

,. may be considered as the real rate of return, i the money rate ofreturn, and e the rate of inflation/escalation.


5. SOME ECONOMIC COMPLEXITIES

Loans

To stimulate their shipbuilding industries, most countriesthroughout the world offer loans for ship purchase, subsidisedfrom central sources at below-market rates of interest. The loansreduce the effective cost of the ship, and encourage owners toplace orders. Credit terms officially available are broadlysimilar in each major (O.E.C.D.) country, for ships typically 80per cent of the contract price for 8.5 years at 7.5 per centinterest. For offshore mobile units, typically 85% loans areavailable but only for five years. Exceptionally favourable termsmay sometimes be granted, e. g. for developing countries as'overseas aid'. Loans for secondhand vessels are usually made onnormal commercial terms. Interest payments are allowed to bededucted before tax liability is calculated on profits earnedduring the ship's life.

Various initial and legal fees are charged in addition to loanrepayments and interest, usually about 1 per cent of the totalloan. Generally the credit is advanced to the owner as buildinginstalments become due, so that interest becomes payable beforethe ship is delivered unless arrangements are made to defer it.Repayment is usually in equal amounts at six-monthly intervalsafter delivery, plus interest on the declining balance. A moredetailed discussion of shipbuilding credit is given in Ref.1.15.Al though favourable credi t terms are an important marketing factorfor shipbuilders (and have cont:ributed to the world over-supply ofships), they do not usually affect the order of merit betweentechnical alternatives.

Figure 14 shows that as the credit proportion approaches 100 percent, the IRR on the shipowner's diminished equity capitalapproaches infinity, but NPV or RFR continue to give meaningfulresults. While this might suggest that shipowners should borrownear 100% of their capital needs, in fact this is risky, as inadverse market conditions, prior charges such as loan servicingwould be excessive, which could force the owner into liquidationwi th insufficient cash flow. An appropriate balance of owncapital (e.g. shareholders' or equity funds) and debt (loans orcredi t) is necessary for financial stability.

o PIiR c:.ENT. 100 CREDIT PItOPO~TION.

100 o faUlTY PROPORTION.

Fig.14 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 claiminvestment grants on new ships. In order to stimulate capitalinvestment, the Government would refund the shipowner 20 per centof the ship's first cost. This system has now been abolished, butin certain other countries, including the U.S., subsidies aregiven for construction and/or operating costs. In economiccalculations, subsidies can generally be treated by reducing theactual cost by the amount of the subsidy and amending taxallowances accordingly. Similarly, subsidies to shipbuilders aresimply allowed for by using the contract price to the owner afterthe subsidy is given, e.g. after Intervention Fund payment.

Unequal Lives

Where investments have unequal lives, it is necessary to make acorrection to NPV calculated in the normal way, as otherwi selonger life investments would appear unduly favourable. Thecorrection converts the NPVs into equivalent annual cash flowsover 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 anexisting ship: one with an NPV of flM, with a duration of 8years, or one with fl. lM over 10 years? Owner's opportunitycost of capi tal 10 per cent.

Superficially, the 10-year contract looks better, but noallowance is being made for possible earnings in years 9 and10 after the capital has been recovered from the 8-yearcontract. However, each NPV can also be regarded as havingbeen produced by a series of equivalent uniform annual cashflows. These may be calculated by the use of the capitalrecovery factor.

(CR - 10% - 8)(CR 10% - 10)

= 0.1874= 0.1627

Equivalent annual cash flows:

8-year contract: 0.1874 x 1,000,000 = f187,40010-year contract: 0.1627 x 1,100,000 = 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 easierto make lives equal, but give the longer life alternative theadvantage of a higher di sposal or secondhand value at the same ageas the shorter life vessel.


Taxation

The present tax structure applicable to British shipowners isbasically as follows:-

Corporation Tax is levied at a particular rate on the "tradingprofi t" (or before-tax cash flow). Thi s taxable profi t isbroadly:

Income Operating Expenses - Depreciation (or Capital)Allowances - Interest on Loans

Tax is assessed after the company's annual accounts are made up andare thus paid 1 - 2 years in arrears of the corresponding cashflows. Annual income can therefore be divided as shown in Figure15.

RETURN aEFOItE TAX

RETU~N AF'TE2 TAX. I TAX.

I

OPERATING LOAN OEPREc:.IATION TAXAB~e

EXPENSE5 INTEREST ALLOWANC.E P~OFIT

1- TOT"'~ ANNuA~ IN~OME. -IFig.15 Distribution of Annual Income

The return after tax, which includes the depreciation provision,is the shipowner's disposable income to use for repayment of loanprincipal, dividends, fleet replacement or any other permissibleuse. Dividends, however, are paid to shareholders without anyfurther deduction to tax (as occurred under the old system);allowance is made in the shareholder's own tax liability for theamount already paid under Corporation Tax (tax credit). Unti I1984, 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 notnecessary to add any further ,amounts for 'depreciation'. The useof CR recovers the capital invested over the life of the ship, plusthe required rate of return. However, depreciation affects theamount of tax payable by a company. Regularly occurring expenses,such as operating costs, may be deducted in full before tax islevied, but purchase of an asset the life of which is greater thanone year, e.g. a ship, is treated on a different basis by means ofdepreciation 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 abook transaction used both for tax and for accounting purposes.For accounting purposes, depreciation must comply with theCompanies Act and it is used to assess the 'profit' available fordistribution to shareholders (and reserves) after applying a rateon fixed assets that maintains capital intact in money terms. SeeFigure 16. The calculation of depreciation for tax purposes isnearly always different, and as it affects the actual cash flowsand final net income, it is the aspect considered here.

HISTOR.IC.

C.oST

OR.

INITIAL

VALUE

Pl""li::"-------,r--------------,CUMULATI't'E PR.O't'I!!lION FOR

O£PRec.IATION To MAINTAINC.APITAL INTACT.

'HR.ITTEH

DOWN

VALUE

s

-.-C.API'TA~

INTA.C.T

A.T ENO

OF LIFE.

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

o y£ ....~~

Fig .16 Straight-line Depreciation

Traditionally, depreciation (or capital) allowances have beencalculated either as 'straight line' (annual allowance = shipcost/ship life) or 'declining (or reducing) balance' (annualallowance = percentage of residual value of ship each year), orother variants which, in effect, write off the initial cost overthe expected life of the investment. In many cases, 'cost' maybeacqui si tion cost minus expected residual value, e. g. assumed scrapvalue. In the U.S. a method called 'sum-of-the-year-digits' issometimes used. If the initial value or historic cost is P, andthe residual or salvage or scrap value is S, and the life of theasset 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 = 0.15)

First year allowance = 15% of 100%= 15%

Second year allowance = 15% of (100 - 15)%= 12.75%

Third year allowance = 15% of (100 - 15 - 12.75)%= 10.84%

Nth year allowance = 100R (1_R)N-1

Accumulated depreciation to year N = 100 (l-(l-R)N)1

The declining balance rate, R is given by: R. 1 _ (;)N


Such methods can be used for accounting purposes, and somecountries' tax authorities use variants of them. In 1984, thedeclining balance method was insti tuted for Bri tish shipowners fortax purposes. Following a transi tion period, the system adopted adeclining balance rate of 25%. Thus first year allowance is 25%,second 18.25%, third 14.06%, fourth 10.55% etc. Thus it takeseight years to accumulate to 90%, a typical amount allowing 10%residual value. Until 1984 British shipowners were allowed todepreciate their ships for tax purposes at any rate they liked,wi th 100% first year allowances and 'free depreciation'. Inpractice, this meant writing the ship off as fast as profitspermitted, i.e. extinguishing all liability for tax until thedepreciation allowance had been exhausted. If there were profitsfrom other ships in the fleet, or other activi ties of the business,it was possible to write off the entire cost of a new ship againsttax liability on these other profits in the first year, e.g. on af. 1,000,000 ship, f 520,000 tax could be saved. From then on, taxwas paid on the full profit. This could be called the 'FullDepreciation' or 'Full Tax' position. The first year tax saving isnow limited to 25%, but in association with a lower rate ofCorporation Tax (35%), i. e. £87,500 on a £lM ship. Any unusedallowance (e.g. because of insufficient profits) can be carriedforward and used in subsequent years.

A more general case for economic studies was to assume thatdepreciation could only be allowed against the profits of theparticular ship or project being studied. This is equivalent to anewcomer to shipping, so can be called the 'New Entry' position.At typical freight rates, it then takes some 6 to 12 years beforetax becomes payable, but with the time value of money, thi s is notworth so much as wri ting off in one year, but was better thanwri ting off over say 20 years. In all cases, tax balancing chargesare usually levied if the disposal value of a ship exceeds itswri tten-down value for tax purposes, i. e. tax allowances have beengranted on the full cost of the ship, but the disposal income needsto be set against this, so is potentially taxable (see page 67) .

The 100% allowance system encouraged the leasing of expensiveships whereby a financial institution like a bank actually ownedthe ship, and could claim the full tax allowance against its otherprofi ts in the fi rst year. The ship was then bareboat chartered toa ship operator at a slightly lower rate than would otherwise bepossible. British shipowners have been campaigning for a returnto the system of free depreciation. Nearly every mari time countrygives special tax treatment to ships, usually including some formof accelerated depreciation.

EzampZes Involving Alternative Tax Regimes

A large anchor-handling/tug/supply vessel costing f6M cash ondelivery is to be built for charter. The owner anticipates atimecharter hire rate averagingfSOOO per day. Annual operatingcosts 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 taxregimes.


Figure 17 sketches the cash flow patterns.

~ N .. 'T"",.

o ...

RI ,,-,ttoJAfl£t TA.XALLOW 1TAJA.L.£

-ANt.E ~

~ ~.... DEPRHIA'TIO>l £ ~ .. ,P.

~

MAU.Wi.D

MrASAu.£au.oc

To """lA.L.VAUJ£

--'''''-''\,.1,.0,...,,/".,Co.'''' TA_A.Lt

:'

Fig.17 Comparison of Cash Flows Under Different Tax Regimes

Annual income

Annual expensesAnnual cash flow(surplus before tax)

====

5000 x 340f1,700,OOOf855,OOOf845,OOO

Case 1. No Tax

PW of cash flows = (SPW-8%-15) = 8.56 x 845,000 = + f7,233,OOOPW of ship cost = (PW-8%-0) = 1.000 x 6,000,000 = f6,OOO,OOONPV of investment = + f1,233,OOO

Case 2. Straight Line Depreciation

Annual allowance for = 6,000,000/15 = f400,OOOdepreciation

Taxable profit = 845,000 - 400,000 = f445,OOOTax at 35% = 0.35 x 445,000 = f156,OOOAnnual cash flow after tax = 845,000 - 156,000 = f689,OOOPW of cash flow after tax = 8.56 x 689,000 = + £5,900,000PW of ship cost = £6,000,000NPV of investment = - £100,000


Case 3. Declining Balance at 25% (Single Ship or New Entry)

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

Year ~ash flow Written Depreciation Taxable 35% Cash PW DCF~efore down all owance income tax flow 8%tax value * after

tax

0 6000. 1 845 5155 845 0 0 845 0.926 782

2 845 4310 845 0 0 845 0.857 7243 845 3465 845 0 0 845 0.794 6714 845 2620 845 0 0 845 0.735 6215 845 1775 845 0 0 845 0.681 5756 845 1067 708* 137 48 797 0.630 5027 845 800 267 578 202 643 0.584 3758 845 600 200 645 226 619 I 0.540 3349 845 450 150 695 243 602 0.500 301

10 845 338 112 733 257 588 0.463 27211 845 254 84 761 266 579 0.429 24812 845 190 64 781 273 572 0.397 22713 845 142 48 797 279 566 0.368 20814 845 107 35 810 284 561 0.340 19115 845 0 107 738 258 587 0.315 185

Total 12675 6000 6675 2336 10339 6216

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

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

+ £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 Deprec- Accumu- TaxablJ 35% cas~1 PW DCFflow down iation lated income tax flow 8%

~efore value allowance allowances aftertax tax

0 60001 845 4500 1500 1500 -655* -229* 1074 0.926 9952 845 3375 1125 2625 -280'" -98* 943 0.857 8083 845 2531 844 3469 1 0 845 0.794 6714 845 1898 633 4102 212 74 771 0.735 5675 845 1423 475 4577 370 130 715 0.681 4876 845 1067 356 4933 489 171 674 0.630 4257 845 800 267 5200 578 202 643 0.584 3768 845 600 200 5400 645 226 619 0.540 3349 845 450 150 5550 695 243 602 0.500 301

10 845 338 112 5662 733 257 588 0.463 27211 845 254 84 5746 761 266 579 0.429 24812 845 190 64 5810 781 273 572 0.397 22713 845 142 48 5858 797 279 566 0.368 20814 845 107 35 5893 810 284 561 0.340 19115 845 0 107 6000 738 258 587 0.315 185

Total 12675 6000 6675 ~336 10339 6295

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

PW of cash flow after taxPW of ship costNPV of investment

= +£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 isused to make taxable income zero each year until the allowance hasbeen exhausted.

Year Cash flow Depreciation Taxable 35% Cash flow PW DCFbefore tax all owance income tax after tax 8%

1 845 845 0 0 845 0.926 7822 845 845 0 0 845 0.857 7243 845 845 0 0 845 0.794 6714 845 845 0 0 845 0.735 6215 845 845 0 0 845 0.681 5756 845 845 0 0 845 0.630 5337 845 845 0 0 845 0.584 4938 845 85 760 266 579 0.540 3139 845 0 845 296 549 0.500 274

10 845 0 845 296 549 0.463 25411 845 0 845 296 549 0.429 23612 845 0 845 296 549 0.397 21813 845 0 845 296 549 0.368 20214 845 0 845 296 549 0.340 18715 845 0 845 296 549 0.315 173

Total 12675 6000 6675 2338 10337 6225

PW of cash flow after taxPW of ship costNPV of investment

= + £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 shipoff in the first year, i.e. over f6,OOO,OOO. Tax is then payablenormally over the rest of the ship's life:

Normal taxable profitTax at 35% = 0.35 x 845,000Annual cash flow after tax = 845,000 - 296,000PW of cash flow after tax = 8.56 x 549,000Free depreciation: 35% of f6,OOO,OOOPW of free depreciation at Year 1

x (PW - 8% - 1) 0.926PW of cash flow to shipownerPW of ship costNPV 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-taxprofitability of alternative tax systems, together with theinternal rate of return which can be found by iteration withdiscount rates of 10, 12% etc.

NPV, f IRR%

1. Case 1. No tax +1,233,000 11.22. Case 6. Free depreciation (first year) + 646,000 10.33. Case 4. Declining balance (other profits) + 295,000 8.94. Case 5. Free depreciation (new entry) + 255,000 8.85. Case 3. Declining balance (new entry) + 216,000 8.76. Case 2. Straight line depreciation 100,000 7.7

The pre-1984 cases are included to show the principle of thecalculation of free depreciation. In practice, the corporationtax rate was 52% at that time, which would have given NPVs of-f263,OOO and +f361,OOO in cases 5 and 6 respectively. Case 2would have become -f747, 000.

Tax payments are usually made a year or more in arrears. If thiseffect had been included, the NPVs above would have been slightlyincreased.

Although most cash flows occur fairly regularly over the 365 daysof the year, it is usually sufficiently accurate to simplify thecalculation by assuming that they all occur at 23.59 on 31stDecember. Two possible exceptions may sometimes be made:

(i) building instalments may often be very large and severalmay occur wi thin a 12-month period

(ii) repayments of loans may be calculated at their usualsix-month intervals. In a particularly detailedcalculation, it would be worth incorporating the exacttiming of these large cash flows, by putting N at itsexact value.

Note the small size of the present worth factors for cash flows along 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 arereduced in the calculation.

The case of straight line depreciation permits a short-cutcalculation of the effect of taxation on annual cash flows. It iseasily shown (e.g. Ref.l.5.2.) that the capital recovery factorafter tax (CR' ) is given by:

CRI = CR(l - t) + tIN

where CR = CR before tax, A/Pt = tax rate as a decimal fractionN = life of ship, years

For example, Case 2 above provided a return of £845,000' before taxon an investment of £6M, or a CR before tax of 14.08%. The CR aftertax 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, line4:

689,000/6,000,000 = 0.1148 = 11.48%

A CR of 11.48% over 15 years is equivalent to a true rate of returnof about 7.1%, i. e. less than the 8% specified, hence its negativeNPV (-100,000).

In some companies, project evaluation incorporating taxconsiderations is assessed by a separate department only after aproj ect has been shown by operating departments to be sufficientlyattractive in the first place. Thus although the engineer shouldbe aware of the general influence of tax on profi tabi li ty, he neednot be an expert in the calculations.

6. A COMPLEX CASH FLOW EXAMPLE

The following example illustrates most of the complexi ties of reallife cash flows involved in ship purchase and operation. The shipin the example is a 100,000 cubic metre liquefied gas carrieroperating in a consortium with a 12-year timecharter. The shipprice is $100,000,000 with a 80% loan for eight years at 8%interest. The shipowner wishes to calculate if the proposedcharter will be profi table, in providing a rate of return after taxof at least 12% in money terms. He has to make his own assumptionsas to escalation of operating costs, and expected secondhand valueat the end of the charter. The tax situation illustrated is U.K.new entry wi th declining balance, but others could be substituted.

Although it is possible to combine all cash flows associated withbuilding and operation into a single table, the important featuresare best illustrated by separating them.

The following notes should be read in conjunction with thecalculations in Tables 9 and 10:


(a) Building Account (see Table 9)

Column*

1. Year ° is contract signing, end year 3 delivery.

2. Bui lding instalments: 5% on contract signing, others asconstruction progresses.

3. Owner pays his 20% inpatterns to Columns 2contract.

fourand

instalments. Note that other3 could be negotiated in the

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. May be paid atsix-monthly intervals.

7 . Cumulative sum of Column 4 minus Column 6.

8. Loan interest at 8% on Column 7, payable at end of each timeinterval. 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 'hirepurchase' price.

10. Present Worth Factor at 12% di scount rate.

11. Di scounted cash flow.

(b) Operating Account (see Table 10)

1. Twelve year timecharter from Years 4 to 15, ship soldsecondhand thereafter.

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

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

* Column numbers refer to Table 9


4. Annual maintenance, repair and stores costs currentlyestimated at $l.lM, but assumed to escalate at 8% per annumfrom Year O. Regular annual provision made for special surveycosts.

5. Annual insurance, admini stration etc. costs currentlyestimated at $1.4M but assumed to escalate at 5% per annum fromYear O.

6. Total annual operating costs, i. e. Column 3 + Column 4 + Column5. (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 4includes interest from Years 1 to 3, not yet set off againstprofi ts for single ship.

9. Maximum capital (depreciation) allowance 25% per annum, basedon $103M including owner's costs, declining balance. Taxsi tuation equivalent to new entry, i. e. no other profi ts to setallowances off before the ship begins earning.

10. Cumulative depreciation total, i.e. written off value cannotbe more than thi s for tax purposes. Cumulative sum of Column 9.

11. The actual depreciation allowance is adjusted to make taxableprofit zero each year as long as the cumulative sum actuallyused in Column 12 is less than the allowance available inColumn 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 untilYear 11.

13. Total tax allowance, i. e. Column 8 + Column 11.

14. Taxable profit = Column 7 - Column 13. The total surplus overthe life of the vessel totals $82. 5M before tax.

Year 16 includes a tax balancing charge. The depreci ationallowance has been based on $99.737M by Year 15, but $30M hasnow been recovered, with allowances of only $3. 263M as yetunused. Hence the excess allowance of $26. 737M is recovered bythe 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. BUILDING ACCOUNT~a>"'S Thousands of Dollars....;::tfQ

~§ III I 2) (J) (4) I S) ( 6) (J) CIf) ( I) (}O) (IU

~. Year Building Owner's I.oan Owner's I.oan }.oan I.oan Owner's Present DCF(') Instalments 20% Orawetown F.xpenses Repayments Outstanding Interest Cash Worthr.,

~lir Fees M% Outflow Factor

(I SOIlO SOm) SilO SSIIO 1.OOO(J SSOO

~ 11.5 lUll011 10(lOO ~llO 101100 U SUO O.1J449 472

~1 IOOIlO sono SOOO SOO 151100 400 5lJOO (J.8nl) 5268

t:J 1.5 15000 1SOOO )IlOOO Mm 6011 O.M37 506

a> 2 20000 SOOO 15000 SOO 4S000 I :WO 6700 O. JlJ7'l 5341r., :!.5 :lOUOO :WOUII bSUUII 1KOO 1800 U. 75JJ lJ56-.~ 'l 20UOO 50110 1501111 1000 80000 2ftOO 8600 O.711H 6121

4 10000 100()0 MOO 164011 O.b)SS 111422') 10000 60000 Sf,00 15600 O.5b/4 HllSl{) 1()()OO 5000U 41100 141HlO O.50bb 14lJM1 10000 411000 4000 14UOO 0.4523 ft]JZ

II 10UUO 30UOO ]:.!O() 1320() 0.40)') 5331'J 10000 WOOO :.!400 12400 0.3b1l6 4411HJ 1000U 10000 IMIO 11 Mill 1I.3no :Ins11 lUlIlJO 0 HlIO IIHlOO O.2H7S 3105

"0tal lOUUIIO 200m) 8000(l 30110 8U(lOO 3541llJ 13840U 7430'J

TABLE 10

OPERATING ACCOUNT

Thousands 0' Dollars

~....:::: (I) (2) (3) (4) ( 5) (6) (7) (8) (9) (10) (11) (12) (l3) (14) (l5) ( 16) (17) (\ 8)

Year Annull Cnll Upkup Other Annual Cuh T A X A L L 0 11 A N C t: S TII XIIble Tu ellSh Pre8'!nt [lCFIncolle Coetl Coatl COlt. O"eutinR Flow Interut 2S1 M!IX. Actual Actual Total Profit et 35X Flow Worth

&Coat. Before Annual CUIII. Annual CUIII. Tu: After factor

Tax Allowanc.. Tax 12%

::s 4 22667 1200 1496 1702 4398 18269 13000 25150 25750 S269 5269 18269 0 0 18269 0.6355 1161f.l(Q 5 22667 1200 1616 1838 4654 18013 5600 19313 45063 12 /,13 17682 18013 0 0 180n 0.5674 10221

~6 22667 1200 1145 1985 4930 17137 4800 14484 59541 12'173 30619 17737 0 0 17737 0.5066 8'1867 22661 1200 1885 2144 522'1 1H.:l8 4UOO 10863 70410 13438 441151 17438 0 0 17438 0.4523 78~7

'9. 8 20667 1200 2036 2315 5551 151 I 5 )lOO 8141 78557 11'115 55972 15115 0 0 15115 0.403'1 61115::s 9 22661 1200 2199 2500 5899 16768 2400 6111 84668 14368 10340 16768 0 0 16768 0.3606 6047~ 1.0 22661 1200 2375 2700 6275 163!'2 1600 4583 89251 14792 85132 163n 0 0 163"2 0.3220 5278~ II 22661 1200 2565 . 2916 6681 15986 800 3437 92688 1556 92688 8356 1636 0 15'186 0.2875 45%.,.... 12 22661 1200 2110 3150 1120 15541 -- 2578 95266 2578 9n1l6 2578 12%9 2673 12874 0.2567 3305::s

(Q 13 18661 1200 2991 3402 1593 llO73 -- 1933 91199 1933 97199 I'Jn 9140 4539 6534 0.22Q2 1I,Q~

tl:I14 22667 1200 3231 3674 8105 14562 -- 1450 98649 1450 98649 1450 13112 3199 11363 0.20 /,6 2325

(') 15 22667 1200 3489 3968 8657 14010 -- 1088 99737 1088 99737 1088 12922 4589 9421 0.1827 1721

§ 16 30000 30000 +3263 103000 3263 26737 4523 25477 0.1631 415517 9358 -9358 0.1456 -1362

~ Total 296002 14400 28398 32294 15091 220910 35400 103000 138400 82516 28881 192029 72311

~(')

~........0::sCl)

I

0)CO

(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 ofreturn after tax. To find the actual rate of return, the last twocolumns in the Tables are re-calculated with one or two lowerdiscount rates, and the results interpolated to find the rategiving zero NPV. The internal rate of return turns out to be11.0%. The prospective owner then needs to decide whether this isadequate. If not, he must seek mo~e favourable conditions, forexample:

association with other activities to give earlier use oftax 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, butcomputer programs used to evaluate a variety of alternativeassumptions and fiscal situations.

The annual and cumulative cash flow patterns are shown in Figure18, i. e. Column 16 of Operating Account minus Column 9 of BuildingAccount. A positive annual cash flow occurs from the first year ofoperation, i.e. earnings are sufficient to repay loan principaland interest. However the cumulative cash flow shows that theowner needs up to about $30M of his own funds to carry theinvestment through its first few years. In practice, most ownershave more than one ship, built at different times whose cash flowpatterns overlap, thus reducing the year to year fluctuations, aswell as influencing the overall tax situation.


ICA~\ol FL.ClW

MIL.L.IClN

OClL.L.A s:t.S.

... .0\

I \I \I \I

H.O I

II

I1+-40 I

//

/+30

11

/

I

I~/+2.0

/ 1\/

//

+10J~ ~~

,// V -- \

AN~U"'L CASH FLOWS ./'I

r- ........... I \-02 4- ill S 10 I 12 14 IUt \n.AltS

" I~

/

\/,"

It\-.10 0 -;, - , 0III / ~ III -'... ,

~

<l \ CUt-tUL.A11"E //Q. I at 0 ')l

~l0,. III )- < II'l 0(

\ OJ\

et CASH ,," C ~ I-~ ... III " ~ 0/1 CL... I' ~ ~L.O"'S , 7- --.J -

C\ ~ V c )( :r <l

It ,;' 0 C '" Zto \0 ./ ..J ~

Z ..... ~\ .....

0 "' .......-30 u

Fig.18 Cash Flows for Complex Example


7. APPLICATION

It is more important to appreciate the general form of thecalculation of Tables 9 and 10 than to become expert in thearithmetic. There are, of course, a number of computer programsavailable for DCF calculations, some more applicable to shipconditions than others and some more suitable for evaluating thecomplexities of alternative financing methods. The BMT computerprogram ECEVAL can be used where comparison of technicalalternatives is the principal aim. This program was used toproduce the curves in Figure 19 which illustrate the effect on NPVof alternative conditions applying to the same ship design. Thebasic ship is a large tanker wi th the following characteristics:

260,000 tonnes deadweightSteam turbine, 15.5 knots23,000 mile round voyage£15,000,000 first cost80% loan for 8 years at 7% interestDiscount rate 10%Corporation tax rate 40%Depreciation of single ship as fast as its profit permit

( 'new entry')Ship life 16 yearsFreight income escalating at 3% per annum.

1.0,000 To .. ..,( O''''O...,I£IGoW'T ,. ... .,K5 •.

~

•o1,:."o3i

~

"~:L...z

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

• J f---+-'7""--+-

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

·1 f----f----+----+--+---+----+--t------i

.-+ t·,

'a'IGoWT ....,£) P'O\olWQS PElt T."'Nt.

2·' J·o

Fig .19 I nfJuence of Alternative Economic Conditions


Whi le some of the conditions no longer apply to present ships, thepurpose is to show that alternative financial conditions have amarked effect on overall profitability. It can be seen that theNPV results vary linearly with freight rate, and are broadlyparallel to one another. There is thus little change in ranking,apart from variants with no tax liability having a steeper slopeas, when freights are high, the corresponding increased profitsare not incurring any tax. The importance of obtaining loans atrelatively low rates of interest is shown - well over flM in NPVterms on a flSM investment. Sufficient profi ts from other sourcesto permit full depreciation in the first year give considerablebenefits - nearly f2M in NPV. The reason for the No Tax case notbeing the best at all freight rates is that such a first yeardepreciation case includes the savings of tax OL other activitiesof the company which have provided the other profi ts, permitting afull write-off in one year (a situation no longer avai lable in theOK). 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 havingthe required capability, i. e. technical performance is identical, ahigher rate of return will be achieved by:

• purchasing at lowest first cost

• borrowing on favourable terms

• paying as little tax as possible, e. g. by accelerated taxallowances

• obtaining cover against escalation of costs

• achieving a long life, assuming that greatly superior designsdo not become available in the earlier years, i.e. physicaldeterioration rather than economic obsolescence is the mainreason for di sposal.

Figure 19 underlines the danger of over-simplifying economicevaluations for detailed studies of whether or not to invest; thedifference between best and worst is over f4M, equivalent to a 30%difference in freight rate. The complexities, however, tend to beless important to the engineer who is considering technicalalternatives, which all tend to be affected in a broadly similarway. The main exception is where ther~ are large differences incapital intensity, e.g. a very advanced small crew automated shipversus one wi th no automation, and large crew.

All the calculation examples have been based on fixed input databut, 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. afuture ship type may render the present design economicallyobsolete. It is possible to introduce such stochastic effects inthe calculation as discussed in Ref.l. 7 .1, but it is usually foundthat the order of merit of the alternatives is not affectedthereby. Stochastic effects can be more readily included in theoverall systems approach discussed in Part Ill, Sections 3 and 4.


For engineers, the author's recommendation for using economicevaluation techniques are:

(i) Use capital recovery factor and series present worthfactor in association wi th uniform cash flows and singlepayment acquisition cost for preliminary screening ofship and equipment alternatives. This will quicklyeliminate the 'non-starters' without requiringextensive data input and calculation. It will also giveresults of the correct order of magni tude and thus forma useful 'first shot' in more detailed iterativecalculations. It will often be adequate for modestitems of equipment, whose investment level does notjustify great detail. Such calculations are likely tobe made in real terms.

(ii) Make full DCF calculation for evaluation of promisingdesigns from (i) appearing on the short list, especiallywhere closely competi tive. The designs are likely to beenti re ships or maj or on-board systems such as mainpropulsion machinery. It will in general be necessaryto allow for economic complexities such as loan termsand escalation, so the calculations are likely to be inmoney terms requiring a higher di scount rate than (i).

Similar techniques may also be used to evaluate investment inother marine capital equipment, e.g. shipbuilding plant oroffshore facilities.


PART Ill.

APPLICATION TO SH IP DESIGN

, • THE GENERAL APPROACH

Earlier Parts have given a broad picture of the economicenvironment within which marine transport operates, and themechanics of making economic calculations. Ship design links thetwo, i.e. the marine transport or service requirements must bedeveloped into a series of feasible ship designs, which must thenbe 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 isa matter only for ship operators, this is not so; the shipbuilderis also concerned, in two principal ways:

Specialist knowledge. To design the optimal ship, extensiveexperience is required of the influence of different designfeatures on first cost. The builder is much better able thanthe shipowner to quantify accurately the cost of alternativehull proportions, materials, machinery arrangements, etc.

Commercial competition. Since ship operators are concerned tomaximise the difference between present worths of income andcosts, rather than minimising ship first cost, there hasarisen a greater need for a shipbuilder to show not that hisdesign is necessarily the cheapest, but that it is the mostprofi table. This approach has been used by the aircraftindustry for some time, and is particularly applicable tostandard ship designs.

Traditionally, ship design from the builder's viewpoint has meantthe receipt of an enquiry from a shipowner, accompanied ei ther by astatement of requirements or an outline design. In the formercase, a design is worked up, often using a basis ship; in thelatter, the design is checked out. Time usually prevents anythingbut a single design being investigated. Then the cost is estimatedand a price submitted to the shipowner. If the tender issuccessful, a contract is placed,' and the design worked up into acomplete building design. There are thus two principal stages ofdesign:

(i) Preliminary or tender design

(ii) Detai led or post-contract design

Stage (ii) will not be considered here, because the principaldesign features will have already been settled and calculationsare largely in the form of analytical procedures and detailing forproduction. 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 engineeringeconomics has its greatest pay-off, since there is then greaterscope for selecting the most economic design variables, such asdraft.

The traditional approach survived during the many years in whichdevelopments in ship types were slow, e.g. 1910 to 1960 in Fig.4.It has proved inadequate for the highly competitive years sincethen, during which ship types have changed significantly, because:

•

•

•

•

Design was usually based on previous ships, yet there was noeXisting experience of the new ship types

Generally only one design for one size and speed wasinvestigated

No economic evaluations were made either for the singledesign or any alternative

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

A modern approach aimed at improving designs of ships requiresgood collaboration between potential owners and builders.Shipbrokers can contribute to this dialogue, while it is oftendesirable for consultants to be used to investigate the range ofpossibi li ties (especially for the smaller ship operator) onaccount of their independent commercial status, and theavai labi li ty of sui table staff.

A comprehensive process includes:-

(i) Investigation of transport demand, corresponding marketresearch and feedback of operational experience.

(ii) Concept formulation: range of possible technicalsolutions, ship types, configurations, sizes and speeds.

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

(iv) Estimates of first cost, operating costs and potentialrevenue earning abi li ty of each al ternative.

(v) Economic evaluation of the alternatives, under a varietyof assumptions.

(vi) Selection of the optimal design, either by judgement, ormathematical programming techniques.

(vii) Discussion of the proposed design (and any sui tablealternatives) with clients.

(viii) Contract, detailed design and construction of the finalselection.


Figure 20 shows some of the more important stages from ashipbuilder's viewpoint.

IM ..llllU TIl ....SPO..T Df ....NC

ICDNeE"" 'oa~ ••Il•.•TIO'"

Roun ""'0 C.. Il... oc ....... a c.""'"S'T le s

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I

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lOC.A\. STIIIWean"'l, V,atATtDN,

.5..041_ MOTIOWS l M ..... OIU"JkING, ETC..

CA"''' BANK I

Icos, ESTIMATING Isua- COWTIl..l:TQeS I

1""OCUC.-rICN D£S"~N I

IswlP CONSTRUCTION I

Fig.20 An Integrated Design Process

The practising ship designer should be interested in every aspectof these stages, but here we are concerned mainly with stages(iii), (iv) and (v). The relationships between these activitiesare shown in the design spiral, Figure 21. The important featureof the design spiral concept is that each successive cycle is madewith an increasing degree of complexity, but a decreasing numberof possible designs. The spiral starts with known information oncargoes and routes, generating a matrix of several hundredpotential designs, with different numbers of ships, lengths,breadths, depths, drafts, speeds and hull form characteristics.Before the economic evaluation is made, each combination ofprincipal particulars has its design features evaluated in termsof capacity, deadweight, trim and stability, and cost. After thefirst cycle, the matrix is reduced in size by the application oftechnical criteria, e.g. stowage factor too small or insufficientstabili ty, and of economic criteria, e. g. inadequate rate ofreturn. 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. Theresults of the second cycle may be sufficient for giving priceindications to a shipowner for a range of possible designs. For amore detailed estimate, a third cycle may be made in still greaterdepth, but for only a single design or a very small number ofdesigns. (Note that an inwardly converging spiral is sometimesused to illustrate the concept of iteration in designcalculations, e.g. main dimensions adjusted until sum of massesequals buoyancy).

TYPES OF ESTIMATE

o GENERALARRANGEMENT

(a) DETAILED EST'M.TE

DIMENSIONS

CV

SPEED

CV

(!)DEPTH

TRADINGPATTERN

0)

<VVOLUME

@LONGITUDINALSTRENGTH

TRIM ANDSTABILITY

~

ECONOMIC

EVALUATION~Q, ~l\'!J ~r.

".,0./

LIGHTWEIGHT AND TU.... o.n

CARGO DEAOWEIGHT / \

@ \

I<:·,~·" /"'\ ~--- ALW, DW \ / CMGO£S /FIMAL

;

C.G • cos~ ~:~ = ,<~.< <'Il'£ (s) iT<" / \SUTICAi. • ,,/ \ I Hc.eT

""{..... 'e"'-......... ~,,\~~. / / "\ .....-"'......\

IOCCl< -..... / "'- \ ...< <'Il'£ (A) "fT~ / Hue;-..... ,< / OATA \

~~ '--- "'" \ / " ----- 0 HULLG\ , ---... / / E.STI ....T[OUTFIT \!V OATA '--- "'- \ ./' \ HeT""'Ai. _ SOOT ...... FORM

..... - GIOOU.' '--- "'"\ / / ----- ..... eURV. 1\

WT.. c:.\G,COST - ~:"'"\ST :: ~ _ _ c, \_ - - ............-:/ ,......... - - O,5P1,.T. - ~~ics_

_ _:::.::: ----- / I \\ " ......... '--- I """""STATIC' 0 DISPLACEMENT

,,'Ee • STOOl. - CHE<:' \ .....- .....- / \ "-....... J JENDURANCE G c:.APAeIT\,.. \ /'.~~; / / 1/ I \ \ "-" "7-~ ". SHOS

/' '/ / I \ nM 1ll0UTC'",",IN ENGINE. \... / .........

.....- WT,C.G.• eOST ~.~.~... / I \ / "'- ~";'.STSnw' , / STEEL \ .....,..u.. "-

OAT...... ". / ~~~ ""'-0/ \ QO£C. /

@ \ 10£"". / \' \ / "'-MACHINERY /" / I \ "'-

/ WEIGHT I \ AD...,.T CHlCl<CHEe. C.G.eoST........ \ / \ /

Ij2I "-... / / '';.~IS.f - c-,:,,.. \\ G)~ ~ \ FREE&oARD

POWERING 5CAN1'c_. •...AI.

.............. I \~P'ULL CALCN._.__ e.-a

@STRUCTURE

Fig.21 The Design Spiral

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


subsequently from estimated scantlings. The early cycles shouldtreat each function as continuous, as at thi s stage relativevalues are more important than absolute values. The later cycleswill use the step functions that may apply in practice, e.g. dieselengines available with integer number of cylinders. Theapplication of step functions too early may lead to the area to beenlarged proving non-optimal when more accurate designinformation has been generated.

It should be noted that principal dimensions are the independentvariables. Deadweight, although a convenient and simple measureof ship size, is a merging of three one-dimensional measures whichdoes not reflect the relative importance of length, breadth anddraft (or depth for volume-limited ships). There is an infinitenumber of ships which can be designed to have equal deadweight, butone of these will prove to be more economical than all the others,given particular operating and financial circumstances. Routecharacteristics generally have a strong influence on the principaldimensions which, in conjunction wi th hull fullness, may determinedisplacement and, for a particular ship type, largely determinelightship also. Hence, deadweight tends to be a drop-out from thecalculation and should not require to be attained exactly in abroad-based design system. What is required is the optimal shipwi thin a general band of deadweight and speed, allowing theindividual dimensions to take up whatever values produce the mostprofi table ship within any given market constraints, such asavailability of cargoes and port facilities.

Such a design system is most easily applied to the straightforwardship types (such as bulk carriers) which usually dominate thenumber of enquiries; in practice, this frees valuable designeffort for the more complex ship types, where a wider range ofdesign features needs to be investigated, e.g. ship motions foroffshore craft.

2. COMPARISON OF ALTERNATIVE SHIP DESIGNS

Having briefly looked at the design process and where technicaland economic factors come together, a more detailed discussion ofthe comparison of alternative ship designs follows, as this is theusual situation facing the designer.

The alternatives need not be entire ships; they may of courseinvolve individual features, such as a comparison of differentcargo handling systems or different materials for piping systems.Such features are straightforward to analyse economically, whenthey do not affect earning oapacity, as in the latter case. Thealternative first costs and maintenance costs are evaluated interms of annual cash flows and converted to present worths to findthe system with the highest NPV (in this case income is notinvolved, so the least negative value is looked for), orincremental rate of return, if cost savings are being related toextra first cost.

In practice, most alternative designs differ not only in buildingand 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 cargohandling gear many not only save on operating costs, but may saveport time, offering the prospect of carrying more cargo per annum.Here, those alternative features which have a significant effecton the overall design are mainly considered.

The secrets of success in comparing alternative designs are toobtain sufficiently realistic data and to use an appropriatemethod of economic analysis. These seemingly simple requirementsare not sati sfied without some careful effort; there are manyexamples, published and otherwise, which violate these principlesand therefore produce results which are likely to be misleading.The scope for error multiplies with the size and complexi ty of thealternatives; short-cuts and doubtful assumptions may betolerated for low investments in small items of equipment, but areliable to produce serious errors when entire ships or maj orsystems are being compared. Some of the most common pitfallsinclude:

• Emphasis on costs alone rather than the difference ofincome minus costs, i. e. profit.

• Failure to recognise that the engineer is usually moreconcerned to evaluate differences correctly than absolutevalues, e.g. ranking the alternatives, rather than decidingwhether to make any investment at all.

• Failure to distinguish between differencesseparately influence earning capacity or payload,from mass or from volume considerations.

whicheither

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

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

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

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

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

• Failure to take account of financial complexities in caseswhere these are significant (e.g. cheap loans, accelerateddepreciation, subsidies, or taxation) although they do notusually alter the order of meri t of technical alternatives.


The above considerations mean that the most elegant technicalanalysis is useless unless the economic analysis is sufficientlyrealistic, and vice versa. Most of the practical difficultiesboil down to obtaining realistic data to include in the analysis,rather than the mechanics of making the analysis. The fact thatcertain data may be missing or of doubtful value does not preventan analysis being made - rather, special attention should bedevoted, firstly to see whether the factor concerned is criticalor not and, if it is, secondly to assess the sensitivity of theresults thereto. The area of uncertainty is then more explicitlyappreciated, which simplifies the answer to questions of the type'What level can we tolerate in this factor before this design losesits superiority over the alternatives?'

A General Approach To The Evaluation Of Economic Performance of FreightEarning Vessels

In any marine transport system, the principal parameters to beconsidered 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 inships of bulk commodities available in large quantities, theseparameters 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 costCrew costsMaintenance, insurance and other daily running costsBunkering patternFuel cost per tonnePort chargesCargo handling chargesFreight rateExpected rate of returnTax rateShip lifeDepreciation (capital) allowancesCredit facilitiesSubsidiesAnticipated escalation.

The essential first step is to establish the technical performanceof the vessel (and any alternatives) from design calculations, andcollect operational and economic data.

(a) Ship Data

}

togethersea fuelday

Type of ship and general characteristicsDeadweight, 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 ballastService power, kW or HPSpecific fuel consumption (sfc), grams

per kWh or HPhAuxiliary and port fuel consumption per dayGross and Net Tonnage (GT, NT)

(b) Operational Data

giveper

Cargoes to be carried, average stowage factorCargo load factor (% full when cargo on board)Steaming load factor (% miles loaded)Typical round trip steaming distance, naut,ical

milesNumber of ports of call per round tripAverage duration of each port call, daysDays off-hire per annum

* 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 cargoTotal miles steamed


}product givesoverall loadfactor (LF)*

x

( c ) Economic Data

Type and duration of charter, where appropriateAverage freight rate and any escalation clauses (if known), lesscommissionsShip 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 containersExpected life of shipExpected disposal value**Required rate of return, money or real termsLoan terms**Tax conditions**Exchange rates, if income and expendi ture are not in same uni tsCrew 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 machineryPort costs, average per port per GTjNT, or total per round tripCargo 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 averageweather, fouling, ballast legs, canal passages etc.

(ii) Port days per round trip (PD) = Number of ports of callx 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 locationof bunkering ports and prices, amount of reserve fuel,bunker capacity of ship, operator's policy etc. Typicalreserve about 20% of total carried or 4-6 days steaming,whichever is the smaller.

(Vi) Maximum Payload = Mass limited: Dwt - MFL - stores, wateretc. or Volume limited:Cargo capacity/average stowage factor

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


N.B. Check both to find the limiting condition, if it is notobvious. Consider if ballast is required in a loadcondition, e.g. Ro-Ro vessels.

(vii) Cargo carried per annum (CCA) = Max. payload x RTPAx LF x 2

N.B. The 2 derives from the ability to carry one cargooutwards and another homewards on a round trip, thuspotentially 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 'freighttons' , partly volume, partly mass.

(ix) Port costs per annum = Number of calls x RTPA x Cost perGT 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 expensivefuel, 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 bedifferent if their life is shorter.

Freight Revenue

(xiv) Voyage charter or Common carrier: CCA x Freight rate perunit 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 tripsand cargo carried per annum not important.

Calculation Of NPV, RFR, Etc.

The author's phi losophy in most cases is to make an initi alshort-cut economic analysis by hand, assuming uniform cash flowsso 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 economicanalyses any further, as the simplified calculations will quicklyscreen the alternatives into 'obviously-on', 'obviously-off', or'requires further investigation' categories. In the latter case,full DCF calculations, probably now in money terms, usuallycarried out by computer, should be undertakenj in which case theanalyst already has a reasonable idea of the magnitude of thelikely answers - a useful check on the computer, or more correctlyits input and output. In the case of modest investments, e. g.small items of equipment, it may well not be necessary to go anyfurther than the CR-type approach - indeed the data may not bereadily available to do any more, e. g. insufficient records toestimate escalation of maintenance costs or deterioration ofperformance with time. In these less complex cases, it is rare forthe CR-type approach not to rank the al ternatives in their correctorder of merit - the engineer's job. Of course, a manager decidingwhether or not to make the investment will consider the financialcomplexi ties, such as loans and taxes - but while the engineer willbe aware of their influence, his is not the final decision.

In practical calculations of al ternative ship designs, many of theabove parameters may remain constant for all alternatives, e.g.cargo handling cost. Others may require extensive preliminarytechnical calculations, e.g. cargo payload requires the accurateestimation of deadweight and power from principal dimensions.Estimating both first and operating costs must also reflect thedifferences between the al ternative designs.

The example which follows has been deliberately simplified, partlybecause the assumed constraints determine the ship size and enginepower, but it does show that differences in performance betweenthe two designs have been allowed for throughout.

Example

Approximately 1.25M tonnes of mineral ore per annum require to betransported between mine and smelter 2,000 miles apart. Comparethe economic performance of a self-unloading bulk carrier of about60,000 tonnes d.w. with a conventional ship using existing shoredischarging plant. Port limitations restrict the ship to 225moverall length and 13m draft. Available machinery fixes shipspeed at about 15 knots. Flag-of-convenience shipowner requires10 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 tonnesAdditional 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.

Displacement, tonnesLightship, tonnesSummer deadweight, tonnes

Voyage Details

Round trip steaming daysHours to dischargeDischarging daysLoading daysDays per round tripHeavy fuel per round trip, tonnesDiesel oil per round trip, tonnesFuel load carried for round trip(includes 20 per cent reserve)Other deadweight itemsTotal non-cargo deadweightMaximum payload, tonnesDays in service per annumRound trips per annumCargo carried per annum, tonnes

Operating Costs per Annwn

CONVENTIONAL

73,50013,25060,250

11.1159.14.701.50

17.31555

35722

4001,122

59,128350

20.221,195,500

SELF-UNLOADING

73,50015,55057,950

11.1128.42.771. 50

15.38555

45720

4001,120

56,830347

22.561,282,200

Crew fOther 'daily' running costs iMaintenance of self-unloading gearHeavy fuel costs (f120/tonne)Diesel oil cost (f180/tonne)Port charges (f20,OOO/RT)Cargo handling charges

Total Operating Costs

Ship first cost, fCapital recovery factor

(CR-10%-16)Capital charges

Total Annual Cost f

Cost per Tonne Cargo, f

600,000800,000

1,347,000127,000404,000

1,076,0004,354,000

18,000,000

0.12782,300,0006,654,000

5.566

650,000800,000

90,0001,502,000

183,000451,000

3,676,000

27,080,000

0.12783,461,0007,137,000

5.566


Thus the cost per tonne is identical. If the cargo quantity perannum had been fixed, the result would have been a reduced loadfactor for the self-unloader, giving a higher unit cost. If shoredischarging costs had been below/above 90P, the conventional shipwould have been better/worse. If an actual freight rate were fixedat above £5.566, the self-unloader would have been moreprofitable, because of its greater annual tonnage; if below, theconventional ship.

The simplified calculation above shows the two systems evenlymatched. It would thus be desirable to make a more rigorouscalculation along the lines of Tables 9 and 10 to include year byyear tabulations of:-

Escalation of items of expenditureCredit arrangementsAccelerated depreciation allowancesDifferent building times and instalmentsResidual valueSensitivity of results to changes in principal assumptions,

e.g. fuel prices.

A third possibility may also be investigated: new shoredi scharging gear with a rate of over 1, 000 tonnes per hour.

Comparison of Alternative Machinery Systems

The compari son of alternative machinery systems is a frequentapplication of engineering economics, but not all publishedexamples take into account properly both the technical andeconomic factors. Typical sources of error include:-

(i) Incorrect translation of volume and mass differencesinto usable payloads for varying operational profiles.

(ii) Use of test-bed or manufacturer's provi sional datainstead of service figures for fuel or lubricating oilconsumption.

(iii) Over-optimism about maintenance and repair costs andtime out of service.

(iv) Use of service power ratings or grades of fuel nottypical of actual experience.

Where they are significant for the alternatives being studied:

(v) Calculations based on one current year's opeation,ignoring changes in performance and operating costswith time.

(vi) Omission of periods of operation at partial load or wi thhigh auxiliary loads.

(vii) Fai lure to examine results for different operatingassumptions, e. g. higher fuel prices.


Typical prime movers considered in such compari sons include:-

Geared steam turbine: oil or coal firedDirect drive slow speed dieselGeared medium speed dieselGas turbine - industrial type or aircraft typeNuclear 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 alternativemay have different:-

Specific fuel consumptionType and cost of fuelMass and volume of machineryMass and volume of bunkersFirst cost as installedRunning costs: fuel, maintenance etc.Propeller r.p.m. and ship speed

which are of particular interest to the naval architect.

Other factors of particular interest to the marine engineerinclude:-

Auxiliary power requirements and alternative means ofproviding same, e. g. shaft driven alternators

Degree of automationManning requirementsNoise and vibrationLubricating oil requirementsBunkering arrangementsTime out of service for breakdown and repairs (off-hire)Number of models or frame sizes availableAvailabili ty of construction and repair faci li tiesSlow steaming capabili tyjpart load specific fuel consumption.

The following example shows how a basic comparison between slowspeed and geared medium speed diesel may be carried out for asingle screw lS-knot 28, aaa-tonne deadweight bulk carrier. Theslow speed (direct drive) ship is conventional, with dieselalternators prov.iding the electrical power at sea, while themedium speed ship has a gearbox-driven alternator and acontrollable pitch propeller. See Figure 22. It should beemphasised that, while the figures used are typical, anyconclusion indicated should not necessarily be regarded as ageneral one, as the data applicable in any particular case may welldiffer. Especially in borderline cases, unquantifiable factorslike the availability of experienced engineers may affect finaldecisions.


SLOW SPEED DIESEL

ME DrUM SPEED DIESEL

Fig.22 Alternative Machinery for Bulk Carrier

As with all technical and economic evaluations, the establishmentof realistic (rather than precise) data applying to the ship inservice is the foundation ofa proper evaluation. In some cases,especially where data is uncertain, e.g. price of fuel in thefuture, it is wise to investigate a range of values to determinethe sensitivi ty of the results to any future change. Note thetypical number of significant figures usedi not too much spuriousaccuracy, but enough to reflect the differences between thedesigns.


Comparison of Slow Speed and Medium Speed Diesel Bulk Carrier

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

Technical Data

(MCR). kW(HP)

(CSR). kW (1)

Main machinery

Maximum continuous ratingPropeller r.p.m.Continuous service ratingPower deductions. KW (2)Power delivered to propeller. KW(HP)Corresponding speed: loaded. Knots

ba 11 ast (3)Total weight of machinery. tonnesSummer 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/dayAuxiliary fuel at sea. tonnes/day (7)Port fuel. diesel oil. tonnes/dayLub. oil, system, g/kWh (g/HPh) (6)Lub. oil. cylinder, g/kWh (g/HPh) (6)Lub. oil. system. kg/dayLub. oil. cylinder, kg/day

Economic Data(costs in pounds)

One 6-cylinderslow speeddirect drivediesel

7360 (10.000)12587.5% =64401306310 (8580)15.015.965028.000380 (3500)

182 (134)28.12.03.00.27 (0.20)0.68 (0.50)42105

One 12-cylindermedium speeddiesel gearedto single screw

7720 (10.500)12585% =65606605900 (8020)14.615.750028,200180 (1500)

197 (145)31.0

°3.01.22 (0.9)

192

Cost of machinery installation (8)Total cost of shipAnnual cost of machinery

maintenance and repair (6)Annual running cost excluding fuel.

lub. oil and port costsCost of heavy fuel per tonne (9)Cost of diesel fuel per tonneCost of fuel at sea per dayCost of fuel in port per dayCost 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

3,400.000 3.000,00012.000,000 11.600,000

120.000 150,000

1,000,000 1.030.000120 122190 190

3752 3782570 570

0.80 0.850.90

128 16330.000 30.000


Operational DataSlow Speed Medium Speed

Miles per round tripProportion of miles in ballast, %Average loaded cargo/maximum, %Load factor %Average speed, knotsSteaming days per R.T.Port days per R.T.Total days per R.T.Days on-hire per annumRound trips per annumCritical draft pointBunkering patternReserve fuel. daysNumber of steaming days to nextbun ker port I

Main engine fu~l carried. tonnesDiesel fuel carried, tonnesTotal bunker load, tonnesOther deadweight items. tonnesSummer deadweight, tonnesCargo deadweight. tonnesCargo cubic capacity, grain,cubic metresTotal cost of sea fuel per R.T., fTotal cost of port fuel per R.T., fTotal cost of 1ub. oil per R.T., f

Annual Results(Mass Limited)

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

(11)

(l3)

(14 )(14)

(15)

(l6)

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

11.0003590

58.515.3229.914.043.9352

8.02UnrestrictedLoading port

6

35.91010

2001210350

2800026440

35000112200

80003800

11,0003590

58.514.9830.614.044.6350

7.85Unrestricted

for round trip6

36.61130

1501280350

2820026570

35000115700

80005000

Cargo carried per annum, tonnesAnnual running costs, fAnnual 1ub. oil costs, fAnnual fuel costs, fAnnual port costs, fTotal operating costs, fCapital recovery factor, (CR-10%-20)Annual capital charges, fTotal annual costs, fCost per tonne cargo. fEquivalent timecharter rate f

(Volume Limited)

Cargo carried per annum. m'Cost per cubic metre. f

Alternatively for Known Freight Rate

(l8)

(l9)(l9)(19)

(20)

(21)(22)

(23)

2481001000000

31000964000 ~

241000 ~

22360000.1175

14100003646000

14.707.65

32840011.10

2440001030000

39000971000236000

22760000.1175

13630003639000

14.917.61

32150011.32

Freight rate. f per tonneAnnual income. fAnnual surplus before capitalSurplus/investment (eR)Rate of return before tax. %N.P.V .• f

charges, f·

(24)(25)

15.00372000014840000.1237

10.8+ 630000

15.00366000013840000.1193

10.2+ 179000


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 andage. Same propeller diameter and propeller r.p.m., although ifa larger diameter propeller could be fitted, the geared mediumspeed diesel could be better matched in r.p.m. Controllablepi tch propeller in medium speed diesel ship gives higherballast speed relative to loaded.

4. Both ships have same main dimensions and di splacement. Assumeddifference in lightship is due to machinery and 50 tonnes extrasteel, resulting in increase in medium speed dieseldeadweight.

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

6. Typical of service conditions, including differences betweendesigns.

7. Diesel fuel for alternators for slow speed diesel ship, gearboxdriven in medium speed ship.

8. Higher MCR of medium speed ship and c.p. propeller slightlyreduces the usual cost differential in pounds per kW for engineplus gearbox.

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

10. Assumed in-port and generator lub. oi 1 consumption not greatlydifferent 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 numberof cylinders and slightly more breakdowns in service.

14. If a draft restriction is encountered, whether at load ordi scharge port or en route, the maximum payload should becalculated by reference to the deadweight at this draft, lessfuel 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 isusually limi ted by deadweight rather than cubic capaci ty. Twinmedium speed diesels may give a slightly shorter engine room,giving slightly more cargo capacity, but in thi s case there isli ttle difference in machinery length wi th single engine.

If there were a difference in cargo capaci ty, the correspondingpayload 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 daysfor round trip.

18. Cargo deadweight x number o~ round trips x load factor x 2 forcargoes potentially both ways.

19. From earlier lines for round trip costs x number of round tripsper annum.

20. Capital recovery factor for 10% rate of return before tax and20 year life. Rate of return is implicitly in real terms, sinceuniform cash flows are assumed.

21. Total annual costs divided by annual cargo. Thi s is ratherhigher than recent freight rates, as not only do low freightmarkets last longer than high, but most existing ships willhave been built at lower prices and therefore able to acceptlower freight rates, if their technical performance is notgreatly inferior. The potential value of secondhand price atearly di sposal is not taken account of, but could be importantif there was a degree of novelty about one of the machineryalternatives.

22. Total annual costs excluding fuel and port charges divided by(summer deadweight/1.016 for long tons x months on hire (12 xon-hire days/365».

23. Appropriate for volume-limited trades such as light grain orpackaged timber, although in this case, the order of merit isnot 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 slowspeed diesel offers a freighting cost about 2% less, largely due toits lower specific fuel consumption. On some voyages, the shipsmay 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 speedship requires a slightly higher rate to compensate for its higherfirst cost. A change in the assumed oil fuel price would notaffect the results significantly, as both designs have much thesame specific fuel consumption. If however the designs had much


different sfc' s, a lower fuel price would have benefi tted thedesign with the higher sfc, e.g. steam or gas turbine, and viceversa.

Since the designs are so close in economic performance, it would bedesirable to make a full discounted cash flow calculation, overthe full lives of the ships, especially if there was a definiteproposal to build. This would take into account the variouspractical financial factors such as loans, taxation andescalation, as well as any anticipated differences in long termperformance, e.g. loss of speed and increase in maintenance andrepair costs and time with increasing age. Furthermore, actualshipyard quotations may show a different variation in first costthan that assumed, depending on market conditions at the time.Different assumptions on for example, fuel price differential, 380vs 180 cSt, or round trip distance or draft limitations may have asmall 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 accountsuch as experience of the company's engineering staff andcompatibi li ty wi th exi sting ships in the fleet.

The results of the economic evaluation are useful in reducing thearea of uncertainty where judgement has to be applied in making thefinal decision, rather than in automatically determining thatdecision.

Sensitivity, Uncertainty and Trade-oHs

The previous examples indicate that the results may be sensitiveto changes in the data, because there may be uncertainty about manyof the technical and economic parameters. For example, it is notpossible to predict exactly over the life of a ship fuel prices,maintenance costs, port time etc. The simplest way ofinvestigating such uncertainties is to repeat the calculation wi thdifferent values of key parameters, and assess how sensitive theresults are to such changes.

Figure 23 shows a typical presentation of such calculations (whichmight be for alternative fuel saving designs), with the economicmeasure of merit plotted against the key parameters (see page 117for the most important parameters). Where the curves foralternative designs do not cross, the ranking is not changed, butwhere there is a crossover, the decision to be made is whether theoperating situation is likely to' be to the left or right of thecrossover.


z:a::=.... - DESIGN- ....

4: a::a:: A....- =z: ....<»

~~:-.... 4:

a: a::....-'= et.... :zCl:

:; a::LOW ....

~ -...Cl: z:

SPEE 0 FUE l PRI CE

=....a:=~....""

FIRST COST

Fig.23 Typical Presentation of Results

DAYS AT SEA PER UNUM

It is also possible to use the results of sensitivity calculationsto make trade-offs, e. g. how much extra in first cost can oneafford to pay to obtain a reduction of fuel consumption. Thedecrease in NPV from say a 10% increase in first cost can becompared with the percentage decrease in fuel consumption neededto generate a corresponding increase in NPV. The second edition ofthi s book gives some examples of such trade-offs, for examplewhether better materials with lower maintenance costs justifyhigher first cost.

There are more elaborate techniques for incorporating uncertaintyinto technical and economic calculations. Ref. 2.30.2 reviews suchtechniques which take account of probabi li ties. These may be at abasic level of assigning mean values and variances to, forexample, costs or weights, or more complex simulation models,using either Monte Carlo methods or analytical functions. Themore complex methods require more data, time and effort foranalysis, and are therefore better reserved for later stages ofdevelopment, once the simpler methods have indicated that theproposed design looks economically promising. The advantage ofsuch techniques is that point value results are no longer produced(e.g. implying 100% certainty that the internal rate of returnwill 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 and11%, 22% between 11 and 12% etc., which gives a better feel for theuncertainty inherent in all techno-economic problems.

3. THE OPTIMAL SH IP

The position has now been reached when the factors involved inselecting 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 sizeor cargo availability, the economies of scale in building andoperating costs indicate that the optimal ship is in general thelargest possible, offering the lowest transport costs. Thesi tuation is shown diagramatically· in Figure 24. The top halfshows a typical curve of freighting costs per tonne, FC, againstship size; one particular freight rate, FD, is shown. The lowerhalf shows the annual cost (or present worth), i.e. multiplyingthe unit cost curve by the payload at each ship size. MaximumNPVis obtained at CD wi th the maximum permissible size of ship for thetrade. Thi s size may be determined by a number of physicalrestrictions, particularly depth of water, such as:-

Loading or dischargingports

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

Shallow water en routeCanalsRepair dry docksShipbuilding 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 cargohas been lifted. Here the maximum return occurs at A I BI; anyincrease above this optimal size merely increases expenditure(which includes capital charges), while income remains constantalong B' El.


C.OST

1FERTONNE

0II i'......aI t""O/'rU~E, £ ...........II

0I,IIIIII

I~' ~~"1lI~ -rL....~~- - _!,

I

1I

ANNUAL. ICOSTS I

Ir'

Ir ~ wC ~ ~ ~r III 1: tIl

;: 0. i ~a % c %Ott) r",

o'SWI~ SIZE -

Fig.24 Optimal Sh ip Size

A similar effect is obtained if the loading or discharging rate isslow compared with the size of ship. Port time increases withsize, reducing the number of voyages per annum and hencerestricting income. Figure 7 illustrates this effect, and alsoshows how the optimal size reduces if shore costs increase withsize 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 (Reference3. 13. land 2.22) .

The more general case of limited cargo availability is wellillustrated by Benford in Ref.3.2.3. Ship size depends onforecasts 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 theship: 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 economiccalculations of ship plus the cargo in transit, unless theoperation is such that inventory costs do not fall on theshipowner, 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:

largerlargerlargerlargersmallersmallerlargerlargerlargerlargersmallersmaller

The influence of several of these factors can be seen whencomparing the large size of container ships with break-bulk cargovessels. The first seven factors are the most significant.

A dynamic view should be taken of physical restrictions, weighingup the possibility of changes during the ship's life. This isparticularly so in the case of draft: it may be worth paying alittle more for a deeper drafted ship, even though it may not beable to use all this draft on more than a small proportion of thevoyages in its life. If there are no restrictions on length orbreadth, a larger ship at reduced draft may well have a greaterpayload and offer lower freighting costs per tonne than a smallership down to her marks. Choice of optimal size is then a trade-offbetween the known costs of greater size against the chances ofbeing able to use the size sufficiently often over the ship's lifeto justify this cost.

Optimal Speed for Ship Size

In transport situations, there is often demand for the greatestpracticable speed to be adopted. Figure 25 illustratesdiagramatically the effect of ship speed on total costs and totalincome. Broadly speaking, increasing ship speed does not have agreat effect on hull first cost (apart from an influence throughreducing the block coefficient, so increasing dimensions to keeppayload constant). Likewise, crew costs, and many of the otheroperating costs are not much affected by speed. Installed powerdoes, however, increase roughly as the cube of speed, so total fuelconsumption and fuel cost go up roughly as the cube, whilemachinery first cost goes up roughly as the square of the speed.Meantime, however, transport capability, even with zero portturnaround time, can only increase directly proportional to thespeed. Thus as indicated in Figure 25, there is an optimal speedfor ships, which is a function of both technical and economicfactors: at what point the increased capital and operating costsoutweigh the increased revenue. It is possible to show, makingsimplifying assumptions, that speed is in theory an optimum whenfuel costs amount to half the total of other operating costs,excluding cargo expenses, but in practice more detailedcalculation is necessary.


--

(05'1'5.

-+-_------ I

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

- ----------,I

FuEL.

--C.APIT ... L C>lAe.r.El>

MAC.HINEltv.

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

- --' ...PlT ... L C ...... C.caESHULL.

SPE£C.

Fig.25 Optimal Speed of a Sh ip

OPTIMUM!>PiEO.

The case of ships is complicated by practical effects of port timeand machinery performance at reduced powers, as well as by therelationship between hull fullness and speed-length ratio. Bulkcarriers have relatively low speed, partly because of the need forlarge deadweight and high block coefficients, but mainly becauseof the low value and "repeatability" of the cargo, i.e. they canoften be considered as interrupted pipelines delivering to bufferstores. General cargoes, particularly manufactures, are of muchhigher 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 ofc.i.f. costs, and thus general cargo not only needs higher speed,but can afford to pay for it without increasing delivered pricerelatively as much as wi th bulk cargoes.

The heavy lines in Figure 26 illustrate the typical case. Theoptimal speed occurs where there is the greatest differencebetween the annual income and annual expenditure. The 'lens'shape indicates that the curve of maximum profi t is shallow in theregion of the optimum; 'flat laxity' is a phenomenon frequentlyfound in such situations. The effect of three other factors isalso illustrated: increased freight rates increase the slope ofthe income line, so increasing the optimal speed; similarly,reduced fuel costs (or reduced power requirements) swing theexpenditure line down, increasing optimal speed; while increasingcargo 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 aresummarised 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 ofhigh-earning cargo over a period. Note the converse: whenfreights are low, ship speeds are often reduced, e. g.tankers in times of surplus.Cheaper fuel (or fuel costs rising slower than other itemsof income and expendi ture ) .Short port turnaround time: increasing the proportion oftime 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 moreimportant.High interest rates: so that high capital charges on theship are spread over more voyages.

High daily operating costs, e.g. crew: increasingproductivi ty per uni t tim~.

Increased trade: but larger ships would be a bettersolution, which themselves permit higher speeds(speed-length ratio).

Shortage of building funds or building capacity: greatertransport capabi lity per uni t investment.


Technical

Lower specific fuel consumption: fuel weight and costreduced.Availability of machinery of requisite high power.Reduced cost of main machinery: e.g. from economies ofscale 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 powerrequirements.Smoother hulls: both when new and in service, e.g. bettercoatings.Improved sea performance: reduced speed loss due to shipmotions, weather routing etc.

Studies of nuclear-powered container ships demonstrate a number ofthese points; their optimal speed will be higher thanconventionally-powered container ships, although their maximumrate of return may be lower depending on assumptions aboutbuilding costs, fuel prices, etc., as indicated in Figure 27. Asthe curves such as those in Figure 27 are usually quite flat in theregion of the optimum, in many cases practical and commercialconsiderations may be allowed to dictate the selection of exactsize 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 toerr on the side of sizes and speeds somewhat greater than thetheoretical optimum; this tendency is often reinforced bycompeti tion and the desire to offer potential charterers anattractive ship, and a general desire to reduce capi tal investmentper annual tonne-mile, even at the cost of increased operatingexpenses over the ship's life.

RUluIR£O

,OlL' FIRED

I tOW'TAI"'~.

; SI4I"

III

'UTE

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 offuel price and freight rate is different from and may well behigher than that of a new ship. In comparison with Fig.25, thecapi tal charges on both hull and machinery are fixed (' sunkcosts' ), whi le there is al so an upper limit, of course, on maximumspeed. In general, it can be said that the optimal speed for anexisting ship is its design speed, unless fuel prices are very highand/or freight rates very low - a si tuation common over many of theyears 1974-85. Reference 3.10 discusses these factors in moredetail.

Speed, as such, may not always be the appropriate designparameter, especially on short distance scheduled services, whentransi t time may be used, in association with port turnaroundtime, e.g. 24-hour frequency may be required for ferries.Nevertheless, it is still possible to calculate the schedulegiving the optimal speed, but usually in the context of a fleet ofvessels providing a service, as discussed on page 107.

Overall Optimisation of a Single Ship

The separate optimisation of ship size and speed has beendiscussed to illustrate some general points, but in practice theymust be combined to yield an overall optimal design. Figure 28illustrates the general situation where ship size and speed canvary over a wide range. A section through AA would indicate theeffect of optimal speed for a given size. Closing the contours asshown in the dotted portions normally requires that someincreasing constraints are placed as ship sizes increase, e. g.that load factors decrease as large vessels find it increasinglydifficul t to obtain full cargoes, or that shore costs ri se steeply- the effects shown in Figs. 24 and 7 respectively. Figure 28 alsoshows contours of equal transport capacity, so it can be seen thatthe line of minimum cost for any specified cargo quantity followsthis tangent line rather than the lowest points of the equal costcontours. 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 asingle ship, particularly participating in general worldwidetrading where the ship does not have to be too closely tailored tocargo availability and fleet requirements. The majority of bulkcarrying vessels fall into this category, where a design is soughtwhich maximises return at any given level of freight rates. Ingeneral, this is achieved by the design offering minimum RFR,given a particular sector of the market and an assumed range oftrades in which the ship might participate, and where the addi tionof one single ship is not sufficient to influence the transportrequirements of any particular trade. The problem is then one ofunlimi ted cargo availability as far as any particular shipowner isconcerned, or an open competi tive system rather than a closedsystem. (Ref. 2.34).

Of course, before thinking about an actual ship design, anoperator will have decided on the general market within which heassesses the best prospects to lie, e.g. because of increasingdemand and limited supply. In effect he decides from his marketresearch to operate in one particular sector of Fig. 28 withconstraints associated with that trade, e.g. large combinationcarriers, reefers, or offshore supply vessels.

Optimisation of any particular ship type, especially well-definedtypes such as bulk carriers or tankers, then involves the findingof that combination of design variables which gives the highestvalue of the selected economic measure of meri t, e. g. RFR, subj ectto various constraints such as dimensional limitations, strengthand stability standards. For most specific ship types, carryingor earning capacity, whether deadweight, cubic capacity or deckarea, is largely a function of the principal dimensions, length,breadth, depth and draft. The last two are usually closely relatedthrough the freeboard rules. In addition, block coefficient andspeed are required to define the ship more exactly, even thoughspeed, length and block coefficient are often closely related(maximum block coefficient is usually a function of Froudenumber) . Thus, for any given ship type, there are only a fewprimary design variables which very largely define the size andspeed, as shown below, although a rather greater number ofsecondary and tertiary variables.

1. Primary Design VariablesNumber of ships in fleetLengthBreadthDraftDepth to principal deckSpeedBlock coefficient

2. Secondary Design VariablesNumber and arrangement of cargo and equipment spacesNumber and height of decksType and capacity of cargo handling gearMachinery type and locationNumber and type of propellers and r.p.m.Fuel, if not oilStructural configuration and material


Hull form characteristicsSuperstructure arrangementTankage allocation: water ballast, oil fuel etc.

3. Tertiary Design VariablesNumber, dimensions and type of hatchesCrew number and accommodationAuxiliary machineryLocation and arrangement of specific equipmentAppendagesManoeuvring devicesExtent of automationTypes of coatings.

Note that other important features of the design depend on theabove variables. These include:

Maximum and cargo deadweight or payloadCargo cubic capacityFuel consumption, at sea and in portLightship massesHydrostaticsLongitudinal strengthTrim and intact stabilityDamaged stabilityFreeboardTonnageVibration.

Thus 'check' calculations are made of these features and if adeficiency is found, one or more of the design variables must bealtered.

There are a number of mathematical techniques for finding theminimum of a function of several variables, e. g. RFR as a functionof some of the above design variables. Reference 3.26 discussestechniques of non-linear optimisation for use in computer-aidedship design whi le References 3.9, 3.13.1, and 3.15 are examples oftheir application. Most of the practical techniques ofconstrained optimisation work best with a moderate number ofvariables. Therefore, it may sometimes be desirable to separatesome of the secondary and tertiary variables to later stages of theoptimisation process (multi-stage optimisation). In some cases,the range of choice of the variable itself is smalli theconclusions from a separate study are therefore likely to be validover all the range of choice of the variables being studied, e.g.choice of machinery type or coatings. In such cases, the couplingbetween primary and the other design variables is small, andsub-optimisation is valid. Of course, such alternatives stillneed to be evaluated economically by the normal methods. Othervariables may be more subjective in their choice, and not easilyquantified, so that the currently preferred solution can simply beadopted as standard, e. g. superstructure arrangement.

The general approach then is to interpret the ship's tradingpattern in terms of cargo volumes, distances and port or otherrestrictions, and select ranges of possible dimensions, blockcoefficients and speeds for the first cycle of the design spiral.


Several hundred designs may be generated either by automaticsearch routines or by straightforward parametric studies. Some ofthe designs are likely to be eliminated on purely technicalgrounds, e.g. inadequate stability, but most will require the useof an economic criterion to reduce the number of possible designs.If freight rates can be predicted, the criterion would normally bemaximum NPV, but it is often found that minimum RFR is morerealistic if comparing different sizes and speeds, as actualmarket freight rates vary with the ship size and speed in a notvery predictable manner. The optimal region of combinations oflength, breadth, depth, draft, speed and block coefficient maythen be 'magnified' on the second and third cycles of the spiral byincreasing the level of complexity of design, using the initialresults as first approximations. The final cycle based on perhapsa single ship is, primarily, to develop the technical design andcost estimate in more detail, but economic evaluations can beapplied to make detai led trade-offs of, say steelmass againstfabrication cost, or additional equipment against reducedoperating costs.

."5"/

" I,I",,,

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Fig.29 Selection of Optimal Design Draft

It is undesirable to apply too many absolute constraints onvariables in the early cycles~ as it is usually found that the mosteconomic solution is simply to build to that constraint. Thisparticularly applies to draft limitations in the bulk trades, butalso to breadth limitations, e.g. for any large ship using thePanama Canal. Unless a vessel is being designed to operate all itslife on a given route with fixed limits (e.g. canals or locks), itis essential to recognise the probabilistic nature of shipoperations; there is always a chance that extra dimensions may beusable at some stage in a ship's life. The distribution ofavailable depths of water in ports throughout the world where the


ship is likely to call might be as shown in Figure 29A. A very deepdraft ship will only be able to call at very few ports, while ashallow drafted ship may not be taking full advantage of the waterdepths available. With planned port improvements, it might bepostulated that the 1995 situation may be different, as shown bythe broken line. Either distribution may be converted into acumulative probability curve as shown in Fig.29B. Thecorresponding load factors are shown in Fig.29C; very deep draftships are likely to have longer ballast steaming times and morepart cargoes than smaller ships which are more flexible. Fig.29Dshows' how the economies of scale in operating costs (includingcapi tal charges) may be offset by declining income per tonne cargoresulting from lower load factors. The optimal draft for a rangeof port and cargo availabilities can then be estimated (higher for1995 as indicated) by simulating the operation of a range ofpossible ship designs through a chosen spectrum of possible portsand cargoes. The selection of design draft therefore requires anassessment of the probabilities of being able to use the extradraft sufficiently often to pay for its extra cost. Figure 30shows the results of one such study, which takes into account bothport and cargo availabili ty. It can be seen that the optimal shipis not neccessarily the biggest deepest draft vessel. The limiteddepths of water available and some high stowage factor cargoescombine to reduce the value of extra deadweight and draft.

11 PV.(EH). d

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Fig .30 Optimal Deadweight with Limited Cargo Availabilityand Water Depth

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


4. THE WIDER SCENE

Fleet Transport Capabilities

While many ships are designed to trade to a wide range of portswith a wide range of cargoes, e.g. vessels such as bulk carrierslikely to be chartered out for most of their lives, others can bedesigned for a more specific trade, especially owner-operatedships. In such situations, the quanti ties and types of cargomoving on particular route(s) can usually be estimated at thedesign stage. The problem is then of limited cargo availability.It is then possible to explore the range of:-

ship typesnumber of ships in fleetship cargo capacitiesship speedsterminal facilities

which will together provide the required transportationcapability. There is a very large number of potential solutions,even before considering the range of detailed designcharacteri stics of individual elements, e. g. ship dimensi ons.There will however usually be a number of considerations whichwi 11 limit the range of practical solutions. For example,technical and economic factors usually combine to limit speed to arange of about 10 to 25 knots, while frequency of service may be animportant marketing factor, limiting the possible combinations ofspeed and size of ship. Furthermore, the possible number of shipsmay only take an integer value - usually identical ships (or nearlyso) will be required - and operational flexibility may demand acertain minimum number, e.g. not a single ship. It is thereforeoften not too difficult to define a more limited spectrum offeasible fleets which all have the required transportationcapaci ty, in terms of, say, tonne-mi les per annum, and to select asmaller number of them for more detailed study.

E:mmple

It is required to find the nwnber, capacity and speed of the variousfleets of bulk carriers which could transport 2.5 million tonnesof mineral ore 1500 mi les between mine and smelter, with no returncargo.

Annual transportation capacity = 2.5 x 1500. = 3750 million tonne-miles.

A quick appreciation of the possible range of ship sizes andnumbers can be gained by using an approximate annual productivi tyfigure from Table 11 which relates to typical ship voyages andspeeds. The potential productivi ty of a bulk carrier is say 45,000tonne-miles per annum per tonne deadweight. (Note that actualproductivi ties may be appreciably less in poor markets, when lesscargo is available).

Approximate tonnage of fleet required = 37;~O~Ol06 '"' 83,300


This might be made up of:

one ship of abouttwo ships of aboutthree ships of aboutfour ships of aboutfive ships of aboutsix ships of aboutseven ships of about

84,000 dwt42,000 dwt28,000 dwt21,000 dwt17,000 dwt14,000 dwt12,000 dwt etc.

It might therefore be decided to investigate in more detail fleetsof up to eight ships, with speeds ranging from say 10 to 18 knots(the cargo is implicitly of low value so very high speeds arelikely to be uneconomic). It is also necessary to take intoaccount the terminal facilities for loading and discharging, andif these do not already exist, the cost of their constructionrelative 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 payloadx Average load factor xRound trips per annum

Assuming no return cargo, cargo payload as 95% of maximumdeadweight and N ships in the fleet:-

Annual capacity, tonnes = 2 x (0.95 x DW) x 0.50 x RTPA x N2,500,000 = 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 forbulk carrier time in efficient ports could be assumed, say 2-3 daysper call, or more realistically a possible cargo-handling rate,say 1000-2000 tonnes per hour for bulk cargo. Such rates wouldcorrespond to about 1 day in port for the smaller ships and about 3days for the larger. '

Assuming for simplicity that loading and di scharging port time areeach 2 days, ship size can now be recalculated for a range ofpossible number of ships and speeds. Only three combinations areshown to indicate the process, but Figure 31 shows the range ofpossible fleets.

Number of shipsSpeed, knotsSea time 3000 miles, daysPort time, 2 calls, daysRound trip daysRTPA (350 days)Ship DW from (1)Frequency of service, days


216

7.84.0

11.829.7

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Fig .31 Spectrum of Possible Bulk Carrier Fleets

Note thatfrequencybecause:

forand

fixed annual cargo capacity and fixed port time.capaci ty are related and independent of speed,

Frequency (days) • Round trip daysNumber of ships

Annual capacity in one direction = Average ship capacity xNumber of ships x RTPA

Average ship capacity _ Annual capacity Round trip daysNumber of shIps x 350

Annual capacity x frequency• 350


It might be considered too risky to have a single ship fleet, andoperationally inconvenient to have less than one ship per week (7day frequency). Similarly a frequency of less than 2 days wouldrequire more than one berth, as port time is 2 days. The remainingcombinations 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 thedesign parameters of ship and shore installations for fleets of 2,3, 4, 5 and 6 ships, at an appropriate level of detail, evaluatingthe comparative economics and finding the overall optimum of shipsplus shore installations, usually in terms of minimising transportcost 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 60 000 40 000 36 000 17 000 6000 25002. Maximum cargo payload. 244 000 57 000 37 000 26 000 12 000 4000 2300

tonnes (crude 011) (dry bul k) ( ref Ined (2300 (general ( 100 (bul k)products) conul nars) ca rgo) t ra I le rs)

3. Ave ra ge speed. knots 14 15 15 21 16 16 114. Total IIllles per round 16 000 11 000 5 000 12 000 15 000 2 000 1000

tr Ip115 0005. Total lIli les per annum 106 000 79 000 88 000 1211 000 70 000 97 000

6. Port calls per round trip 2 3 3 6 9 2 27. Average days per cal I 2.5 6.0 2.0 1.7 11.0 1.0 2.08. Port days per round trip 5 18 6 10 36 2.0 4.09. Per cent port time 9 37 30 29 46 26 51

10. Sea days per round trip 116 31 111 211 39 5.2 3.611- Sea days per annum 317 221 245 2117 182 253 17112. Tota I days per round trip 53 49 20 311 75 7.2 7.613. RTPA (350 days) 6.60 7.14 17.5 10.3 4.67 46.6 44.914. Average per cent miles 50 60 50 lOO 95 100 60

loaded15. Per cent full of cargo 96 90 90 70 75 50 9016. Overa 1I load factor 116 54 45 70 71 50 54

per cent583 000 375 000 80 000 194 000 112 01117. Tonnes ca rgo pe r annum 1 546 000 440 000

16. Tonnes per annum per d~t 6.2 7.3 14.6 10.4 4.7 32 4519. Tonne-miles per annum (H) 12 370 2420 1460 2250 600 194 5620. Tonne-miles per d~t 49 500 40 300 36 400 62 500 35 200 32 300 22 300

Line (17) = 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, butthere are more considerations to take into account. In particularthe performance of fleets of unitised cargo ships is markedlydifferent from that of break-bulk ships. Unless there is a clearlydefined type appropriate for the trade, it may thus be necessary tocompare fleets of one or more of the following types:-

Container shipsRoll-on/roll-off ships (RoRo)Pallet carriersBarge carriersBreak-bulk ~ulti-deck cargo vesselsCombination types,

e.g. container/RoRo, multi-purposetween-decker, containerjbarge carrier.

As most cargo liners operate in Conferences, there may berestrictions' on the number of a company's ships or minimumfrequency of port calls for a particular service. Furthermore I asfreight rates are fixed within each Conference, competition tendsto take the form of higher speeds or better performance in handlingparticular cargoes.

Higher speeds are also encouraged by the higher average value ofgeneral cargo compared with bulk, which adds potential inventorycosts. The cargo movements will also fluctuate with the state oftrade, as well as seasonal effects. Even with unitised cargo,there are nearly always more than two ports served. An adequatemargin is therefore necessary in fleet capacity, taken inconjunction with an appropriate load factor. Where cargoes of awide range of stowage factor are being carried, allowance must bemade to provide adequate cubic capacity, and if necessary deckstowage.

Figure 32 shows how sea transport cost per container varies for aparticular trade route wi th number of ships, size and speed. Sinceseveral combinations all offer virtually the same freighting cost,other factors would be then considered before undertaking detai leddesign studies e.g. competition, physical limitations on shipdimensions, machinery requirements etc.


1040

7~OOO CONTAINERS PER ANNUM. 8,200 MILES EACH WAY

DPTIIoUL 3 - SNIP fLEEl z 2400 HO ~., (NOlS

OHIIW. ~ . SIll P flEET , 1150 HO 19 0 UOlS

DPlIIoUl 5- SKIP flEEl , 1320 Ho 19~ UOlS

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Fig.32 Container Ship Fleets Transport Cost

The Systems Approach

Much has been written on the subject of the systems approach todesign but, in essence, it can be regarded as an integratedquantified approach to problem solving using appropriate tools.It reduces the complexity of a real-life system to manageableproportions, yet still retains the essential features which affectperformance and economics.

Systems Analysis is used to define the problem:

The system under study, e. g. crude oi I transport systemThe relevant sub-systems, e. g. machinery systemThe objectives of the system, e.g. to minimise transportcostsThe gathering of basic information.


System Design is concerned wi th:

Forecasting, e. g. the demand for oi 1Model building, i.e. a simplified representation of thereal system, such as a mathematical modelSimulation of the system or replication of the essentialfeatures of operating a complex systemOptimisation of the system, e.g. selection of the designvariables, i.e. those under the control of the designer,such as ship main dimensions.

At the ship design level, the systems approach encompasses stagessuch as set out in Table 12. At the supra-system level, theproblem of looking at alternative transport concepts rather thanconventional tankers might be studied, e. g. pipelines, towedflexible containers etc. At the sub-system level, al ternati vecargo handling systems might be studied - the results of whichcould be fed back at the ship design level. System boundaries needto be considered, particularly by reference to financial andcontractual cornrni tments at various stages.


TABLE 12

The Systems Approach to Ship Design

1.

2.

3.

4.

STEP

Formulate problem andobjective.

Construct conceptual modelshowing logical relationships

Identify independentvariables

Identify dependent variables

EXAMPLE

Find optimal design of bulk carrierfor a given trade route with minimumtransportation cost.

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 returnCC: daily, fuel, port etc. costs

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

First cost: steel, outfit, mach1y cost+I ~POt.,d·· t dlmenSl0ns spee

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

4.1 Design variables

5. Co" ect data

5.1 Establish constraints

6. Construct mathematical model -6.1 Technical design

6.2 Economic aspects

6.3 Cptimisation procedure

7. Test model

8. Adjust model

9. Run model for real

10. Mak.e decision

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

hold geometry, etc.

Cargoes, ports, costs, masses etc.

Canals, berth depths, cargo handlingrate, freeboard, stability etc.

usually computer program

Set up relationships, equations etc.

Power =f(dimensions, V, CB etc.)

Steelmass =f(dimensions, arrgt. etc.)

First cost, operating costs, annual cargo

R.F.R. = annual costs/annual cargo

Search process to find combinationof design variables giving min. R.F.R.

Check. results against actual ships

As necessary

Given route, unit costs etc.

Choose final design parameters,L, B, T, V etc .


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 ofnew systems) and operational research (broadly, concerned withimproving the performance of existing systems) include:

Forecasting: Estimating the demand for some product, for exampleship types such as product carriers, or trade flows, such as ironore. A range of techniques may be used, ranging from canvassingexpert opinion, e. g. the Delphi technique, to trend analysis(perceived relationship between demand and time), to economicanalysis, and to model-building. These techniques are listed inthe order of movement away from judgement towards quantifiedtechniques (Refs.2.13 and2.36).

Allocation: Assigning resources to jobs by matching supply anddemand points to minimise total costs, e.g. which ships to use onwhich trades. Such transportation problems can be solved vialinear programming (Ref. 2.41) .

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

Probability concepts: Many of the aspects of ship design exhibituncertainty, in the sense that the probabili ty of the actual valueequalling the predicted value is rarely unity, e.g. steelmass,speed on trial, outfit manhours etc. Where it is possible toestablish mean values and variances, probability theory can beused to estimate the likelihood of the actual value being withinsome acceptable tolerance of the predicted (Refs .1.7.1 and 3.43) .The Taylor series approach and hybrid method are extensions of theconcept (Refs.2.30.2 and 2.31).

Simulation: A process of replicating the operation of a system overtime. Particularly useful for transport problems which are toocomplex for mathematical expression, where a 'motion picture' ofvariation in performance with time is required (e.g. to identifybottlenecks), and where stochastic variables are present, e.g.variation in cargo handling time. Random influences may be suchthat deterministic (steady state average) values do not givesufficient insight into the range of possible outcomes. Theprobability of delays may need to be quantified so that theprobability of attaining the specified performance can beassessed. Simulation is a powerful tool, but generally requiresappreciable effort to develop a model and collect data (Ref.2.43).

Queueing theory: Some systems may be simple enough to calculatedirectly the probability of delays to minimise the cost ofproviding some service, e. g. number of berths required to handle agiven flow of ships, knowing the arrival rate of ships and servicetime 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 cancomprise: interest on stock held, plus cost of providing astockholding facility, plus risk of obsolescence, plus cost ofre-order and delivery. Only the first item is usually applicableto cargoes carried on ships, when it can be added to ship transportcost or RFR in determining the best design features, such as speed(Ref. 3.2.2) .

Replacement analysis: Addresses the problem of the best time toreplace equipment, whether now or to defer the decision to a laterdate. In the ship context, the problem compares the improvedperformance and lower operating costs of a new ship wi th decliningperformance and increasing costs of an old ship (Ref. 3.2.4) .

Decision theory: Attempts to assess the risks associated withalternative courses of action, e.g. buying, selling, leasingdifferent vessels. Decision making under risk may be aided ifprobabilities can be assigned to expected (monetary) outcomes ofdifferent policies. Utility analysis takes account of suchconsiderations, as well as the decision maker's propensity forri sk taking (Ref.l. 8) .

Problems with multiple objectives: Not all problems can be assigned asingle measure of merit to indicate the 'best'. If severalobjectives have to be satisfied, e.g. reducing the transport costand minimising amount of foreign exchange and maximisingemployment, one method using linear models is goal programming,assuming that priori ties can be assigned to the goals andpenal ties for deviating from them (Ref. 2.45) .

Ill-defined problems or fuzzy sets: Techniques have been developed forchoosing amongst a range of possible design alternatives; whereboth objectives and constraints cannot be precisely defined. Forexample, speed should be much larger than 12 knots, but availableengines are such that speed should be between 10 and 18 knots. Theset which satisfies the various goals and constraints andmaximises some 'membership value' or measure of merit is deemedoptimal (Ref.2.46).

Each of such techniques has an economic dimension, in that they canbe used to investigate various aspects of establishing the bestchoice of ship or design feature. The economic evaluationtechniques already described may be used in conjunction wi th them,for example, RFRs in allocation problems, NPVs of alternativedesigns in replacement analysis or decision theory.

Broadly speaking, such techniqu'es, e. g. simulation, should bedeferred to later stages of analysis, particularly if the simplermethods do not model the real life situation well enough, or givesufficient insight into problems of the design concept underconsideration. There is a trade-off between the generality of amethod, and the complexity and need for quantification ofuncertainty. Not all are necessarily applicable to every designproblem, but an awareness of the existence of a technique, itspotential usefulness and availability of further information orcomputer programs is important.


One feature implici t in the systems approach is the trade-off - theextent to which improvement in performance of one element can beattained at the expense of either increased cost, or decreasedperformance of another element. Figure 33 illustrates someexamples in the case of two variables.

UNI'T

COSl.

CI-I"'~"'C 'TERISTIC

EXAMPLES

CHARACTERISTIC

Ship SizeSpecific Fuel ConsumptionFrame SpacingFuel Quality

Fig.33 Examples of Trade-offs

A

Shore CostFuel CostMaterial CostFuel Cost

B

Ship CostMachinery CostLabour CostM&R Cost

Some techniques used in the systems approach are described inReferences 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 shipsenables the relative importance of different features of a ship'sperformance to be evaluated. Table 13 shows the economic benefitaccruing to a lOO-ship fleet representative of twelve types in theBri ti sh merchant navy, ranging from VLCCs to offshore supplyvessels. The increase in NPV resulting from a 10% improvement invarious design, building or operating features has beencalculated, while holding other features constant, except thosedirectly related. For example, if installed power requirementscould be reduced by 10%, say from improved hull forms or higherpropulsive efficiency, the overall benefit from the 100 shipswould be a sum of money wi th a present worth of f.S9. SM. That is, upto this amount could be afforded if a 10% gain could thereby beachieved. Even if only, say, 1% gain is considered attainable, upto f.S.9M could be spent - on research and development (in areassuch as hydrodynamics, propulsion devices and coatingstechnology) and increased first cost - and still yield a netbenefi t for the 100 ships.

Part 111 - AppUcation To Ship Design - 117

TABLE 13

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

FEATURE ORDER OF NPV NPVMERIT fM CHEAP

FUEL

/ Freight rate 1 336.8 316.1Load factor 2 206.4 187.7Steaming distance 3 187.6 167.1First cost 4 87.0 87.0Port turnaround time 5 68.3 66.2Dry cargo handling cost per tonne 6 65.9 65.9Power requirements 7 59.5 44.1Fuel cost per tonne 8 59.2 38.6Specific fuel consumption 9 55.2 36.3Crew costs 10 49.7 49.7

.Building time 11 36.4 36.4Lightship displacement 12 35.6 28.0Hull steelmass 13 34.5 29.4Port charges 14 32.3 32.3Upkeep costs 15 26.5 26.5Hull construction labour cost 16 19.4 19.4Other running costs 17 14.4 14.4Steel cost per tonne 18 10.4 10.4Time out of service 19 9.8 9.8

Increasing freight rates by 10% shows the greatest improvementbecause it applies to the entire income side of the economiccalculations, but of course it is outside the control of theshipowner and shipbuilder. Increasing load factor is alsovaluable, 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 offreight rate, as cargo handling costs and port time will also beincreased, and offset some of the gain. While reducing steamingdistance appears very worthwhile, 10% reductions in practice arenot possible overall. Fractional gains are, however, possiblefrom better course-keeping or more accurate navigation or theopening of short-cut channels. With capital charges forming sucha large element in freighting costs, reduced first cost is alwaysworthwhile, providing that performance is not jeopardised.Reduced power requirements, resulting in both reduced machinerycost 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 fuelprice of f100 per tonne, escalating at 5% p.a. Substituting acheap fuel price of f50 escalating at 8% p.a. moves crew costsabove power requirements in order of merit. Compared wi th the 1971table published in Ref.1.12, all items concerned with fuel costshave moved up in importance.

Reduced building time from contract to delivery is only assessedby its effect in bringing forward in time all the cash flows, and


is therefore influenced by the assumed discount rate (12%). Thecompeti tive advantage to owner or bui lder of shorter deliverytimes is not easily quantified as it depends on the current marketsi tuation. Reduced port turnaround time benefi ts all ships, whilereduced cargo handling costs are also of great benefit,particularly in the general cargo business. In the dry bulktrades, typical cargo handling costs have been included eventhough 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 thanin 1971, owing to more ships becoming volume-limited rather thanmass-limited, e.g. segregated ballast tankers. Reduction in shiprunning costs are, of course, worth striving for; crew costs showup as the single most important factor. Al though important to theshipbuilder, 10% reductions in steel prices or hull labour costsdo not have a very large effect on the overall ship, as they onlycontribute together in the region of one-third of ship firstcosts. 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 theoreticalmaximum and the actual, not to the absolute value, i.e. 365 daysper annum in service and, say, 350 days, when 10% improvement isonly 1.5 days.

Table 13 assumes a standard improvement of 10%, but clearly gainsof this amount are not equally attainable for each feature in thetable. It would be far more difficult and costly to reduce, say,first cost by 10% than, say, time out of service. The figures inthe table can be scaled for attainability, for example a 5%reduction in power requirement (f29.7M) is more valuable than a15% reduction in hull labour cost (f29.1M) taken over the fleet'slife. The benefit for a specific ship can be estimated by runningthe ECEVAL program with full sensitivity output.

However, because Table 13 relates only to existing ship types, itdoes not highlight the potential benefits from improvedtransportation methods and novel configurations of marinevehicle. Furthermore, it does not identify unquantifiablebenefi ts, e. g. in safety or environmental protection.

Some Concluding Comments

Most engineers will use engineering economics as a tool forcomparing 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 bestof current developments of the present designs, and to the samerequired standards of performance.

For preliminary calculations, when simplicity is important, theuse of Series Present Worth and Capital Recovery factors wi 11indicate whether it is worth pursuing the economic calculations inany depth. If the designs appear promising economically, it isusually necessary to take account of the economic complexitiesdescribed in Part 11 before any actual investment decision can bemade. The essential nature of design is a compromise as reflectedin the summation of performance curves giving flat optima overall,


as shown in Figure 33. Flat laxity has the advantage that thesubsequent 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 toquantify, such as vibration or safety, or intangible factors suchas appearance, can be allowed to influence final decisions wi thoutexcessively distorting the results.

The engineer is more concerned with relative than absolute values,so that lack of precise information does not prevent economiccalculations from being attempted as long as the relative ordersof magnitude are realistic. Any analysis is only as good as thedata input. The wise engineer will build up not only a personaldatabase of technical information, but also of economicinformation. Well presented technical recommendations have abetter chance of acceptance, when there are many competingalternatives. It is also important for engineers to appreciatethe various definitions, e. g. costs are not the same as prices (atleast not if you wish to remain in business), and depreciation isnot an item of expenditure, but a bookkeeping and tax calculationdevice. The manager's problem is rather different, especially thecapital budgeting decision of allocating resources to differentprojects (or none at all). In this case, absolute values arecrucial, insofar as ri sk and uncertainty permit reasonablecalculations to be made. Broader problems, especially thoseinvolving the wider transport scene, are increasingly requiringthe use of more sophisticated models, including stochasticvariables, e.g. in simulation.

It is now widely appreciated that designs with minimum first costare not necessarily those with minimum life cycle costs. It maywell be worth paying appreciably more in first cost to obtaincontinuing savings in maintenance and improved performance over aship's life, e.g. high duty coatings, despite the difficulty ofconvincing some decision makers. The effects will usually bedifferent between mass or volume-limited ships, and betweenconstant speed or constant power ships, and between good marketsand bad markets.

The competitive conditions in shipbuilding and ship operationhighlight the differences between those designs which are merelyadequate and those which have the highest standards of technicaland economic performance ,over the widest range of operatingconditions.


A SELECTED BIBLIOGRAPHY

R Contains useful reference material* Recommended reading

1. MARITIME ECONOMICS

1.1* COUPER, A.D. The Geography of Sea Transport. Hutchinson1972.

1.2 BRANCH, A.E. Economics of Shipping Practice andManagement. Chapman & Hall, 1982.

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

1.4.1 GOSS, R.O Studies inUniversi ty Press, 1968.

Maritime Economics.(Includes 1.4.2)

Cambridge

1.4.2

1.4.3

1. 5.1

1. 5.2

1. 5.3

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

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

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

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

BENFORD, H. Of Dollar Signs and Ship Designs. S.N.A.M.E.,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 ShipDesign. 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 ofMichigan, Dept. Nav. Arch. & Mar. Eng., Rpt No.270,Jan.1983.

1.5.7 BENFORD, H. A Naval Architect's Introduction toEngineering Economics. Universi ty of Michigan, Dept.Nav. Arch. & Mar. Eng., Rpt. No. 282, Dec .1983.

1. 6 WALSH, W. R. Own or Charter - A Suggested Method ofAnalysis for Oil Companies. Marine Technology, October1966.

1. 7.1* KLAUSNER, R. F. Evaluation of Risk in Marine CapitalInvestment. Marine Technology, October 1970.

A Selected Bibliography - 121

1. 7.2 KLAUSNER, R. F. What an Engineer Should Know About Capi talBudgeting. University of Michigan, Dept. Nav. Arch. &Mar. Eng., Rpt. No.083, 1970.

1.8 LORANGE, P.Management.

and NORMAN, V. D. (Edi tors) . ShippingInst. for Shipping Research, Bergen, 1973.

1. 9* IHRE, R., GORTON, L.Chartering Practice.Press, 1984.

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

1.10

1.11

1.12

1.13

1.14

1.15

1.16

1.17

1.18

1.19*

1.20

1.21*

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

METAXAS, B.N. The Economics of Tramp Shipping. AthlonePress, 1971.

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

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

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

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

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

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

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

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

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

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

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


1.21.2 BUXTON, LL. Fuel Costs and their Relationships withCapi tal and Operating Costs.

1.22* STOPFORD, R.M. Maritime Economics. To be published byAlIen & Unwin 1987.

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

2. MARITIME TRANSPORT

2.1.R Dry CargoResearch.1975-77.

Ship Demand to 1985.6 volumes published by

Maritime TransportGraham & Trotman,

2.1.1

2.1.2

2.1. 3

2.1. 4

2.1.5

2.1. 6

2.2

2.3.1

2.3.2

2.3.3

2.4

2.5.1

2.5.2

2.6

2.7

Introduction.

Food and Drink

Raw Materials

Manufactures

Chemicals

Ship Demand

International Symposium on Middleterm and LongtermForecasting for Shipbui Iding and Shipping. StichtingMaritime Research, The Hague. (Now MARIN). June, 1970.

Uni tization of Cargo. United Nations TD/B/C. 4/75. 1970.

Coastal Shipping, Feeder and Ferry Services. UnitedNations, ST/ECA/134. 1970.

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

HEAVER, T.D. The Cost of Large Vessels - An Examination ofthe Sensitivity of Total Vessel Costs to CertainOperating Conditions. National Ports Council T & RBulletin No.7, 1970.

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

GOSS, R. O. The Cost of Ship's Time. Government Economi cServices, Occasional Paper No.10. H.M.S.O., 1974. (See1.4.3. )

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

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


2.7.1

2.7.2

2.7.3

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

MEREDITH, W. G. and WORDSWORTH, C. Size of Ore Carriers forthe New Port Talbot Harbour.

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

2.8 HILLING, D. Barge Carrier Systems: Inventory andProspects. Benn Publications, 1977.

2.9

2.10

2.11

2.12

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

CHAPLIN, P.D. and HAYWOOD, K.H. Operational ResearchApplied to Stern Freezer Trawler Design. Inst. of MarineEngineers, Miscellaneous Section, March, 1968.

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

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

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

Trade Forecasting.

2.14

2.15

2.16R

2.17

2.18

2.19

McCAUL, J.R., ZUBALY, R.B. and LEWIS, E.V. Increasing theProductivity of U.S. Shipping. S.N.A.M.E. SpringMeeting, 1972.

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

FRANKEL, E.G. and MARCUS, H.S. Ocean Transportation.M.I.T. Press, 1973.

KOENIGSBERG, E. and LATHROP, D. S. Transocean Tug-BargeSystems. A Conceptual Study. Matson ResearchCorporation, 1970.

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

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

2.20 OVREBO,Europe.

S.H. Short Sea and Coastal Tramp Shipping inInstitute for Shipping Research, Bergen, 1970.

2.21 BIRD, J. Seaports and Seaport Terminals. Hutchinson,1971.


2.22

2.23

2.24

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

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

FOSS, B. Coastal Shipping. Norwegian Shipping Academy,1983.

2.25.1 Transport and Handling in the Pulp and Paper Industry.Vol.l. Proceedings of First PPI Symposium. MillerFreeman 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 ofShips. Ship Repair and Maintenance International,January, 1975.

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

Seaway andTransport

2.28 SWIFT, P.M. & BENFORD, H. Economics of Winter Navigationin 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 inShipbui lding (ICCAS). North Holland Pub., 1976.

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

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

2.31

2.32

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

CARACOSTAS, N. Containership Economics for EffectiveDeci sion-making Analysis. Marine Technology, October1979, p.353.

2.33 LIND, O. &DevelopmentLaid-up andp.145

ERICHSEN, S. Economics of Technologicalof Tankers and the Competition betweenNew VLCCs. Trans. R. I.N.A. Vo1.120, 1981,

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


2.35 BUXTON,WEGEMT,notes.Vol.3.

I.L. The Influence of Ship Operation on Design.8th School. Ship Design for Fuel Economy, courseGothenburg; Chalmers Technical University, 1983,

2.36

2.37

2.38*

2.39"

2.40

2.41

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

PEARSON, R., and FOSSEY, J. World Deep Sea ContainerShipping. Gower Press, 1983.

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

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

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

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

2.42 DANTZIG, G.B. and FULKERSON, D.R. Minimising the Number ofTankers to Meet a Fixed Schedule. Naval ResearchLogi 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 ComputerSimulation 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 ArrangementDesign. LC.C.A.S., Trieste. 1985. North HollandPublishing.

3. DESIGN OF SHIPS

3.1* WATSON, D.G.M. and GILFILLAN, A.W. Some Ship DesignMethods. Trans R.LN.A. Vo1.119, 1977, p.279. (Also inthe Naval Archi tect, July 1977. )

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

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


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

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

3.3 FARIDANY, E.K. LNG Review.Operations, Ship Technology,& Market Prospects for LNG.Ltd, Wokingham, 1977.

A Study of Marine CargoProject Finance, LNG Prices

Energy Economics Research

3.4 CHRISTOPHE, J.P.Carrier Projects.1982.

et al. Optimisation of LPG and LNGGastech Conference, Hamburg, October

3.5 BUXTON, 1. L. and SNAITH, G. R. The Development of the BulkCarrier. 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 CargoLiner in Light of the Development of General CargoTransportation. 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. 1181974-1975, pp.55-76.

3.9* ERICHSEN, S. Optimi sing Containerships andTerminals. S.N.A.M.E., Spring Meeting, 1972.version: Universi ty of Michigan Report 123) .

Their(Full

3.10 ZACHARIADES, A. What Influences Optimal Ship Speed?Marine Engineers Review, May 1983.

3.11 VOSSNACK, E. Aspects of Cost from the Shipowner's Point ofView. Symposium on "Developments in MerchantShipbui 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 inPreliminary Ship Design. (Applied to the Australian OreTrade). Trans. R.I.N.A. Vo1.114., 1972 pp.293-320. (Alsothe Naval Architect, April, 1972.)

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

3.14 UNIVERSITY OF MICHIGAN. Computer Aided Ship DesignLecture Notes, published 1970.


3.15*

3.16

3.17

3.18

3.19

3.20

3.21

3.22

3.23

3.24

3.25

3.26

3.27

3.28R

3.29

3.30*

NOWACKI, H., BRUSIS, F. and SWIFT, P.M. TankerPreliminary Design - An Optimisation Problem withConstraints. Trans. S.N.A.M.E., Vol.78, 1970.

LAREDO, A. et al. Design of the First Generation of550,000 dwt Tankers. Trans. S.N.A.M.E. Vol.8S, 1977,p.209.

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

HOLTROP, J. Computer Programs for the Design and Analysisof General Cargo Ships. International ShipbuildingProgress, February, 1972.

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

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 ofpaper in Marine Technology, April, 1965).

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

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

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

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

COLLIN, L.T. and BERGSTROM, K. Comparison of Power PlantPerformance. WEGEMT 8th School, Gothenburg. ChalmersTechnical University, 1983, Vo1.2.

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

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

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

KOMOTO, M. & YABUKI, S. The Effect of Higher Fuel Prices onthe Design of Ships. International Marine and ShippingConference, 1976. Institute of Marine Engineers.

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


3.31.1 GALLIN, C. Fuel Economy, Propul sion Efficiency and DieselEngine Installations. Motor Ship, Sept 1980.

3.31. 2 GALLIN, C. Al ternatives for Economical Diesel Propul sion.Motor Ship, May 1981.

3.31.3* GALLIN, C. &: HIEDERICH, O. Economical and TechnicalStudies of Modern Ships. Shipbui lding and MarineEngineering International, April, 1983, p.157.

3.32

3.33

3.34

3.35

3.36

3.37

3.38

3.40

3.41

3.42*

3.43*

3.44

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

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

REINERTSEN, W. Economic Trends in Ship Design. MotorShip, May 1982, p.77.

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

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

BARBER, N. Box, Wheel or Carton? Motor Ship, Feb 1982,p.23.

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

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

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

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

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

ERICHSEN, S. and JAEGER, A. Handbook in Marine Design. Tobe published 1987.


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 (Annual Series).

4.2.1R Shipping Statistics.published monthly.Bremen.

A wide variety of collected tablesjInstitute for Shipping Research,

4.2.2R Shipping Stati sti c s Yearbook. Bi - annual summary of 4.2.1.

4.3R LLOYD'S REGISTER OF SHIPPING. Statistical Tables (AnnualSeries) .

4.4

4.5

4.6.1

4.6.2

4.7R

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

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

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

LLOYDS SHIP MANAGER. World Order Book (arranged by shiptype). (Quarterly).

BRITISH PETROLEUM. BP Statistical Review of World Energy(Annual Series).

4.8.1R UNITED NATIONS. Monthly Bulletin of Statistics. (Variousissues contain speci al annual tables) .

4.8.2R UNITED NATIONS. Maritime Transport Study. Commodi tyTrade by Sea Statistics. 1975-78. UN. Statistical PaperSeries D, Vol. 27-30. Geneva, 1983.

4.8.3R As 4.8.2 but for 1979-82. UN, 1986.

4.8.4 UNITED NATIONS. Review of Maritime Transport (Annual).

4.9 BRITISH PORTS AUTHORITY. Port Statistics. (Annualseries, formerly published by National Ports Council).

4.10.1 NETHERLANDS MARITIME INSTITUTE . Maritime ResearchStatistics 1979. (Details of sources of national tradeand other statistics)

4.10.2 NETHERLANDS MARITIME INSTITUTE. Employment of the DeepseaConventional and Specialised General Cargo Fleet. 1979.

4.11 MARITIME TRANSPORT RESEARCH.publi shed in Ref. 2.1.

Statistics up to 1972

4.12R O. E. C. D. Maritime Transport (Annual Series).


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

4.14 Lloyds Ports of the World.(Annual) .

Lloyds of London Press

4.15R

4.16R

4.17R

5.

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

DREWRY, H.P. Shipping Studies. Series of consultantsreports. Over one hundred published from 1972, coveringa wide variety of topics such as Combined Carriers, WorldGrain Trade, VLCC Ports etc.

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

CONFERENCES

The subject of economic evaluation of alternative designs,particularly machinery, fuels and ship performance, has resultedin a number of papers, mostly to conferences. Conferences arenumerous, though many of the papers have a strong salesmanshipemphasis. However among the following conferences, papers may befound which make a useful contribution and/or provide backgroundfor 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.IMarE, 94C Conf.No.12, 1982, 86 pp. (includes SVENSEN,T.E. Techno-economic reasons for selecting fuel savingpriori ties) .

5.5 Fourth Marine Propulsion Conference. Motor Ship, London,March 1982. (includes HAKKINEN, P. Evaluating theeconomics of main machinery: an integral approach). (SeeRef.3.35) .


5.6 Theory and Practice of Marine Design. RINA, London, April1982. First International Marine Systems DesignConference (includes: MEEK, M. The effect of operationalexperience on ship design. LANGENBERG, H. Methodologyand systems approach in early ship design in a shipyard.KEIL, H. Methods covering the technical and productioncostwise optimization of a shipbuilding project and theireffects 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 efficientLNG carriers) .

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

5.9 First International Grain Trade, Transportation andHandling Conference. Cargo Systems Publications, 1982.

5.10 Fourth InternationalHandling Conference.Publications, 1986.

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


APPENDIX

ESTIMATING COSTS

The engineer is often concerned with evaluating al ternativedesigns. The alternatives will usually differ not only inperformance, but in their first costs and operating costs. It is,therefore, useful for him to obtain quickly an indication ofrelative costs, before setting in train more detailed studieswhich may involve work by other organisations.

Cost estimates may be broadly divided into three main categories:

(i) Feasibi li ty study cost estimate (or preliminary orbudget estimate) for general investigations.

(ii) Design study cost estimate, associated with detailedexploration of a few alternatives.

(iii) Fully detailed cost estimate, usually for tenderingpurposes.

The expected level of accuracy increases with detail, as does theamount of data and effort required. This Appendix will beconcerned only with category (i), because cost estimating is morelikely to be applied at this level by ship operators, consultants,equipment suppliers, regulatory bodies, researchers, etc., ratherthan at the more detailed levels, which are largely the preserve ofprofessional cost estimators, e. g. in shipbui lding companies.

It is not possible in this publication to suggest more than verysimple cost estimating relationships for 'ball-park'-typeestimates; nevertheless, these can still be useful in establishingthe potential feasibility of a project, and in ranking theprincipal alternatives for more detai led study.

In the ship design context, the need to estimate the followingprincipal costs to carry out an economic evaluation is indicatedon page 83:

(i)(ii)

(iii)( iv)(v)

(vi)(vii)

Ship first costDaily running costsFuel costsPort chargesCargo costsCapital chargesFreight rates (unless RFR is the criterion)

The following notes will· assist in producing approximateestimates, but are not a substitute for more detailed methods ormore 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 beconsulted for methods and data.

Appendix - 133

Ship First Cost

At the simplest level, the first cost of a ship is influencedmainly by its type, size, and speed. Where the range of possiblespecifications is small, e.g. in straightforward vessels such astankers, size alone is often a fair guide to approximate firstcost. Maritime journals such as Fairplay and Lloyds Ship Manager, andReferences such as 4.15 include published prices of recentcontracts, and graphs can be plotted to give an indication ofexpected prices, at least when market conditions are reasonablystable. Such graphs may indicate whether a simple costrelationship of the form:

Cost = k (size)x

may be derived. The slope of such a curve, if plotted on log-loggraph paper is given by x, typically about 0.7; that is, costincreases 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 sametime periods should be used, as well as a relatively stablecurrency, such as U. S. dollars.

Vossnack of Nedlloyd suggests that cost per tonne lightship mayalso be used, with typical prices being $1800-2000 per tonne fordeep-sea container and RoRo vessels in 1985 (when market priceswere low). Bulk carriers would be 80% of this, VLCCs 75%, andproducts/chemical tankers 108%.

Where the alternatives differ in other respects, e.g. speed,machinery type, hull material, etc. a more detailed process isrequired, unless the cost of the differences can be easilyidentified and simply added to the basic price, e. g. more powerfuldeck cranes. The total cost of a ship may be divided into abouteight principal categories, as indicated in Table 14 which givesan indication of the breakdown of shipbuilding costs into thosecategories for three types of ship. The following relationshipsgive an indication of how the main components may be estimated atthe feasibility study level based on typical U.K. experience. Itis assumed that the ship technical data will already be availablefrom other design procedures, e.g. steelmass and machinery power.

(0 Steelwork Materials Cost

The floating steelmass is taken from the lightship estimate. Thescrap percentage (typically 10% but 20% or more for smallvessels), is added to give the invoiced steelmass in tonnes. Thecorresponding average price per tonne of steel material canusually be obtained from a steelmaker, e.g. British SteelCorporation who publish a price list for each main type of steel,heavy plates, sections, etc. Current prices for mild steel arearound £250 to £350 per tonne. Extra may have to be added forhigh-tensile steel, or a preponderance of very thin or very thickplates, etc.


TABLE 14

Approximate Percentage Breakdown of Shipbuilding Costs

Item

1 Steelwork materials

2 Steelwork labour

3 Outfit materials andsub-contractors

4 Outfit labour

5 Main propulsionmachinery

6 Other machinery

7 Machinery installationlabour

8 Overheads

9 Total building cost

Sub-total materialsSub-total labour,

including overheads

10 Approximate 1985selling price, fM

Cargo Li ner Bulk Carrier Tanker12-20000 25-50000 dwt 20D-300000

dwt (geared) dwt

10 } 13}26

20)22 3412 13 14

19 } 16}23

18}26 267 7 8

13

}3112 } :}a-

15 1: 273

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 equipmentoutside 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 plantmaintenance.

9 Profits not included, so percentages of selling price should be slightlylower.

Appendix - 135

(ii) Steelwork LabOlU' Cost

S 1 manhours x wage ratetee work tonnes x tonne steel manhour

At the simplest level,from:

steelwork labour cost can be estimated

Manhours per tonne depend, not only on the general level ofproductivity in a particular shipyard, but also on the size andtype of ship. Large vessels, such as tankers, have greatersteelmass per unit area of structure, i.e. thicker plating, aswell as more repetitive components, than smaller ships, e.g.ferries. Manhours per tonne for complex regions, e.g. ends andsuperstructures can easily amount to two or three times that forparallel mid-body construction. As a first approximation,Carreyette in Ref. 3.30 suggest that steelwork manhours may beestimated from:

Manhours • 227 x

whereand

where W = invoiced steelmass, tonnesL = length b.p., metresCB = block coefficient

This suggests that manhours per tonne can vary from below 50 forlarge ships, to over 200 for small ships. Substantially higherfigures are appropriate for warships and structures offshore.

Wage rates per manhour excluding overheads vary from yard to yardand country to country. In the U.K. the rate at present isapproximately £5 per manhour; but allowance should be made forinflation 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 andspecification; for example, variations in cargo handling gear,accommodation and equipment. At the simplest level, a cost pertonne of outfit mass could be assumed for material plus labour, sayaround £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 whereinformation can often be obtained from manufacturers, e.g. hatchcovers and cargo handling equipment, plus an aggregation of otherremaining 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 approximatelyrelated to ship size or outfit mass, e. g. :

Manhours = kLIBB = breadth mld., metresk = 200 to 300 for straightforward ship types


Wage rates for outfit - workers are generally similar tosteelworkers. Carreyette suggests that outfit labour can beestimated from:

Manhours = 2980 x (outfit mass)2/3and outfit material from:

Cost = D x (outfit mass)0.95

where D was 2011 in pounds in 1977. This figure can be updated bythe use of a price index such as "Price Index Numbers for CurrentCost Accounting" published by HMSO. This suggests that the 1986coefficient would be about 4000.

(ivJ Machinery Cost

Economic studies comparing alternative machinery are common. Ingeneral, each different type of machinery has a different firstcost, both of the basic prime mover, and as installed as a completesystem. Broadly speaking, the cost of reciprocating machineryrises faster with increased power than that of rotating machinery,i. e. it has a larger exponent in the cost relationship. Theexponents are, however, less than unity, indicating that cost peruni t power falls wi th increasing power.

Machinery cost = k(Power)n

Type of Machinery n Relative costat 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 0.50-0.60 115-125turbine

The above are total machinery costs, including auxiliaries. Theexponent for slow-speed diesel engines alone is about 0.8, takenover a wide range of powers, but for a particular model andcylinder size, about 0.9. Derated versions (e. g. to reducespecific fuel consumption) are almost the same price as themaximum rating model, despite the lower output. Currently, k isabout f700 000 to 900 000 with power in MW for a slow-speed dieselinstallation, of which the main engine comprises about f200 per kWin the 15 MW range. Coefficients for the other types may bederived after selecting an appropriate exponent. .

Appendix - 137

The relative first costs at a maximum continuous rating (MCR) ofabout 15 MW are shown; the ratios will be different at other powersbecause of the different slopes of the curves.

It should be noted that these costs are per unit at MCR. Becausedifferent machinery types may require different installed powersto achieve the same ship speed (different transmission orpropulsive efficiencies and service ratings), the ratios ofabsolute costs may not be the same as the relative costs. Fortwin-screw propulsion, about 15% can be added for diesel or gasturbine, and about 25% for steam turbine. For electrictransmission, compared wi th gearing / 15 to 20% can be added.

It is often possible to obtain an estimate for the price of aslow-speed diesel from a manufacturer. Total machinery cost maythus be estimated by multiplying this figure by about 2 (highpowers) to 2.5 (low powers). Approximately 80% of total machinerycosts is contributed by the ten most significant items ofequipment.

Broad corrections may be applied for maj or changes, such as:

ship typemachinery aft or midshipspropeller type and r.p.m.steam conditions and number of boilersdifference in major auxiliariesalternative fuels, e.g. coal.

Beyond this level, a more detailed specification and quotationsfrom sub-contractors would be required for a full cost estimate.

(v) Overheads

Overhead costs (sometimes called establishment charges) are costswhich cannot be allocated to any particular contract, such assupervisory staff, training, power supplies, capital charges onplant, insurance, local taxes, maintenance, research anddevelopment, and marketing.

Overheads are often expressed as a percentage of total directlabour costs as calculated previously, typically about 60 to 150%.

(vi) Profit

In a shipyard, it is the j ob of management and not the costestimator to decide on an appropriate profit margin to add to theestimated building cost. The decision will be influenced by theexperience of the yard with the type of work in question (and theassociated uncertainty of the cost estimate), the yard's orderbook, the state of the shipbuilding market and competition, andthe standing of the customer. A figure of about 10% of estimatedcosts is aimed at, but rarely achieved in the present competitiveworld of shipbui lding.

In simple cost estimates, it is possible to aggregate bothoverheads and profit together by adding about 30 to 35% to the sumof 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 becompared with current market prices to assess whether the resultsappear to be reasonable. However, over recent years, manyshipyards have quoted prices below cost to obtain work, assistedin 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 abatch in Europe, their average cost can be' reduced by about 2 to3%, i.e. the slope parameter of the progress curve (or learningcurve) is about 0.975. This means that the average cost of each ofN 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 shipsfalls faster than material costs.

Operating Costs

(i) Daily Running Costs

Daily running costs include such items as crew costs, upkeep costsand insurance. Crew costs depend on the number of the crew andtheir nationality. Figure 34 gives an indication, where high costflags include U.S., Australian, Japanese; medium costs Europe andSouth America; and low cost Asia generally excluding Japan. Sincemost of the other elements are related to ship size and type, it ispossible to relate daily running costs to a ship parameter. Figure35 shows how other daily costs vary with size for typical ships.The band indicates that for any given size and type of ship, therewill be a variation between older and newer ships, between thosewi th different types of machinery and equipment, between differentowners and between those wi th different operating patterns.

Appendix - 139

000

2000

1Doe

.000

4000

DAllltom £mo

//

V// V

/ ."w tOSl /FlAV1

J / ./

/ / MEOI NM tOSl /I HA IS-""

/ V /V

la. COSl

'/V ---...----I ~~

~2DC

IDOO

400

iCO

2000

IDI

1400

1600

1200

1100

UHUlltomIl

10 20 30 40 so '0 70

CREW NUMBER ON BOARD

Fig.34 Manning Costs 1985.(Including Wages, Benefits, Victualling).

10000

1000

=;::~ 2000

4 5 & '10 15 211 10 40 50 ill 10 100 150 700 300 400 &111 100 1000

SIZE t TMOISUOS ).

£

&00

4 DO

4000

3000

&000

7000

1500

1000

.00

DAILYCOSl S

'0000

e000

1-5

MH ITS fOR SIZE SCALE ADO MAUII' COSTS FROM flliHIILl O· 7 0 OWCllMllIU110I CAUIERS. O·ISoOWlAIHRS 1·0 ·OWMULil- DEtl fIEIIiKiERS. 1·7 • OWCKOII tAL TAHlERS 1·4 • OWFAST tAHO L1IERS 2 • OWCUI AlHER SHI~. IEEfERS 3 • IWlOLL-OH /ROLL-OH SKI"'. 4 • OWL.' li. CURIE RS 3 ·.1L.ft Ii. CURl ERS . 4 • .1

--'~r-r

~IL.

~...,.. V .....

~~ V. ./'l

,....,. "7~

~ ;/'"./1. ~

.A'f" 1//~

/"'J~ ~

V1"~ ./~

Vf-( l,.)--I,Y

l/

/~

Vl,.VV

V

IIllJ

7.

HO

SOD

400

110

1001

1000

HOD

~ 1500;;.,c%

.........

5000

::; SOOO-= 4000--=

...,---:;[---..

........-

Fig.35 Range of Ship Running Costs - 1985.


Table lS shows running costs broken down by maj or category for fourvessel types. Crew costs include not only wages, but victualling,leave and reliefs, training, benefits, and travel. Upkeepincludes maintenance, repair, stores and lubricating oil, whilemiscellaneous includes administration, equipment hire, etc.

TABLE 15

Percentage Breakdown of Daily Running Costs

120 000 dwt 2000 TEU 30000 dwt 3000 dwtbulk carrier container tanker coaster

Typical crew number 22-30 18-26 14-22 7-12

Crew % 47 48 46 61

Upkeep 30 27 32 20

Insurance 16 19 14 10

Miscellaneous 7 6 8 9

Total % 100 100 100 100

Approx % of total 18 14 24 34cost incl. capital,fuel, port and cargohandling

Maintenance and repair costs vary with ship size, machinery andage. Analysis of actual M & ~costs suggest that they are roughlyproportional to (ship size)O· and that they increase with age inreal 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 offirst cost, annual total premiums covering all categories ofinsurance carried vary between about 1 and 3%.

Where data is available from different time periods, theescalation rates given on page 51 may be used to adjust them to acommon basis. Such rates may also be used to estimate future cashflows if calculations are being made in money terms.

(ii) Fuel Costs

Daily fuel consumption at sea and in port will already have beenestimated from the technical calculations via service power andspecific fuel consumption (Ref. 1. 21. 2) . Although fuel prices varythroughout the world, such differences are often small enough toignore in feasibility studies. The prices published in journals

Appendix - 141

such as The Motor Ship, Lloyds Ship Manager or Lloyds List (Wednesdayedition) may be taken as a good guide. After several years whenheavy fuel prices were in the range $140 to $190 per tonne (dieseloil about $220 to $300), they fell dramatically in 1986 to abouthalf those levels. Until some degree of stability emerges in fuelprices, it would be wise to investigate a range of prices ineconomic 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. Thelowest costs per gross or net (registered) tor. are usually foundfor large ships in ports with few facilities, e.g. tanker loadingjetty ports, while the highest tend to apply to small ships inports with an extensive range of facilities. Total costs per netton 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 thefeasibili ty study stage as port costs in total amount to less than10% of total annual costs including capital charges, and the samerate 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 Suezand Panama Canals. Dues per transi t per NT are approximately $1.83laden and $1.46 ballast for Panama. For Suez there is a slidingscale based on Suez net tons and Special Drawing Rights, whichrange for laden ships from about $6 for small ships up to 5000tons, 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, especiallyfor break-bulk general cargo. For the latter, loading ordischarging 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 viceversa, rising to as much as f30-f40 in high cost areas such as NorthAmerica. A realistic average to use for feasibility studies willdepend on the range of ports served, and also the range of cargoescarried - low stowage factor cargoes such as steel costs less tohandle than high stowage factor cargoes such as wool.

Unit load cargo handling costs are more uniform throughout theworld. A container can vary between about f50 to f120ship-to-guay, or vice versa, i. e. about f5 to flO per tonne averagecargo (multiplied by two for 'loading and for discharging).Stuffing and stripping the container itself will cost extra, butis 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 coalor 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 formineral 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 area large element in annual ship costs, around 30 to 50% excludingcargo costs if a good rate of return is to be achieved. At theirsimplest, they are calculated as a direct proportion of first costvia the capital recovery factor. In more complex situations,where taxation and loans arise, the processes outlined in Part 11are required to incorporate the acquisition cost into the economiccalculations. In poor markets, shipowners will accept freightrates making no contribution to capital charges; but this cannotbe sustained indefinitely, especially if there are loansoutstanding on the ship.

(vi) Freight Rates

All of the categories mentioned previously are items ofexpendi ture. Income is generated from the product of cargocarried per annum times average freight rate. The derivation ofannual cargo is discussed on page 83. Freight rates, especially inthe bulk trades, vary widely with supply and demand. Past andpresent rates for particular cargoes and trade routes arepublished in References 4.1.3, 4.2.1, 4.2.2, 4.8.1, 4.12 and 4.15and in the shipping press, from the trends of which an assessmentcan be made regarding possible future long term levels (unless RFRis the criterion). Some realistic escalation rate should also beapplied as, in the long run, freight rates increase wi thinflation. Such references often also give freight rates datingback for several years, which can help in estimating possibleescalation rates.

Cargo liner freight rates are not usually published, varyingwidely between routes and different types of cargo. However,shipowners and cargo agents are usually willing to provide somecurrent freight rates for particular cargo liner servicesquay-ta-quay. By selecting an 'average' cargo, e.g. machinery,paint or hardware, and allowing for stowage factor ifweight/measurement rates are quoted (see page 25), a reasonableestimate can be made. On some routes, especially' short sea,'freight all kinds' rates are quoted for containers, i.e. a rateper box irrespective of contents. Liner freight rates on a routedo not fluctuate as widely as bulk rates, but remain constant forsome months before any percentage change (overall or for specialfactors like bunker charges) is applied. The German cargo linerfreight index' publi shed in Reference 4.8.1 can be used to give someguidance on escalation. .

For all freight rates, the shipowner does not receive the fullrevenue. For bulk cargoes, brokers' fees will amount to typically2.5 to 5% of the gross freight, while for liner cargoes withinConferences, rebates of typically 10% are granted to shippers whouse only Conference ships. Most freight rates are now quoted inU.S. dollars; the appropriate conversion must be made ifcalculations are carried out in other currencies.

Appendix - 143

Documents

Engineering Economics and Ship Design - Buxton