Prof. Dr.

Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

LECTURE NOTES

ON

SHIP ECONOMY

BY

Prof. Dr. Galal Younis

FOR

B. Sc. Students
Naval Architecture & Marine Engineering Department
Faculty of Engineering , University of Suez Canal

Port said

1
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

LECTURE NOTES

ON

SHIP ECONOMY
BY

Prof. Dr. GALAL YOUNIS

FOR

B.Sc. Students
Naval Architecture & Marine Engineering Department
Faculty of Engineering , Port Said

2003

2
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

SHIP ECONOMY
Introduction :

Engineers, by definition, aim to use scientific knowledge for the good of the society. In free market
economy, society makes its needs known through its purchases, engineers can therefore ill afford to
overlook economics when making design decisions . Those who misuse or ignore economics will
waste the human and natural resources, thus subverting the profession's central aim . These facts
apply to marine technology as well as any other field of engineering .

Definitions :

1. Economics :
--------------
For our purpose, it is the task of allocating a finite supply of investment funds in the face of infinite
possibilities .

2. Engineering :
----------------
It is the job of engineer which is using the scientific knowledge for the benefit of the society, the
engineer must alternately deal and communicate with scientists and business managers .

3. Engineering Economy :
------------------------
It can be defined as the matching of society needs with the maximum effectiveness in the use of
resources, man power, materials and investment funds .

If the engineer wants to convince the business manager, he must demonstrate that his proposed
design promises to be more profitable than any alternative design. Furthermore, the engineer must
realize that the wise manager may consider several competing investment opportunities, e.g., an oil
company may find a pipe line more profitable than a tanker .

In summary of the above, the well engineered project has a basis of careful economic thought, such
thought is applied not only to the preliminary and major decisions but to every detailed decision
along the way, and finally, when ready to present to management , the proposal is couched in terms
of profitability.
A good naval architect must then know how to make economic studies and must unendingly
develop his ability to estimate future costs of building and operating ships.

Engineering economy was of little use to the naval architects in the days of sail, when
unpredictable weather precluded any quantitative economic analysis .
The introduction of steam propulsion changed the situation, the profession was quick to apply cost
studies to improve the design and operation characteristics of ships.

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Engineering Economy and Ship Design .

--------------------------------------------------------

Many ship owners were putting their orders and choosing their ships which are optimized from
shipbuilder's point of view only which may not be sufficient .
The proper choice of design criterion has been notably lacking in the past published design
procedures, that is, it has been assumed that one single criterion suffices which was mainly
technical or technological, these criteria have their priority in ship design, but the final decision
must be based on economical thoughts.
The sharp changes in world economy due to 1973's crisis added a large advance to economical
studies of ship design and shipping, the tool which is now judging and helping in decision making .

There are mainly two approaches in ship design procedures :

1. Traditional Approach.
-----------------------------
Traditionally, ship design from builder's point of view has meant the receipt of an enquiry from a
ship owner, accompanied either by a statement of requirements or an outline design, in the former
case a design is worked up, some times using a basis ship , in the latter, the design requires to be
checked out .

The traditional approach survived during the many years in which the developments in ship types
were relatively slow, it appeared to be inadequate for the highly competitive decade of 1960's
during which the ship types changed significantly, that was due to the following :

a. Design was usually based on previous ship, yet there was no existing experience of new ship
types .
b. Generally only one design, one size and speed was investigated .
c. Traditional cost estimating methods did not reflect the changes of ship types and production
methods .
d. No economic criteria or evaluation were applied either for a single design or any alternative .

2. Modern Approach .
-------------------------
The modern approach demands a closer collaboration between builder and owner possibly using
consultants through :

a. Investigation of transport demand and market research,

b. Concept formulation of possible ship types, sizes and speeds compatible with the service
required
c. Preliminary technical design of range of alternatives ,
d. Estimation of first cost, operation cost and income of the alternatives,
e. Making economic evaluation of the alternatives,
f. Selecting the optimal design, while making allowance for intangible factors,
g. Detailed design and construction of the final selection .

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

The practicing ship designer should be in every aspect of these stages , the principal parameters to
be considered in any marine transport system are :
1. Cargo payload 11. Other daily running costs
2. Ship cost 12. Bunkering pattern
3. Speed 13. Fuel price
4. Fuel consumption at sea and in ports 14. Port charges
5. Round trip distance 15. Freight rate
6. Cargo handling rate 16. Cargo handling charges
7. Number of ports of call 17. Discount rate
8. Service days per year 18. Depreciation policies
9. Ship's life 19. Credit facilities
10. Crew costs 20. Subsidies
21. Escalation of costs and freights .

Although the list of parameters to be established for alternative designs apparently only shows a
few directly related to technical characteristics, in practice, a full process of naval architecture
design is required to establish them, for example, calculation of cargo payload or fuel consumption
requires as a minimum the establishment of basic data such as length, breadth, draft, depth, speed,
hull form coefficients, power and type of machinery, dead weight and capacity .

The Economical Ship

Ships , at least merchant ships are being built to satisfy economical needs of countries or interest
groups , but also other ships whose services are not directly devoted to economical purposes- such
as naval ships - cost money to be built and operate and therefore have to be economical .
But what is the economical ship and how does one recognize it ?
The definition ECONOMICAL is not the same for all partners in designing , building and operating
the ship .
The shipyards understand that the economical ship is that consuming least costs , time and effort to
be built but nothing more .
The owner understands that the economical ship is that having minimum combination of building
and operating expenses , respectively to maximize the profit or to enlarge his competitory
capability .
The ship designer have a more scientific vision to this task , he understands the economical ship
that whose hull lines create least resistance at specified speed and size , have the least possible
stowage factor , can operate safely in all sea and weather conditions and have an efficient propeller
for calm sea operation as well as for extreme propeller loading conditions .
The aims of ship designer and ship owner are generally meeting from strategical point of view , so
, it would be necessary for ship owner to have a design staff who can translate his needs to a
correct project technically and economically .

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Tools of Ship Economy :

--------------------------------

A. Definitions :

1. Investment : Is the allocation of a capital for use in order to gain profit .

2. Capital (P) or Principal : Is the worth which is used for producing further worth .

3. Return (R) : Is the result of productivity of capital, it is the difference between income and
expenses .

4. Profit : Is the worth produced by investing unconsumed capital, it is the return reduced by the
depreciation .

5. Income (REV) or Revenues : Is the total worth results from consuming the capital .

6. Equity Capital : Is the capital owned by those who own the venture .

7. Borrowed Capital : Is the capital borrowed from other sources .

8. Interest : Is the annual charge in percent of invested funds, it may be considered in two different
ways :

a. Contracted Interest: Which is the savings in general (deposits, bank loan and mortgages ,..etc)
b. Returned Interest : It is the measure of gain (if any) from risk capital invested, this is
sometimes called Internally generated interest or Interest rate of return. It
is an important measure of profitability .

Since in most nations the taxes are imposed on corporate profits, we must differentiate between
interest rate of return before and after tax .

9. The Simple Interest :

Is the amount earned by a unit of principal in a unit of time , the principal which is the basic
amount of money is regarded fixed and the interest is calculated at the end of each time unit .
Interest = I = P . i . n
where;
P = Principal , i = rate of interest , n = no. of years
After (n) years , the sum of money = P + I = P(1+i.n)

10. Compound Interest :

It is the more usual situation in financial transactions, the interest at the end of period of time is
added to the principal for the next period.
At the end of nth year S = P (1+i)n

6
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

B. The Time Value of Money :

--------------------------------------

The value of money is changeable by time, the main reason is the inflation in international and
national economy, most of us would rather be given one dollar today than a promise of one in the
near future . The time value of money is judged by the running rate of interest or the rate of
inflation .
If the running rate of interest is 10% then $ 1.00 today is exactly $1.1 a year hence, conversely,
$1.00 now is $0.909 a year ago . Thus , the interest relationships can be used to transpose the
money to equivalent values in other periods of time .
Future cash flows are often analyzed by discounting all future annual amounts to their individual
present worths and summing them in what could be called " Time addition" .

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

C. Basic Interest Relationships

In Engineering economy studies , we always assume compounding while the interest rates we talk
about are annual rates , as far as decision making in ship design is concerned , the assumption of
annual compounding yields accurate conclusion .
There are three main groups of interest relationships that must be understood :

1st group

This is concerning a single payment arrangement ;

CA F

P PW

F = ( CA – i % - N ) P
P = ( PW - i % - N ) F = 1 / ( 1+ i )N
CA = 1/PW
i = Interest rate of return , or discount rate
P = Present sum , Principal , Investment cost , or present worth of future money .
F = Future sum of money ,
N = Number of years ,
CA is the single compound amount factor
PW is the single present worth factor
The single payment is returning the borrowed capital to its initial value at once after N years .

2nd Group

This is concerning uniform annual amount (A) to be balanced against present value or investment .

A A A A A A A A A A

CR SPW
P

A = ( CR - i % - N ) P
P = ( SPW - i % - N ) A
CR = (i (1+ i )n/ [(1+ i )n - 1 ]
SPW = 1/CR , A = P x CR
CR is the capital recovery factor
SPW is the series uniform present worth factor
The vertical arrows represent total cash flow during the time unit .
The capital recovery factor is the percentage returning annually of the capital .

8
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

The reciprocal of CR gives also the pay out time of the numerical value of investment .
A common application of CR is in installment buying , by finding the periodic amount (A) that
will repay the dept (P) in (N) years at an interest rate i % .
Conversely , if you have opportunity to buy a facility that promised to return (A) dollars per year
for (N) years , you can find how much can be paid for it .

3rd Group
This is concerning a uniform annual amount (A) to be balanced with a single future amount (F) .

SF SCA F

A A A A A A A

A = ( SF - i % - N ) F
F = ( SCA - i % - N ) A

SF is the sinking fund factor = i / [(1+ i )n - 1 ]

SCA is the series uniform compound amount factor = 1 / SF , A = F. SF

If we want to accumulate at a determined future date a certain amount of cash (F) by regular
banking (A) , the product of (F) by SF yields the value of (A) .

The Derivation of Equations of Basic Interest Relationships :

F = A(1+i)n-1 + A(1+i)n-2 + .......+ A(1+i) + A

Multiplying by (1+i)

F(1+i)=A(1+i)n + A(1+i)n-1 + .......+ A(1+i)

Subtracting ,

F . i = A (1+ i)n -A

F = A[ (1+i)n – 1] / i

As F = P(1+i)n & A/P = CR

Also SF = i / [(1+i)n -1 ]

Thus CR = i.(1+i)n / [ (1+i)n –1 ]

The three basic interest factors are used in various combinations to analyze cash flow pattern, no
matter how complex .

9
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Examples :

1. Prove that the sinking fund factor plus the rate of interest are equal to the capital recovery factor .

2. If you borrow $1000 today with i= 10% and repay the loan in a lump sum after five years, how
much you will return to the lender ? .

F =(CA-i%-N)P = (1.1)5 x 1000 = $1610.0

3. If you borrow $5000 and will repay the debt at 5 equal annual payments, how much each
payment will be, i=10% .

CR =(CR-10%-5)= 0.2638
A = 0.2638 x 5000 = $1319.0

Show how the book keeper would keep account of the annual payment of $1319 .

End of year Residual dept Interest Tot. annual Reduction

before payment payment payment in dept

1 5000 500 1319 819

2 4181 418 1319 901
3 3280 328 1319 991
4 2289 229 1319 1090
5 1199 120 1319 1199

5. Find the present worth of the following cash flow (i=10%) .

During year 1 $100

2 $ 50
3 $ 0
4 $100 loss
5 $200
Solution :

End of year Amount (PW-i-n) Product

1 100 0.909 91
2 50 0.826 40
3 0 0.751 0
4 -100 0.683 -68
5 200 0.621 124
-------------------------------------------------------------------------------------------
Total P.V. $188

10
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

D. Average Annual Cost (AAC) .

_______________________________

The average annual cost in shipping may be determined by converting all costs to an equivalent
uniform annual amount taking due recognition of the time value of the money .

Examples:
1.Find the AAC for a ship that requires an initial investment of $10,000,000 and annual operating
costs of $1,500,000 . The ship is expected to last for 25 years and a rate of interest of 18% is
specified .

AAC (operation) = $ 1,500,000

AAC (capital) = (CR-18%-25) P = 0.1829x10,000,000
= 1,829,000
____________________
Tot. AAC = $ 3,329,000

Recalculate the problem with assumption that a special expense (T) of 3,000,000 will be paid at the
5th year .

AAC = Y + (CR-18%-25)P + (PW-18%-5).(CR-18%-25)T

The average annual cost of a single payment such as (T) is found by first calculating its present
worth and then multiplying by CR.
AAC = 3,329,000.0 + 0.437109 x 0.1829 x 3,000,000.0 = $ 3,568,841.822
---------------------------------------------------------------------------------

2. Find the AAC of a ship that has an investment of $6,000,000 and a predicted resale value of
$3,000,000 after 5 years. The operating costs as listed below and the rate of interest is 20% .

Year 1 2 3 4 5
$1.0M $1.2M $3.0M $3.0M $3.2M
Solution :

P (net) = 6,000,000 -(PW-20%-5)3,000,000

P (net) = 6,000,000- 1,205,700 =4,794,300

Year Amount PW Product

1 1.0M 0.8333 0.83330M
2 1.2M 0.6944 0.83328M
3 3.0M 0.5787 1.73610M
4 3.0M 0.4823 1.44690M
5 3.2M 0.4019 1.28610M
---------------------------------------------------
Tot. $6.13566M
AAC = (CR-20%-5)(4,794,300+6,135,660) = $3,654,979

11
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

3. Find the AAC of a passenger ship that has an investment cost of $28.0M , a life expectancy of 30
years and a disposal value of $4.0M . The operating cost are $3.0M p.a. for the first 15 years and
$3.5M p.a. for the final 15 years . There are also rehabilitation expenses of $5.0M in the 5th, 10th,
15th, 20th, and 25th years, interest rate is 22% .

P = 28,000,000 - (PW-22%-30)4,000,000
= 28,000,000 - 0.0026 x 4,000,000 = 27,989,600.0

Y = (SPW-22%-15)3,000,000+(SPW-22%-15)(PW-22%-15)3,500,000 +
+5,000,000((PW-22%-5)+(PW-22%-10)+(PW-22%-15)+(PW-22%-20)+
+(PW-22%-25)

Y = 4.3159x3,000,000 +4.3159x0.0507x3,500,000 +
+5,000,000(0.370+0.1369+0.0507+0.0187+0.0069)
= 12,947,700+ 656,448+ 2,916,000 = 16,520,148.4

AAC = (CR-22%-30)(P+Y) = 0.2206x44,509,748.4 = $9,818,850.497

E. Finding an Unspecified Interest Rate .

__________________________________________

The principal purpose of this section is how to determine the rate of interest for a particular
transaction or saving process.
For example, suppose a banker offers to give you a sum of $1220.0 after 10 years if you will
deposit $750 in his bank today. What interest rate does he has in mind ? .

P = (PW-i%-N) , PW = P/F
PW = 0.614
0.614 = (1+i)-10 & i = 5%

Example:

A retirement plan involves you to pay annual premiums of $445 for the next 50 years . At the end
of that period you will be given a sum of $50,000.0 What interest rate is implied .

SF = A/F = (SF-i%-50) = 0.089

0.089= i /((1+ i)50 -1)

The result could be found by trial and error or from the tables .
i = 0.03

-------------------------------------------------------------

12
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

2.Some Economic Complexities

The detailed study of ship economy demands a sufficient knowledge about the factors which are
giving rise to non-uniform cash flow , such as , Loans , Escalation , Depreciation , Taxes , Scrap
Value and Subsidies .

a. Loans :
Few ship owners have sufficient funds to buy a ship for cash , usually a loan has to be raised .
The loans reduce the effective cost of the ship and encourage owners to place orders .
The credit terms available are broadly similar in each major country as recommended by the
Organization for Economic Co-operation and Development (OECD) , typically 70% of the contract
price repaid over seven years at 8% interest .
The interest payments are allowed to be deducted before tax liability is calculated on profits earned
during the ship’s life .

b. Escalation
During the year of industrial expansion of the post-war period , the price of virtually every
commodity and service has increased . Until about 1970 , there was an underlying rate of inflation
of about 2 to 5% per year in most developed countries . To maintain the purchasing power of
money in real terms , money prices need to rise by an average of 4% .
Oil prices generally remained roughly static through a long period falling about 4% p.a. in real
terms .
Since 1970 there has been a rapid escalation in nearly every item concerned with ship operation at
around 10 to 15% p.a. .
Also the price of fuel has been eight folded in seven years time ( 1973-1980) .
In most conditions of calculations a specified rate of escalation is assumed constant through the
life span of the project , that is , to estimate the behavior of prices and /or expenses during the life
span .
If ( C ) is the assumed annual rate of escalation in percent , the escalation at the end of (N) years
will be : (1 + C)N

c. Depreciation
The depreciation is not an actual cost or expenditure of cash , but a book transaction used for both
tax and for accounting purposes . It is used to assess the profit available for shareholders after
applying a rate on fixed assets that maintains capital intact in money terms at the end of economic
life
Types of Depreciation :
1. Straight Line Depreciation : In which the capital is divided into equal parts according to the
number of years assigned for the project life (N).
Annual Depreciation = ( P – S ) / N
P is the capital , S is the disposal value or resale value

Depreciation

P Book Value

13
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

2. Declining Balance Depreciation : In which the annual allowance is made equal to a

percentage ( R ) of the residual value of the capital each year .
1 st Year allowance = R x P
2 nd Year allowance = R ( 1- R )P
Nth Year allowance = R ( 1- R )N-1 x P
Residual Value (S) after N years = (1 – R )N x P
The Declining Balance R = 1 – ( S/P) 1/N

3. Sum of the Years Digit Depreciation : In which the capital is allowed to be consumed in a
progressively decreased percentage depending on the remaining years of project’s life :

Annual allowance = [( Remaining Years + 1 ) / Sum of the years ] (P-S)

4. Free Depreciation : In which the capital is allowed to be consumed as much as the return
permits , in other words , writing the project off as fast as the difference between revenues
and expenses permits and extinguishing all liability for tax until the full consumption of the
capital .
------------------------------------------------------------------------------------------------------------------

Example on depreciation policies :

11,000 ton payload cargo ship makes 10 round voyages per annum with 60% load factor.
The voyage costs are L.E. 30,000 per trip, annual operating costs L.E 290,000 and trip freight rate
is L.E 15 per ton after commission.. etc . The ship cost is L.E 3,000,000.0 and her expected life is
15 years , 8% discount rate, zero resale value and 50% tax rate .
Calculate the net present value of cash flow using the following methods :
1. No tax
2. Straight line depreciation
3. Free depreciation.

Solution :

Annual Income = 11,000 x 10 x 0.6 x 15 = L.E. 990,000.0

Annual Expenses = 30,000 x 10 + 240,000 = L.E. 590,000.0

Annual return before tax = L.E. 400,000.00

Case 1. No tax

PW of cash flow = (SPW-8%-15)400,000 = 8.56 x 400,000

= 3,424,000
PW of ship cost = -3,000,000
-----------------------
NPV = 424,000

14
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Case 2. Straight Line Depreciation

Annual allowance for depreciation(P/15) = 200,000

Taxable profit = 400,000-200,000 = 200,000
Tax (50%) = 100,000
Annual cash flow after tax = 300,000
PW of cash flow 8.56 x 300,000 = 2,568,000
PW of ship cost = -3,000,000
-----------------
NPV = -432,000
Case 3. Free depreciation

The tabular presentation shows how the depreciation allowance is used to make taxable return zero
until the capital be fully exhausted .

---------------------------------------------------------------------------------------------------------
Year Return Dep. Taxable Tax Return PW PW of
bef. tax return after tax cash flow
----------------------------------------------------------------------------------------------------------
1 400 400 00 00 400 0.9259 371
2 400 400 00 00 400 0.8573 343
3 400 400 00 00 400 0.7938 318
4 400 400 00 00 400 0.7350 294
5 400 400 00 00 400 0.6806 272
6 400 400 00 00 400 0.6302 252
7 400 400 00 00 400 0.5837 233
8 400 200 200 100 300 0.5403 162
9 400 000 400 200 200 0.5002 100
10 400 000 400 200 200 0.4632 93
11 400 000 400 200 200 0.4288 86
12 400 000 400 200 200 0.3971 79
13 400 000 400 200 200 0.3677 74
14 400 000 400 200 200 0.3405 68
15 400 000 400 200 200 0.3152 63
-----------------------------------------------------------------------------------------------------
Total present worth of cash flow after tax = 2,808,000
Present worth of ship cost -3,000,000
-----------------------------------------------------------------------------------------------------
NPV = - 192,000
The order of benefit to shipowner :

Case 1 No tax NPV = L.E. 424,000

Case 3 Free Depreciation NPV = L.E. -192,000
Case 3 Straight line dep. NPV = L.E. -432,000
-------------------------------------------------------------

15
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Profitability Before and After tax

The After Tax Capital Recovery Factor CR’ :

Most of maritime nations tax the profits of corporations , the tax laws not only vary between
countries but are likely to change over the years within the same country .
The influence of tax may be explained through the following example :
A ship owner aims for a 10% after tax rate of return on his investment on a 20 years life span
project .
CR – overlooking the corporate profit tax = 0.1175
If a straight line depreciation is assumed , an allowance of 0.05P will be deducted annually .
If the tax rate is 50% , then :
Tax = 0.5 ( 0.1175 – 0.05 ) P = 0.03375 P
Owner’s return after tax = ( 0.1175 – 0.03375 ) P = 0.08375 P
This is corresponding to 6% rate of interest .
It is therefore important to project the capital recovery factor to be after tax .

CR’ = CR – ( CR - 1/N ) t
CR’ = CR ( 1 – t ) + t/N
CR = [CR’ – (t/N)] / (1 – t )
CR’ is the Capital Recovery Factor after Tax
-------------------------------------------------------------------------------------------------------------
- Tax – Return Relation Figure

Taxable Return = Profit Before Tax – R – P/N

Operating Cost Depreciation = P/N Profit After Tax = (1-t)(R-P/N)

R E V E N U E S

R’ = Return After Tax = R(1-t) + Dep.t Tax = t(R-P/N)

R=Return Before T ax

Example on tax-return relation figure :

An owner specifies an after tax rate of interest of 15% and a life of 25 years for his proposed ship .
The tax rate is 48% and the straight line depreciation is decided . What interest rate should he use
before tax .
CR = [CR' - t/N]/( 1-t )
CR' = (CR-15%-25) = 0.1547
CR = 0.261 , i = 0.259
For the given example, how much annual revenue would be required if the operating costs are
$1,500,000 and ship's price is $10.0M.
Required revenues = Y + (CR-0.259-25)P
=1,500,000+2,610,000=$4,110,000

16
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Example 2.
Reverse the process starting from the revenues and operation cost.
Revenues 4,110,000
Operating costs 1,500,000
Return before tax 2,610,000
Depreciation 400,000
Taxable return 2,210,000
Tax 48% 1,060,000
Profit after tax 1,149,200
Return after tax 1,549,200

CR' = 0.154
i' = 0.15

Exercise :
For the following ship operating information, find whether the specified rate of interest is suitable
or not .
Pay load = 30,000 ton
Number of trips = 20 trip/year
Freight rate = $14/ton escalating 5% p.a.
Y = $2.0M escalating 10% p.a.
P = $40.0M
Tax rate = 50%
N = 20 years
S = 0.0
i = 10%
Straight line depreciation is applied .
SOLUTION:

N REV Y R TAXABLE TAX R AFTER TAX PW CASH FLOW

1 8400000.0 2000000.0 6400000.0 4400000.0 2200000.0 4200000.0 0.9091 3818182.0
2 8820000.0 2200000.0 6620000.0 4620000.0 2310000.0 4310000.0 0.8264 3561983.0
3 9260999.0 2420000.0 6840999.0 4840999.0 2420500.0 4420500.0 0.7513 3321187.0
4 9724048.0 2662000.0 7062048.0 5062048.0 2531024.0 4531024.0 0.6830 3094750.0
5 10210250.0 2928200.0 7282052.0 5282052.0 2641026.0 4641026.0 0.6209 2881712.0
6 10720760.0 3221021.0 7499742.0 5499742.0 2749871.0 4749871.0 0.5645 2681178.0
7 11256800.0 3543123.0 7713678.0 5713678.0 2856839.0 4856839.0 0.5132 2492326.0
8 11819640.0 3897435.0 7922206.0 5922206.0 2961103.0 4961103.0 0.4665 2314391.0
9 12410620.0 4287179.0 8123443.0 6123443.0 3061722.0 5061722.0 0.4241 2146664.0
10 13031150.0 4715896.0 8315256.0 6315256.0 3157628.0 5157628.0 0.3855 1988488.0
11 13682710.0 5187486.0 8495222.0 6495222.0 3247611.0 5247611.0 0.3505 1839255.0
12 14366840.0 5706235.0 8660608.0 6660608.0 3330304.0 5330304.0 0.3186 1698399.0
13 15085190.0 6276859.0 8808327.0 6808327.0 3404164.0 5404164.0 0.2897 1565393.0
14 15839440.0 6904545.0 8934900.0 6934900.0 3467450.0 5467450.0 0.2633 1439750.0
15 16631420.0 7594999.0 9036416.0 7036416.0 3518208.0 5518208.0 0.2394 1321015.0
16 17462980.0 8354499.0 9108486.0 7108486.0 3554243.0 5554243.0 0.2176 1208765.0
17 18336130.0 9189949.0 9146186.0 7146186.0 3573093.0 5573093.0 0.1978 1102606.0
18 19252940.0 10108940.0 9143994.0 7143994.0 3571997.0 5571997.0 0.1799 1002172.0
19 20215590.0 11119840.0 9095748.0 7095748.0 3547874.0 5547874.0 0.1635 907121.4
20 21226360.0 12231820.0 8994542.0 6994542.0 3497271.0 5497271.0 0.1486 817134.0

THE NPV = $ 1202476.0000

The rate of interest assumed is suitable because the NPV comes out positive .

17
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Taxable profits in Case of Borrowed Capitals :

Up to now , the depreciation period is assumed equal to the life of investment and the investment is
all equity capital .
In actual business practice , the picture may be more complicated , the depreciation period for tax
(q) may be shorter than ship’s life , also a part or all of the investment may be raised through a bank
loan , the interest payments to banks are generally tax-free .
The picture gets more complex if the period of bank loan (h) is also less than the life of the ship .
In this condition we shall have the following :
Period 1
Tax depreciation period (q) Period 2

Loan Period (h) Period 3

Useful Life of The Ship

The Condition for Period 1 :

Bank Interest
Operating Cost Payment Depreciation Taxable Return

R E V E N U E S

Pb/h R’ = Owner’s Return After Tax Tax

Annual Bank Payment

R=Return Before T ax

The Condition for Period 2 :

Bank Interest
Operating Cost Payment Taxable Return

R E V E N U E S

Pb/h R’ = Owner’s Return After Tax Tax

Annual Bank Payment

R=Return Before T ax

18
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

The Condition for Period 3:

R= Return Before Tax

Operating Cost Taxable Return

R E V E N U E S

R’ = Owner’s Return After Tax Tax

R=Return Before T ax

In cases of borrowed capitals , if R is known , we can find i but only by trial and error , this could
be done by assuming that the after tax interest rate of return will make the present worths of all
after tax returns exactly equal to the total investment (NPV = 0.0).

P = (SPW-i-N)R(1-t)+(SPW-i-h)t.Z)+(SPW-i-q)t.Dep ………………… (1)

R = P-(SPW-i-h)t.Z-(SPW-i-q)t.P/q ……………….…(2)
(SPW-i-N).(1-t)

CR = R/P = 1-(SPW-i-h)t.Z/P -(SPW-i-q)t/q ……… ..………. (3)

(SPW-i-N)(1-t)

In the same way, if we want to determine the investment share of the owner Po ;

Po = (SPW-i-N)Ro

Po = (SPW-i-N)R(1-t)-(SPW-i-h)(Rb-t.Z)+(SPW-i-q)t.P/q ……………….(4)

P = Po + Pb

Example :

Find R if:

i = 10% N= 20 iB= 6% h = 10
q = 15 P=$10.0M t = 0.48 Pb= $6.0M

Rb = (CR-6%-10)6,000,000 = 0.1359x6,000,000=$822,000
Z = Rb -Pb/h = 822,000-600,000 =$222,000

R = $1,561,000 ( From Equation 2 )

Exercise :

19
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

A 80,000 ton pay load bulk carrier has the following particulars :
First cost = $40.0M from them $20.0 is equity capital, the rest are lend from a bank for 6 years
equal payments at 8% .
Number of voyages per year = 7.42
Operation and voyage costs = $4.0M escalating 10% p.a.
Freight rate per trip = $20/ton escalating 10% p.a.
Expected life = 10 years
Discount rate = 10%
Disposal value = 00
Tax rate = 50%
Using the free depreciation policy, find the project's NPV and the owner's NPV on his investment
share .

Solution :
CRb = (CR-8%-6) = 0.2163
Rb = 0.2163 x 20,000,000 = 4,326,000
Z = Rb- 20/6 = 0,933,000
---------------------------------------------------------------------------------------------------------------------
N REV Y R Rb Dep. Taxable
Z Pb/h Return
1 11.876 4.000 7.872 0.933 3.333 6.939 000000
2 8.659 0.933 3.333 7.726 000000
3 9.525 0.933 3.333 8.592 000000
4 10.477 0.933 3.333 9.544 000000
5 11.525 0.933 3.333 7.199 3.3930
6 12.678 0.933 3.333 --- 11.7450
7 13.946 --- --- --- 13.9460
8 15.340 --- --- --- 15.3400
9 16.874 --- --- --- 16.8740
10 18.562 --- --- --- 18.5620

N Tax R' Ro PW C.F C.F.

R - Tax R'-Rb owner project
1 000 7.872 3.5458 0.9090 3.223132 7.155648
2 000 8.659 4.3330 0.8260 3.579058 7.152334
3 000 9.525 5.1990 0.7513 3.906009 7.156133
4 000 10.477 6.1510 0.6830 4.201133 7.155791
5 1.6965 9.8285 5.5025 0.6210 3.417053 6.103499
6 5.8725 6.8055 2.4795 0.5645 1.399678 3.841705
7 6.9730 6.9730 6.9730 0.5130 3.577149 3.577149
8 7.6700 7.6700 7.6700 0.4665 3.578055 3.578055
9 8.4370 8.4370 8.4370 0.4240 3.577288 3.577288
10 9.2810 9.2810 9.2810 0.3850 3.573185 3.573185
____________________________________________________________________________
Total Cash Flow $ 34,031,174 52,870,787
NPV $ 14,031,174 32,870,787

20
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

ECONOMIC CRITERIA

The valid economic criteria in ship design and operation adhere to the following principles :

1. A commercial ship as an investment that earns her returns as a society useful instrument of
transport .
2. The best measure of engineering success is the profitability .
3. Any save in operation costs is an addition to the profit .

There are generally two conditions for the choice of the suitable economic criterion :

A. If the future income is predictable ,

B. If the future income is not predictable .

A. Economic Criteria in Case of Predicted Future Income :

1. Equated Interest Rate of Return .

The rate of interest which makes the present values of the total cash flow through the ship's life is a
measure of profitability between alternatives .

2. Capital Recovery Factor .

If we can predict future returns and if we assume them to be reasonably uniform, we can find CR ,
the maximum CR is the better to be chosen .

3. Pay - Out time .

The pay-out time is the time to bay back the ship's price, it is defined as the reciprocal of the
capital recovery factor .
( Pay out time = 1/CR' )

4. Permissible Price .

The permissible price of a ship is to be treated carefully, it is considered as an element of overall

expenses, the better permissible price is that which makes the ( NPV ) the maximum between
alternatives .

5. Net Present Value (NPV)

The net present value of income and expenses is a good measure of economic success of any
project .

NPV = PW ( Annual Cargo x Freight Rate ) - PW( Annual Operating Costs ) - P

This is for the life span of the ship .

21
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

B. Criteria for Unpredictable Future Income .

1. Average Annual Cost (AAC) .

The most economical ship is that which produce the service at the lowest average annual cost, this
is in case if the alternatives have the same revenues annually .

2. Required Freight Rate .

If revenues varies between alternatives, and the choice is done between different ships, the required
freight rate may be a suitable criterion, it forms the least income per ton of cargo.

RFR = AAC / Cargo Transported

or
RFR = (CR . P + Annual operating expenses) / Annual Cargo Transport

3. The Specific Cost (Sc).

It is the most suitable criterion in many ship design problems, it can be considered as a suitable
measure of the economical utility of the ship, it does not use the future income which is mostly
unpredicted, this criterion is defined as the cost of transporting one ton of cargo through a distance
of one sea mile or the cost of unit energy of ship's transportation .
The specific cost has to be the minimum between alternatives .

Sc = PW ( Overall Costs Through the Life Span )

Total Cargo Transported x Distance Traveled in Sea Miles

22
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Elements of Operating Costs of the Ship

A well established economic criterion must be based on proper and accurate evaluation of costs
elements of the ship, the costs elements of any ship may be as follows :

A. Capital or First Cost ,

B. Operation Fixed Costs ( speed independent )

1. Manning (Crew),
2. Victualing (Provision),
3. Stores and Supplies,
4. Maintenance and Repair ,
5. Insurance ,
6. Administrations and overheads .

C. Voyage Costs ( Speed dependent )

1. Bunkering at Sea and in Ports,

2. Port Dues and Canal Dues,
3. Ancillary Voyage Expenses which may include Commissions.

Example :

It is required to design a new Panamax bulk carrier having a displacement of 97,500 ton, the choice
is to be made between four design speeds,( 12 , 14 , 16 , 18 Knots ).
The rate of interest is 10%, tax rate = 50% , ship's life is 20 years .
The costs and operation information are given below.
Use the RFR and Sc criteria .

12 Kn 14 Kn 16 Kn 18 Kn

P (First Cost) $ 3.000E7 4.360E7 4.508E7 4.722E7

Operation (fixed) Costs $ 7.893E7 8.508E7 9.287E7 1.019E8
Voyage Costs $ 7.083E7 9.996E7 1.431E8 2.007E8
Cargo Transported (life span) 2.414E7 2.631E7 2.833E7 3.006E7
Route Distance (Sea miles) 5000.0 5000.0 5000.0 5000.0
Number of Voyages per year 14 16 18 19.4

23
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Classification of Criteria for Optimum Operation:

The first cost and operation costs are the main factors controlling the economics of ship operation .
The ship operation is managed according to speed decision which is dependent on whether the
freight rate is known or not .
The operation speeds may be classified as follows :

1. Optimum Profitable Speed

Is the speed which the best to be decided , it is the speed which gives the highest profit at a known
market freight rate .

2. Zero Profit Speed

Is the speed at which the freight rate will be the minimum RFR and there will be no profit .

3. Economical Speed :
Is the speed at which the least cost per ton mile will be paid , this speed is not dependent on freight
rate , it may be with profit or with loss , it is best used if there are no boom freights and in
depressed market conditions .

First Cost Known ? No

Yes Insufficient Data

Operation Costs Known?

No

Freight Rate Known?

No Yes

Profit
No
Cost per Ton.mile (Sc) Required Freight Rate

Profitable Speed

Economical Speed Zero-profit Speed

24
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Chartering of Ships

The ship operation may be classified into two mail systems :

a. Owner’s Operated ships In Which the owner is managing his ships and undertakes all
responsibilities >
b. Chartered Ships : In which the ship is operated by the owner although the owner
undertakes a part of responsibilities of operating expenses .

The chartering of ships is performed in several methods :

I- Non-Demise Chartering
1. Single Voyage Charter (V/C) :
The ship owner undertakes to provide a vessel for transporting specified cargoes for a single
voyage between two or more ports .
The charterer pays a freight per ton of cargo actually carried ( Tons are Long Tons = 1016 Kg).
The Ship Owner pays :
a. Daily running costs of the ship covering crew expenses , upkeep , insurance ..ets
b. Capital Charges , Covering depreciation and taxes ,
c. Fuel Costs,
d. Port Charges and Canal Dues ,
e. Cargo Handling Charges , the extent to which it is paid by the owner or charterer are as
follows :
- Gross Form , the ship owner pays for loading and discharging
- Free In and Out (F.I.O.) the ship owner doesn’t pay neither for loading nor for
discharging,
- Free on Board ( FOB) , The ship owner doesn’t pay for loading
- Free Discharge ( FD) , the owner doesn’t pay for discharging .

The charterer’s role is to supply the cargo , and in return , he pays the owner an agreed rate of hire
for the ship . The rates of ship hiring are usually expressed as Dollars per ton or sometimes as a
lump some of ship load .
If the voyage takes less time than anticipated the ship owner pays the charterer ( Dispatch Money) ,
If longer time the charterer pays the owner (Demurrage) for delaying the ship .

2. Consecutive Voyage Charter ( CV ) :

These are as described for single voyage charter , but two or more voyages in succession may be
contracted .
The owner’s income over a year from either types of voyage charter may be as follows :

REV = Average Cargo Tonnage per Voyage x Number of Voyages per Year x Average net
Freight per ton of Cargo

25
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

3. Time Charter ( T / C ) :
It is the term given when the ship owner undertakes to provide a vessel for a specified time for use
by a charterer , it is called sometimes period charter , this period may be either fixed or for a
round voyage ( Trip charter ) .
The ship owner , who provides the ship and crew and maintains the vessel is responsible only for
the following payments :
- Daily Running Costs
- Capital Charges .
All voyage expenses ( Fuel , Port charges , canal dues , cargo handling charges ) are on the
charterer ‘s account , sometimes they are paid by the owner and then reclaimed from the charterer .
The hire rate is usually expressed in Dollars per ton deadweight per day which is called ( Gross
Hire) or it may be based on a month time ( 1 month = 30.4375 days ) .
The cargo weight in this condition of chartering is the summer deadweight of the ship or it may be
specified to other limited draft according to the nature of the route .
The hire is payable only for time in service , it ceases during repair or breakdown , but it continues
to be paid even if the ship sails empty or delayed in ports .
A deduction from owner’s income is due to the commission/brokerages , the percentage of which is
varying between 2.5 to 5% .
The owner’s income due to time chartering over a year will be :
REV = Summer DWT x Months on Hire x Freight Rate ( per ton DWT/month) .

II- Demise Chartering

This type of chartering is also called Bareboat Charter in which the owner undertakes to provide a
vessel to be operated entirely by the charterer for a specified period .
The charterer provides Crew , and pays for maintenance and uses the ship as she is owned to him .
The capital charges are payable by the owner while all other cost elements are paid by the charterer
Besides a hire rate for bareboat .
This type of chartering is not oftenly used as other types , but is the usual method when a ship
operator leases the ship from a financial institution such as Banks .
The hire rate is usually paid per ton DWT per month .

III – Contract of Affreightment :

The contractor undertakes to provide a specified transportation capability over a period . No ships
are named , the ships may not be owned to him , his skills lie in matching a number of charters to
minimize ballast time , the chartering may be by any of the above methods .

26
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Distribution of Financial Responsibilities in Chartering of Ships

Capital Charges Daily Running Costs Voyage Costs Cargo Expenses

Loan Repayments Crew Expenses Fuel Costs Cargo Claims

Loan Interest M&R Port Charges Cargo handling
Taxes Stores & Supplies Canal Dues
Depreciation Insurance
Administration

Owner Charterer
Bareboat Charter

Owner Charterer
Time Charter

Owner Charterer
Voyage Charter

Owner’s Operated

Example on Chartering of Ships :

Determine the NPV at 10% discount rate for 100,000 ton payload bulk carrier (5 years tax
exempted), given that :
- First cost = $5.9M
- Acquisition cost = $0.1M
- Hire rate for time chartering = $1.2/ton/month
- Chartering period = 5 years
- Resale price after 5 years = $3.5M
- Crew cost at first year = $0.1M escalating 10% p.a.
- Other daily running costs = $0.3M p.a.
- Operational time per year = 11.5 months
Solution
Annual income = 1.2 x 100,000 x 11.5 = $1.38M
Year Ship cost Crew Cost other Cost Income Return PW Cash flow
0 -6.0 --- --- --- ---- -6.000
1 --- -0.100 -0.3 1.38 0.980 0.909 +0.891
2 --- -0.110 -0.3 1.38 0.970 0.826 +0.801
3 --- -0.121 -0.3 1.38 0.959 0.751 +0.720
4 --- -0.133 -0.3 1.38 0.947 0.683 +0.647
5 --- -0.146 -0.3 1.38 0.934 0.621 +0.580
+3.5 ---- --------- ------ --- ------ 0.621 +2.173
NPV = -0.1875
Since the NPV is negative , the chartering rate must be increased otherwise the operation will not
be feasible .

27
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

OPTIMAL LIFE AND REPLACEMENT ANALYSES OF SHIPS

----------------------------------------------------------------------------------

The question of how long an object should be kept in service is difficult to answer on any long-term
basis . The practical and reliable decision can be made on a year-to-year basis . For many objects
there are a time when which the repair and maintenance expenses be at such a level that it will be
more economical to replace this object .
The replacement of ships or shipyards may happen due to the following reasons :

1. The ship or shipyard may become outmoded ,

2. The attractive prices in second hand market ,
3. The technological innovations concerning a part or more of the ship or shipyard ,
4. The termination of economical life or technical life of the object .

The purposes of replacement may be as follows :

1. Replacement for further use ,

2. Replacement for scrap .

The decision of replacement is to large extent hinged with the optimal life prediction, the difference
is that the optimal life is determined at the year zero for the ship, while the replacement decision is
based on a year-to-year analysis from which the answer may be : Replace Now or Wait one More
Year .

Prediction of Optimal Life :

-----------------------------------

The Average Annual Cost Method :

This method was given by Edge (a Canadian author) in 1964, he used the AAC as a criterion .
This method requires a knowledge of the initial cost , annual operating cost , the escalation figures
of expenses , the salvage value figures every year and the rate of interest .
This method may be performed through the following :

a. Converting the capital cost into annual cost using CR ,

b. Converting the salvage value into negative annual costs using the sinking fund factor ,
c. Converting the operation (fixed and voyage) costs into average annual values using CR for their
present wroth ,
d. Summing all elements annually will give a figure for comparison,
the year which gives the lowest total determines the economical life of the ship .

28
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved
Total AAC

AAC of Capital

AAC of Operation Cost

Economical Life

N Years

AAC of Resale Value

Example :

Find the optimal life of a ship having the first cost of $30.0M , and a salvage value equals to the
book value at depreciation of declining balance type (R=15%). The first year worth of operation
and voyage costs (Y) is $3.30M , escalating by 10% p.a. , the assumed rate of interest is 10% .

Solution :

N PW at Salvage PW of Total PW CR AAC

10% value Salvage of Y at 10%

1 0.9090 25.500 23.12805 3.000 1.1000

2 0.8264 21.675 17.91222 6.000 0.5760
3 0.7513 18.423 13.84176 9.000 0.4021
4 0.6830 15.660 10.69600 12.000 0.3155
5 0.6209 13.311 8.26490 15.000 0.2638 9.690719
6 0.5645 11.314 6.38703 18.000 0.2296 9.554338
7 0.5132 9.617 4.93561 21.000 0.2054 9.461600
8 0.4665 8.175 3.81351 24.000 0.1874 8.404949
9 0.4241 6.949 2.94686 27.000 0.1736 9.383624
10 0.3855 5.906 2.27685 30.000 0.1627 9.391556
11 0.3505 5.020 1.75961 33.000 0.1539 9.424895

It is clear that the economical life of the ship is only 9 years according to this method .

29
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

DUAL PURPOSE STUDIES

---------------------------------------
The rational decision on when to replace existing equipment requires a preliminary analysis of the
optimal life of the new proposed equipment. This is postulated by Alchain in 1952 .
The techniques of Alchain's method require calculations of the present value for two alternatives
which are either Replace now or Wait one more year and repeat the analysis .
This method recognizes inferiority both in income potential and in operating costs , the components
of inferiority are w , x , y , z.

( Income )
Long Term Trend for New Ships w

Trend for Existing Ships

Long Term trend for New Ships ( Operation Costs)

Time

Component w . Means , new ship are better money earner than the old ship was when it was
new .
Component x . Means , the old ship is fundamentally less able to produce income than when it
was new .
Component y . Means , the old ship has higher operation costs than it had when it was new .
Component z . Means , new ship has lower initial operation costs than the old ship had when
it was new .
The factors x , y are caused by deterioration of existing ship, this deterioration is due to :
1. Maintenance and repair costs increasing with the age .
2. Hull roughness and increasing resistance with speed loss .
3. Fuel rate of engines which increases with the age.
4. Insurance, for hull and machinery it drops as depreciation advances , but protection and
indemnity insurance increases .
5. Dead weight , the ship grows heavier with tears and hence less able to carry payload .
6. Crew wages which increase generally more than the cost of living, it is not function of ship
age but it may reflect advantages to the smaller complement required in modern ships.
7. Reliability, the ship becomes less reliable as she grows older.
The factors w , z are caused by technological progress .

30
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

1. Automated engine rooms (unmanned),

2. Advanced cargo handling equipment,
3. Fuel efficient engines,
4. Better protective hull coatings ,
5. Technological progress in ship production which may reduce the first cost relatively .

The criterion applied in this method is that for year - by – year analysis to find the time when the
present value of predicted benefit of one more year of operation become equal to the cost of
immediate disposal .

Ln = Resale value at the year n

Ln' = Resale value after tax = Ln - tc ( Ln - Bn )
Bn = Book value at the nth year
tc = Tax rate for capital gains
Ln+1 = Resale value at the year n+1
L'n+1= Resale value after tax = Ln+1 - tc ( Ln+1 - Bn+1 )
Bn+1 = Book value at the year n+1

Ao = Initial return before tax

An" = Return corrected for inferiorities
= Ao - Fn - t ( Ao - Fn - Dn )

Fn = Total inferiorities at the end of nth year

=[( w+x)R+( y+ z)Y]N

Dn = Depreciation allowance at nth year

t = tax rate for income
N = the year of analysis

NPV = ( PW - i - 1 ) ( L'n+1 + An" ) - Ln'

If NPV comes out positive, the decision is WAIT ONE MORE YEAR !

If NPV comes out negative or zero, the decision is REPLACE NOW !

31
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Example :

Find the decision of the following problem of replacement .

P , (Initial investment) = L.E 8.40M
Y , (Initial operating cost) = L.E 0.68M
R , (Initial revenues ) = L.E 3.90M
t , (tax rate for income) = 45%
tc, (tax rate for capital gains) = 25%
i , (discount rate ) = 10%

Components of inferiorities :

w = 3% R/year
x = 1% R/year
y = 1% Y/year
z = 1% Y/year

The year of starting analysis is the beginning of the 10th year .

The depreciation , book value , and resale value are as follows :

Year Resale value Book value Depreciation

L.E L.E L.E
10 4.188M 2.822M 0.39M
11 3.946M 2.469M 0.36M

Solution :

L10' = 4.188 - 0.25 ( 4.188 - 2.822 ) = 3.846M

L11' = 3.946 - 0.25 ( 3.946 - 2.469 ) = 3.576M

A10 = ( R – Y ) = 3.22M
Fn =10 [(0.03+0.01) R + (0.01+0.01)Y ] = 1.696M
A10" = A10 - Fn - 0.25 ( A10 - Fn -Dn )
= 3.22 - 1.696 - 0.45 ( 3.22 - 1.696 - 0.36 ) = 1.0002M
A10"+L11' = 1.0002 + 3.567 = 4.5762M

NPV = (PW-10%-1) 4.5762 - 3.846 = + 0.31418M

The decision is WAIT ONE MORE YEAR !

32
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Note to Students :

The next chapter consists of the following papers:

1.The Computer Role in Controlling Design

Speeds of Cargo Ships (16 pages)

2.Computer – Aided Ship Design Economics

(15 pages) .

The Determination of Permissible Price

33
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

In Case of Free Depreciation

------------------------------------

Year Total Return Remarks

1
2
3
.
.
X.Dif Dif = The Return
N at the year N
(1 – X ) . Dif

n=N-1
REVX = Σ REVn ( Sum of returns up to the year N ) ..... (1)
n=1

n =N-1
REVY = Σ REVn(PW) ..... (2)
N =1

N = NEC
REVZ = Σ REV (1-Tx)(PW)
n ( Sum of PW of returns after tax up to NEC) ..... (3)
n = N+1
Term = (1+i)n

REVX + X.Dif = Po .....(4)

Also ;

Po = REVY + REVZ + X.Dif/Term + (1-X)(1-Tx)Dif/Term ....(5)

Taking ;

Re = (REVX -REVY -REVZ) Term/Dif .....(6)

Then ;

Re = X - X . Term + ( 1 – X ) ( 1 – Tx ) .(7)
Re = X ( Tx - Term ) + 1 - Tx . ....(8)
X = ( Re - 1 + Tx ) / ( Tx - Term ) .....(9)
And from eq.(4) the quantity of Po can be determined .

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

ELEMENTS OF MARINE TRANSPORT

1. Multi - Purpose Ships

In September 1967 an important development occurred in dry cargo shipping , this was the
introduction of the first of a new type of small , yet versatile , dry cargo ship which sought to
combine some of the advantages of the self – trimming bulk carriers with the flexibility of
conventional cargo ships .
The original concept of this type of ± 15000 ton DWT ship embodied in the design of the Japanese
built “ Freedom “ and the equally successful European versions in which there are a greatly
improved cargo handling capability , facilitated by their wide hatches , obstruction –free holds ,
easy trimming and stowage , low initial price due to the standardized design , and high resale value
.
These ships are called Multi-Purpose Ships , there are many standard designs of these ships , these
designs are either Japanese or European .

2.Cargo Types and Stowage Rates.

Basically , there are two types of Cargo ; Bulk and General Cargo .
Bulk cargoes present little difficulty in stowage , but for general cargo the problem is more difficult
.
Following is a broad selection of main cargoes carried and their stowage rates .
The stowage rate is the space occupied in cubic meters in the ship’s hold by one metric ton of cargo
( 1000 Kg) .

Type of Cargo Specifications Packing Stowage Stowage

Condition Factor m3/Ton
Apples ---------------- Cases, Boxes, Cartons 1 oC 2.266
Butter ---------------- Cases , Boxes, Cartons Refrigerated 1.558 – 1.669
Cement ----------------- Bags , Bulk , Dry 1.0 – 1.133
or Containers
Coal Spontaneous Bulk Dry , Isolated 1.0 - 1.416
Coffee -------------- Hessian Bags Dry 1.699
Cotton Inflammable Bales Dry , Clear 1.416 – 2.833
from Iron Work
Eggs -------------- Crates , Cases 2 oC High
Flour ------------ Bags Dry 1.416
Grain ------------ Bulk Dry 1.416 – 2.408
Jute Spontaneous Bales -------- 1.699
Meat ------------ Cartons , Containers Frozen -----------
Motor ------------ Unpacked ------------ ----------
Vehicles
Oil , Petroleum Dangerous Bulk ------------ 1.11 – 1.25
Oranges ------------- Boxes Low 1.84 – 2.125
temperature
Ores Heavy Bulk ------------- 0.34 – 0.85
Rice ------------ Bags Dry 1.416

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Type of Cargo Specifications Packing Stowage Stowage

Condition Factor m3/Ton
Rubber ------------ Bags , Bales, or -------------- 1.418 – 2.125
Cases
Salt ------------- Bulk , Bags Dry 1.133 – 1.416
Steel Rails ---------------- Bundles -------------- 0.340
Sugar ----------- Bulk , Bags Dry 1.133 – 1.416
Tea ------------ Cases Dry 1.418
Timber Spontaneous Varies -------- 0.708 – 2.55
Tobacco Spontaneous Hogsheads , Isolated High
Bales , Cases
Wool Inflammable Bales , Bags Dry 5.099- 7.932

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

3. Bill of Lading :

When a ship owner, or agent agrees to carry goods by water , or agrees to furnish a ship for the
purpose of Carrying Goods for a sum of money paid to him , the established contract for such deal
is called Contract of Affreightment , the sum to be paid is the Freight , the shipment of goods is
usually evidenced in a document called the Bill of Lading .
The bill of lading is not the actual contract , it forms an excellent evidence of the terms of the
contract .
The two acts which have played an important role in the development of this document are :
1. Bills of lading act 1855
2. Carriage of goods by sea acts 1924 and 1971

The salient points of a bill of lading are :

1. The name of the shipper
2. The ship’s name and owner’s name
3. Full description of cargo ( if it is not bulk)
4. Port of shipment
5. Port of discharge
6. Full details of freight , including when and where to be paid
7. Name of Consignee
8. Actual date on Master’s or his agent’s signature .

Types of Bills of Lading

1. Shipped Bill of Lading :

The ship owner supplies bills of lading proving that the goods have been actually shipped .
The following sentence may be written :
" Shipped in Apparent Good Order and Condition "
It facilitates earlier financial settlement of the export sale .

2. Received Bill of Lading :

This arises if the total goods have been handled over to the ship owner , but the word "Shipped
" doesn't appear in the bill of lading , it is not preferable for banks settlements unless provision
has been made in the contract .

3. Through Bill of Lading :

This arises if the total transit is shipped on different carriers ( cargo transit through the way) .
The shipping company issue bills of lading which cover the whole transit and the shipper deals
only with the first carrier .

4. Stale Bill of Lading :

It is important that the bill of lading is available at port destination before the goods arrive or at
the same time .
If the bill of lading presented to the consignee or his bank after the goodsare due at the port they
are called (Stale) , it is undesirable because of the warehouse rent may arise and the cargo
cannot be normally delivered by the ship owner without the bill of lading .

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 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

5. Groupage Bill of Lading :

It arises when the ship owner issues a single bill of lading to a group of consignments from
individual consignors to various consignees at the same destination , the agent will issue to the
individual shipper shippers a certificate of shipment and he will distribute the goods to the
various consignees.
The advantages of this type are less packing, lower insurance, less risk of damage and lower
freight rates.

6. Clean Bill of Lading :

Each bill of lading states " In Apparent Good Order and Condition" which of course refers
to the cargo , and if this statement is not modified by ship owner , the bill of lading is regarded
as clean or unclaused , this type is much favorable to the banks .

7. Claused Bill of Lading :

Is the reverse of the clean bill of lading , it is usually unaccepted in the banks .

8. Negotiable Bill of Lading :

If the words " or His or Their Assign" are contained in the bill of lading the bill is considered
negotiable , it can be endorsed or transferred .

9. Non-Negotiable
If the words " or His or Their Assign" are deleted from the bill of lading it is considered non-
negotiable , it cannot be endorsed or transferred

Functions of Bills of Lading

1. Receipt for the shipped goods

2. A transferable document which enables the holder to demand the cargo
3. Evidence of the terms of the contract of affreightment .

Contracts of sale :

There are two conditions of contract of sales ;

a. Free on Board (F.O.B.) which means that the price quoted by the vendor includes the price
of the goods and all expenses until the goods delivered onboard ship , it does not include the
cost of sea freight .
b. Cost , Insurance and Freight (C.I.F.) , which means that the price quoted includes the cost
of goods , the insurance fees to destination , and the freight for transport .

38
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

4. Freight Rates :

The sum of money paid to ship owner in order to perform the terms of the contract with the
shipper is called freight , The freight rate is the cost of transport one ton of cargo through the
distance agreed in the contract .

Types of Freight Rates:

1. Advance Freight
Is payable in advance , before delivery of the cargo , it is applied in liner trades and tramping .

2. Dead Freight :
Is the name given to a damage claim for breach of contract , such situation would arise if the
chartrer undertook to provide a certain quantity of cargo , but he failed to get the full quantity
.The ship owner is then entitled to claim dead freight for the unoccupied space .

3. Pro-Rata Freight
( In proportion of the complete voyage ) , it arises when the cargo has been carried only a part
of the way .

4. Back Freight
It arises when the cargo is refused after arrival , it is the freight of the back trip .

39
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

5. Containerization

Containerization is a method of distributing merchandise in a unitized form permitting an inter-

modal transport system to be evolved providing a possible combination of Rail , Road , Canal ,
and Maritime Transport .
The Container ship is basically a cellular vessel in design with the crew/machinery aft .
The holds of the ship are provided with a series of vertical angle guides adequately fitted to
accept the container . Such guides act as restraints for containers accommodated therein and
obviate the need for any lashing .
They also ensure that each succeeding container in stack rests securely on the weight bearing
corner casting of the one below .
Not all container ships are so designed with cellular frame and usually have one to three holds
with straight sides and small guides fitted to the hold floor to prevent lateral movement of the
bottom tier of containers , but these are mainly working on short sea trades .
The third generation of container ships emerged in the late 1970'shave the capacity of carrying
up to 3000 TEU's .
In 2001 a maximum capacity of 7500 TEU has entered service .
The tare weight of TEU is about 4 tons
The feed /distribution procedure requires much pre-planning .
The time spent in loading and unloading containers varies by port circumstances , the average
rate ranges between 3.0 to 15.0 minutes per container per crane .

Container Types :

The range of container types tends to expand annually to meet the increasing demands .
Basically the majority of containers are built to I.S.O. ( International Standards Organization)
specifications thereby permitting easier handling through the international trade ports .

Standard Sizes of Containers

Length ft , m Width x Height Payload

ft x ft mxm Ton
10 , 3.05 8x8 2.54 x 2.54 not common ------
20 , 6.10 ,,, ,,,, ,, ,,, TEU 16.75
24 , 7.31 ,,, ,,,, ,, ,,,, not common -----
30 , 9.15 ,,,, ,,,, ,, ,,,, 20.00
35 , 10.70 ,,,, ,,,, ,, ,,,, not common ------
40 , 12.20 ,,,,, ,,,, ,, ,,,, 2 TEU 24.00
The given payloads are average for comparison reasons , the actual load of container depends
on the stowage rate of cargo loaded in the container and the capacity of cargo handling gear
( Container handling ) .

40
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Materials of Containers

1. Aluminum Alloys :
Lighter , is not brittle at low temperature , has a comparatively high scrap value .

2. Steel :
Sufficient strength , resistant to overloading , cheap to manufacture , with a disadvantage of
higher tare weight .

Container Types:

1. Standard Dry Container:

Comprises the majority of today's containers and simply provides a container with a solid
,watertight roof and sides . It is suitable for carriage of any cargo not requiring temperature
control .

2. Ventilated Dry Container :

Dry insulated container has a small heating and air conditioning - built in - unit , which can
maintain a desired temperature and humidity .

3. Refrigerated Container
Dry insulated container contains a refrigeration unit capable of taking the interior stowed cargo
below freezing.

4. Open Top :
Dry container with a tarpaulin type roof . The large bulking goods can be loaded through the
top by a crane and then to be covered by tarpaulin cover .

5. Open Flat :
The structure of this type is more closely related to a large pallet with corners posts so that it
can be picked up with containers handling gears and can be stacked with other containers .
The open flat usually has a much more substantial base than a dry container which is capable of
supporting heavy machines not requiring protection .

6. Bulk Liquid Container:

Containers can be provided with cylindrical tanks to be loaded with liquid cargoes .

7. Bulk Containers :
Basically a dry container fitted with an internal plastic bag into which palletized or other free
flowing bulk commodities are loaded . Once the rear door is opened , discharge can be
facilitated by tipping the container .

8. Car Carrier Container :

Open framework container designed to accept 4 or more standard size automobiles .

9. Cattletainer :
As the name implies , it hauls beef and cattle .

41
 Prof. Dr. Galal Younis
Lecture Notes on Ship Economy ------ All Rights Reserved

Advantages of Containerization

1. It permits a door to door service,

2. It is a high capacity unit,
3. No intermediate handling at terminal or transshipment points which ensure fast performance
and less risk of damage and pilferage .
4. Labor saving , less packing cost ,
5. Less port time and more number of earning trips are allowed ,
6. More productivity of the ship .

Disadvantages of Containerization :

1. It is a capital intensive project

2. Its high capacity may not be fulfilled in limited trades due to the limited capabilities of
exporters ,
3. The actual payload is forming 60 to 70% of the actual cargo deadweight of the ship,
4. In some countries restrictions exist regarding the internal movement of containers .

These Lecture notes are prepared by Prof.Dr. Galal Younis , September 2003
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