A ship owner is considering investment in retrofitting an engine modification to their ship, which will...

 

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A ship owner is considering investment in retrofitting an engine modification to their ship, which will save diesel whilst the ship is at sea (no savings are made with the ship in port or at anchor). They are considering financing the retrofit either with cash from a surplus they have built up during a period of good freight rates, or by using loan finance. Finance would involve a normal repayment loan with equal annual repayments, and with payment made on the last day of each year. The owner expects to keep the ship for 5 years following the refit and anticipates that, in addition to money saved from lower diesel use when at sea, the retrofitted equipment will give the ship a higher re-sale value. Separately for each case (A and B) use the data in the following table to answer the questions in part a (40 marks) and part b (60 marks). A B Investment cost ($US) Tenor and period to sale of ship (years) Interest rate for loan Saving in fuel (tpd) Days at sea per year Bunker cost ($US) per tonne 700,000 750,000 5 5 3.0% 2.0% 1.0 1.2 280 290 380 390 Assumed discount rate for investment 5% 6% appraisal Resale price without investment ($ million) Resale price with investment ($ million) 10,000,000 11,000,000 10,200,000 11,220,000 a. The owner decides first to examine the change to their cash flow over the five years of ownership following the retrofit, due to the combination of loan costs and saving in fuel costs due to the retrofitted equipment. For each case (A and B) calculate the following: i. Show in a table by year the annual change in cashflow that should be expected due to loan costs and the saving in diesel fuel. Calculate the total amount paid for the retrofit including interest if finance were to be used, and state the total amount of interest paid. ii. b. The owner decides to proceed on the basis of cash payment for the retrofit, without using loan finance. Use the assumed discount rate shown in the table above for your case (A to D) to calculate the net present value of the investment based on the future savings in diesel costs and the additional resale value and use this to judge whether the retrofit is a viable investment. A ship owner is considering investment in retrofitting an engine modification to their ship, which will save diesel whilst the ship is at sea (no savings are made with the ship in port or at anchor). They are considering financing the retrofit either with cash from a surplus they have built up during a period of good freight rates, or by using loan finance. Finance would involve a normal repayment loan with equal annual repayments, and with payment made on the last day of each year. The owner expects to keep the ship for 5 years following the refit and anticipates that, in addition to money saved from lower diesel use when at sea, the retrofitted equipment will give the ship a higher re-sale value. Separately for each case (A and B) use the data in the following table to answer the questions in part a (40 marks) and part b (60 marks). A B Investment cost ($US) Tenor and period to sale of ship (years) Interest rate for loan Saving in fuel (tpd) Days at sea per year Bunker cost ($US) per tonne 700,000 750,000 5 5 3.0% 2.0% 1.0 1.2 280 290 380 390 Assumed discount rate for investment 5% 6% appraisal Resale price without investment ($ million) Resale price with investment ($ million) 10,000,000 11,000,000 10,200,000 11,220,000 a. The owner decides first to examine the change to their cash flow over the five years of ownership following the retrofit, due to the combination of loan costs and saving in fuel costs due to the retrofitted equipment. For each case (A and B) calculate the following: i. Show in a table by year the annual change in cashflow that should be expected due to loan costs and the saving in diesel fuel. Calculate the total amount paid for the retrofit including interest if finance were to be used, and state the total amount of interest paid. ii. b. The owner decides to proceed on the basis of cash payment for the retrofit, without using loan finance. Use the assumed discount rate shown in the table above for your case (A to D) to calculate the net present value of the investment based on the future savings in diesel costs and the additional resale value and use this to judge whether the retrofit is a viable investment.

Answer rating: 100% (QA)

a Determination of change in cash flow over 5 years of ownership following retrofit due to a combina... View the full answer