I am very pleased to send on its way this third edition of Dr
Buxton's "Engineering Economics and Ship Design" in the hope that
it will continue to be of service to those interested in ship
design and operation. The fact that there is still such a demand
from both indu stry and from students for thi s work which was first
published in 1971, shows how close is the link between design and
economics. The designer is today being called upon more than ever
to justify his decisions commercially. At the same time the
commercial background is, I believe, more uncertain than it used
to be, because of the variable nature of fuel price trends, or
labour costs; or because of the particular political environments
which can affect ship trades.
Under these conditions, the designer finds he needs to produce
alternative designs and then carry out the economic evaluation of
them. It may involve al ternati ve propulsion systems, or different
manning levels, or some other variable, but the guidance available
in this Volume should prove to be valuable. The basic format is
still arranged in the same way as found in the earlier editions,
but figures have been updated; and the experience of ten more years
of application since the second edition appeared has been
October 1986
Foreword - 3
1. The Demand for Marine Transport 9
2. The Supply of Marine Transport 15
3. The Freight Markets 20
4. Operating Economics 26
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
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
Estimating Costs ................................................................... 133
Contents - 5
The subj ect of Engineering Economics and Ship Design has been
treated in a general way as the intention is not to include any
extensive coverage of formal economics or detailed ship design,
but to show how the two are related. The standpoint is that of the
practising designer who needs sufficient information to evaluate
the technical and economic performance of alternative designs of
ships and their equipment. While many of the techniques may be
used by shipowning management, it is not the primary purpose of
this book to assist decisions about whether to build, when to
build, or where to build, but rather what to build.
It is only in the last decade or so that rigorous economic
evaluations have been seriously applied to ships. There would
appear to be three principal reasons for thi s change:
(i) The' scope for making the wrong decisions in ship design
has increased greatly with expansion in ship sizes and
types, together with novel concepts. Until recently, the
decision depended more on whether to build rather than
what to build, as each succeeding ship design was usually
a modification of an earlier one. Now, as one design of
ocean-going ship can be 100 times larger than another, the
scope for poor investment mul tiplies correspondingly.
(ii) It is axiomatic that a ship design must be the best for the
job, but technical criteria such as minimum resistance
are not enough. It is widely recognised that the main
cri terion must be of an economic nature, giving full
weight to technical factors in its calculation. The
optimal design is that which is most profitable, in the
sense described in Part I I.
(iii) There has been increasing complexity in the financial
conditions surrounding ship procurement. Traditionally,
new ships were largely financed out of retained profits,
but now cheap loans, accelerated depreciation, subsidies
and tax relief all add greatly to the difficulties of
estimating ship profi tabili ty.
The principles of 'engineering economy are straightforward, and
engineers find no difficulty in making the detailed calculations,
al though of course there are computer programs avai lable.
Summary and Introduction - 7
The book is divided into three parts:
I The supply and demand for marine transport, and shipping's
economic environment.
I I The detai led mechanics of making engineering economy
I I I Application of the principles to ship design.
An Appendix includes information on estimating building and
operating costs.
8 - Engineering Economics and Ship Design
For centuries past, man has used boats and ships for commerce and
trade, but unti I the 19th century, the accent was on the transport
of passengers and high-value cargoes - the present-day role of air
transport. Until the Industrial Revolution, local economies were
largely self-sufficient, so there was no demand for large scale
transportation. With the harnessing of steam power based on coal
came the demand for raw materials, especially for the textile
industry. Distant lands supplied wool and cotton and, in turn,
recei ved manufactured goods.
The application of steam to ship propulsion in the mid-19th
century enabled reliable shipping services to be provided,
initially for short-distance trades. As telegraph networks and
coaling stations became established further afield, not only were
world-wide shipping networks developed, but also an important
export trade began in bunker coal, largely supplied from Britain.
Thus British ships were able to carry full cargoes outwards, and
offer real economies in the homeward transportation of raw
materials such as iron ore and grain. The parallel development of
railways opened up hinterlands to ports, but trains could not
compete with ships over large distances. The alliance of steam
propulsion and iron shipbuilding proved an unbeatable combination
compared with sail and wood, especially with continuous technical
progress in hulls and machinery. Although steamships had higher
operating costs than sailing ships, their annual transportation
capacity and regularity, and hence revenue earning ability, were
very much greater, and by the end of the century they had displaced
the latter in deep-sea trades almost entirely.
The world's surface area is 71% water and Britain, with its great
19th century empire, was roughly at the centre of the global land
mass. Thus geography, politics and technical innovation all
served to make Britain the dominant nation in maritime transport,
a position which was held well into the 20th century. The present
century has seen a massive increase in the demand for marine
transport of both raw materials and manufactured goods, although
temporarily interrupted by depressions. Freight, rather than
passengers, dominate the shipping scenei indeed, more
tonne-miles* of international freight are carried by sea than by
road, rail, and air put together throughout the world.
In terms of both cargo tonnage and tonne-miles, bulk cargoes are
more important than general cargoes (typically manufactured
goods), although the position is reversed when cargo value is
considered. As statistics of international and seaborne trade are
not as good as they might be, any analysis inevitably contains
estimates and uncertainties. The Standard International Trade
* All miles used in this publication are nautical miles of 1852m.
Part 1 - Shipping's Economic Environment - 9
Classification has four maj or groups:
Basic Materials
Classes 0 and 1
Classes 2 and 4
Class 3
Classes 5 to 8
These divisions are not very convenient for marine transport, as
one class may contain both bulk and general cargoes (e.g.
foodstuffs) or dry and liquid cargoes (e. g. fuel). Various bodies
attempt to produce more meaningful statistics for shipping, one of
the more successful being the Norwegi an shipbrokers Fearnleys, who
regularly publish figures for major bulk commodities
(Rei. 4.1. 2) * . Thp.i r fi gures are derived both from publi shed trade
stati stics and from tracking individual shiploads. Individual
nations publish extensive statistics on their seaborne trade, the
U.K. figures being particularly detailed (Ref.4.9) while there are
useful guides to sources of mari time stati stics (e. g. Refs. 4.10.1
and 4.17). The United Nations publish global figures (Ref.4.8.1)
which give a general idea of the growth of world trade, and are now
extending their coverage of seaborne trade statistics generally,
for example Ref.4.8.2, updated in Ref.4.8.1 with an annual special
table containing 12 commodities and 19 regions; more detail is
gi ven in Rei. 4.8.3, although not as up-to-date.
Figure 1 shows the trends for dry and liquid cargo tonnages since
before World War 2. Al though tanker cargoes grew steadi ly at about
10% per annum compound until the 1973 oil crisis, there has been
effectively no growth since then, owing to increased prices
restraining consumption and stimulating supplies nearer the point
of consumption, e.g. North Sea. Dry cargoes have grown almost
continuously wi th minor fluctuations and now outweigh oil cargoes
in tonnage terms. Figure 1 also shows the growth in the value of
world trade in money terms, i.e. which includes the effect of
inflation. In real terms, i. e. money of constant purchasing
power, the pre-war figure would have been about the same as the
immediate post-war figure. Most of the increase in the 1970s has
been due to inflation; the real annual growth rates post-war have
been between -5% and 10%.
* See bibliography on page 121 for references.
10 - Engineering Economics and Ship Design
19'06 1964 mo 1916 1972 1966 1964 1960 1956


TO AL /,

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.. IV
u ' t. )
(H., J
t 1 I /


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SSR.i &
/' / ,,' VALIJE

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1937 WW 2 1952
1 00
Fig.l Growth of World Trade
Part 1 - Shipping's Economic Environment - 11
Table 1 shows an approximate breakdown of world seaborne cargoes
in 1984. The liner trades are more important for shipping demand
than the figures for general cargoes indicate, as general cargo
unit values and stowage factors are considerably higher than for
bulk cargoes. The divisions between bulk and general cargoes and
between deep-sea and short-sea cargoes are not easily defined.
Crude oil
Iron ore
Oil products (deep-sea)
Forest products
Iron and steel products
Liquefied gases
Bauxite and alumina
Refrigerated cargo
Minor bulk cargoes, deep-sea
Other general cargoes, deep-sea
Short sea cargoes
Note: These figures are approximate guides based partly on Fearnley' s
statistics (Ref.4.1.2): V.N. figures (Ref.4.8) are different, as they include
a number of 'local' figures such as re-exports of oil after refining, Great
Lakes traffic, transhipments etc. Minor bulks include sugar, manganese and
non-ferrous ores, salt, petroleum coke, china clay, scrap, sulphur etc.
12 - Engineering Economics and Ship Design
Table 2 shows that most of the freight moving on deep-sea routes is
low value bulk cargo, which will only be traded if transport costs
can be kept to a reasonable proportion of the value of the cargo.
Bulk transport by sea offers the lowest possible transport cost
over long di stances, i. e. less than 1% of air transport costs 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 cargo
transport costs by sea are about ten times higher than those of
bulk transport owing to the particular nature of the wide range of
cargoes, the careful stowage and expensive and slower cargo
handling required, the limitations of exploiting the economies of
scale with the smaller quantities moving and high overheads, and
the higher speeds which higher value cargoes intrinsically demand,
due partly to inventory costs, i.e. the capital tied up whiJ.e the
cargo is in transit. Nevertheless, the inroads which air freight
can make into sea transport are clearly limited, for the simple
reason that the low or medium value cargoes which predominate
cannot afford high-cost transport. Air freight will continue
therefore to be the medium for those cargoes, small in tonnage but
high in value, where the advantages of speed and inland
penetration are worth a high premium, i.e. urgent, perishable, and
valuable commodities.
Typical Approx Typical Typical Freight Approx
transport annual cargo freight as %of pence
mode tonnage, value cost value per
millions f./tonne f./tonne tonne-
Bulk Tanker, bulk 2500 15-200 4-15 10-30 0.1-0.3
cargoes carrier
General Cargo liner 400 200-10000 50-200 5-15 2-4
High value Aircraft 5 over 10000 300-1000 5-20 30-50
Tonne-miles are a better guide to transportation requirements than
tonnes. Of the estimated 13.5 x 10
tonne-miles for world trade
in 1984, over 80% was composed of the following seven main cargo
Cl"ude Oil
Principal routes:
Arabian Gulf -'7 North West Europe, A.G. -> Japan, A.G. ->
Mediterranean, A.G. ~ U.S.A., A.G. ~ S o u t h America, North and
West Africa - U. S. A., North Africa and East Medi terranean -
Part I - Shipping's Economic Environment - 13
Europe, Caribbean - U.S.A., S.E. Asia - Japan. 4450 billion
tonne-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 billion
tonne-mi les, average haul 5330 nautical mi les.
Oil Products (Deep-sea)
Principal routes:
Caribbean - U.S.A., Arabian Gulf - Europe, S.E. Asia - Japan,
N. W. Europe - Medi terranean, (Intra-European). 1140 billion
tonne-miles, average deep-sea haul 3840 nautical miles.
Principal routes:
U.S.E.C. - Japan, Australia - Japan, U.S.E.C. - Europe, Canada
W.C. - Japan, S. Africa - Europe, Intra-European. 1270 billion
tonne-mi les, average haul 5470 mi les.
Grain (Wheat, maize, soybeans, barley, sorghwn, oats, rye)
Principal routes:
U.S.A. - W. Europe, U.S.A. and Canada - Far East, U.S.A. and
Canada - E. Europe, Argentina - Europe, Australia - Far East.
1160 billion tonne-miles, average haul 5600 nautical miles.
Forest Products (Logs, sawn lwnber, 'Wood pulp, paper, board, newsprint,
'Wood chips etc.)
Principal routes:
North America - Japan, Scandinavia - Continent, S.E. Asia -
Japan. 420 billion tonne-miles, average haul 3200 nautical
Deep-sea General Cargoes (Manufactured goods, machinery, vehicles,
processed foods, conswner products, etc. J
Principal routes:
N. America - Europe, Europe - Far East, Far East - Australia, N.
America - Far East, Europe - Indian Ocean. Approximately 1100
billion tonne-miles, average haul 5500 nautical miles. Note
that the above areas include the most highly developed
countries of the world.
Al though marine transport dominates the shipping scene in terms of
tonnage of ships in the world, mi li tary vessels are as significant
in terms of construction cost. Ocean resource
exploration/exploitation vessels (e.g. for oil recovery and
fi shing) are important in terms of numbers, though not of tonnage.
Economic forces are seen at their clearest when applied to
transport vessels, so that application of engineering economics is
best understood in that context. However the basic principles
14 - Engineering Economics and Ship Design
apply wherever an economic cri terion can be developed as a measure
of meri t, particularly when comparing al ternative designs.
Marine vehicles can be divided into a number of broad categories as
shown in Figure 2. Estimates have been made of number, gross
tonnage and replacement cost for the world seagoing fleet of
vessels over 100 tons gross to give an indication of the relative
importance of different categories.
Patrol craft
Mine craft
Land ing craft
Support craft
Drill ship
Supply vessel
Crane ship
Cable ship
Sur\ll!Y vessel
Figures refer to percentage of
work! fleet OV!!,r 100 tons 9"055
NumbersiG. R.T./Replacement c
100%' 90 000 sh,ps
447M G.R.T.
860 x 10
55/11/63 I No' IiSlod in
I-Lloyds RegIS'" ..
Fishi,.,. Service craft Military Other
25/3/5 15/2/5 14/5149 marine craft
I 1/'1'
(Self propell,
Large yacht
Bulk cargo General cargo Passenger
__., 1
Liquid Dry Breal< bulk Unit load Ferry Cruise
_T'u '''I' !
Liquid Oil tanker BUlk- - ded< Cargo liner Container I
gas (crude carrier freighter Reefer Ro-Ro - - - J
Chemicals products) Sill\!le ded< Heavy lift Car carrier
Combination (roasterl ship Barge carrier
carrier (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
Part 1 - Shipping's Economic Environment - 15
Noteworthy features are:

Large tonnage but small numbers of bulk-carrying vessels:
66% and 15% respectively, indicating large average size.
Large but declining number of break bulk cargo vessels: 24%
compared with 37% 14 years earlier (partially superseded by
bulk carriers and unit load ships, the latter having grown
tenfold in that period) .
Small tonnage of passenger vessels: 2%.
Large numbers but small tonnage of fishing vessels: 25% and
3% respectively.
Large value but small tonnage of military vessels: 49% and
5% respectively.
Growth of service craft such as tugs, dredgers, and supply
vessels particulary servicing the offshore industry, from 8%
of number 14 years ago to 15% in 1983.
The offshore sector is understated, since non-propelled
craft such as barges are excluded.
A more detailed breakdown of the world merchant fleet over 100 tons
gross i s given in Table 3 derived form Lloyd' s Regi ster (Ref. 4.3) .
Figure 3 shows the expansion of the world fleet since 1890,
interrupted only by the depression of the 1930s and from 1982.
From about 1950 to 1973, the growth rate was in line wi th the
growth of world trade at about 8% per annum compound, but the
oversupply of tonnage has not yet worked itself out, especially
for tankers. The increasing average size of ships can be deduced
from the fact that until about 1950 the actual number of ships
remained virtually constant at around 30,000 while the fleet
tonnage quadrupled.
Figure 4 illustrates the growth in size of the larger vessels used
for carrying the most important bulk cargoes over an even longer
period. The logari thmic scale reveals the steady growth up to
about 1910, the relative stagnation between the wars, and the
dramatic expansion as bulk carriers took over from multi-deck
freighters in the late 1950s. The curve has now caught up wi th its
1860-1910 trendline, as there now are appreciable numbers of bulk
carriers in the 200,000 dwt (deadweight tonnes) size range.
The rapid increase of ship size was seen even more dramatically in
the case of tankers, where the typical larger vessels went from
30,000 dwt in 1950 to 100,000 dwt in 1960 to 300,000 dwt in 1970.
Peaking out at about 560,000 dwt in the late 1970s, the size of
tankers ordered since then has fallen sharply, as economies of
scale are now less available owing to the fragmentation of the
international oil industry, and the reduced role played by the oil
majors like Exxon and Shell who are now less able to integrate
exploration, production, transportation and refining.
16 - Engineering Economics and Ship Design
Ships over 100 gross tons
Type of Ship Number Gross Tonnage Deadweight
1000 ·000
Over 30,000 GT (ca 50,000 dwt) 1377 110188
Under 30,000 GT 5213 28260
Liquefied gas carriers 776 9965 15.04M m
Chemical and other tankers 1012 3696
Total: 8378 152109
Combination carriers 384 23726
Dry bulk and ore carrriers
Over 20,000 GT (ca 32,000 dwt) 2054 68452
6000-20,000 GT 2953 41805
Total: 5391 133983 237312
Dry cargo ships:
Cellular container & barge carriers 1011 18364
Rc-Ro vessels (est. over 2500 dwt) 807 7000
Multi-deck cargo (estimated) 10041 53225
Single deck cargo 10774 19446
Total: 22633 98035
Total cargo carrying fleet 36402 384127
Other vessels (service craft):
Fish catchers 21251 9447
Fish factory 872 3732
Passenger vessels & ferries 3815 8331
Tugs 7737 2601
Dredgers (self-propelled) 769 1560
Supply ships 2146 1400
Miscellaneous 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
Part 1 - Shipping's Economic Environment - 17

S... ,i='S
I )

, I
/ I

Fig.3 Growth of World Fleet
18 - Engineering Economics and Ship Design
~ '
h ~
V ,
~ .
~ \
~ .
11100 I ~ O O Ict2l0 2000
Fig.4 Trend of Vessel Size for Dry Bulk Cargoes
Part 1 - Shipping's Economic Environment - 19
The supply and demand for marine transport are matched in the short
term through the mechanism of the freight markets, and in the
longer term through newbuilding and scrapping of ships. The
market is international and the open competition provides a good
example of the laws of supply and demand. Figure 5 illustrates
typical supply and demand curves, which may apply to, say, the
tanker market.

£ \
- - - - - - -- "- - -
(TONN""E A.......I. .. "l.t)
Fig.S Supply and Demand Curves
Three levels of demand are illustrated and for any given level, the
intersection with the supply curve determines the equi libri urn
freight rate and tonnage required and available. Each level of the
demand curves depends on the state of world trade as influenced by
economic developments, weather, harvests, and political crises,
but however high demand goes, there is a limit to supply in the
short term, so that the available tonnage is directed to the
highest bidder. At lower levels of demand there will be some
unused capacity, either ships laid up, or encouraged to be
scrapped, or slow steaming, or loading part cargoes, or spending
longer in port (waiting for or handling cargo, or under repair).
The supply curve shows that the supply of ships will dry up before
zero freight rate is reached, because ships are generally laid up
when freight rates regularly fail to cover direct costs, excluding
capi tal charges. The equi libriurn point moves continuously as
demand changes, and as ship operators' perceptions of market
trends change, influencing decisions on buying, selling and
chartering ships.
The actual matching of shipowners' supply of tonnage and
charterers' demand is mostly done by shipbrokers operating on
shipping exchanges such as the Bal tic Exchange in London. OVer the
centuries, the shipping business has evolved standard practices
for chartering organisations, and English is the "lingua franca"
of the international shipping scene. Standard charter parties
(i. e. contracts) are frequently used, with extensive use of "small
print" clauses found necessary by years of hard-won experience,
20 - Engineering Economics and Ship Design
but these may be modified by addi tions and deletions. The
following is only a brief summary of the principal features which
affect ship design; there are many finer points. For more detai led
information, consult a standard reference, such as Ihre (Ref. 1.9) .
Ships may ei ther be chartered (i. e. hired to someone wi th cargo to
transport) or operated by the owner in his own business.
A. Chartered Ships
(i) Single Voyage Charter CVIC)
The shipowner undertakes to provide a vessel for the carriage of
specific cargo(es) for a single voyage between two (or
occasionally more) ports. The charterer pays freight pe":t:"toIlC?;
cargo actually loaded wi thin specified limits. "Tons" may be long
{"-e. 1016 kg, or metric tonnes, i.e. 1000 kg. The
Daily running costs of ship, covering crew expenses, upkeep,
insurance etc.
Capi tal charges, covering depreciation, interest, taxes,
Fuel costs.
Port charges and canal dues.
Cargo handling charges.
The extent to which the cargo handling charges are paid by the
owner may be varied according to trade and usage, e. g.
Gross terms: shipowner pays for loading and di scharging.
Free in and out (f.i.o.): shipowner pays for neither loading
nor di scharging.
Free on board (f. o. b. ): shipowner does not pay for loading.
Free discharge (f.d.): shipowner does not pay for
Voyage chartering is generally used for full loads of liquid or dry
bulk cargoes. Freight rates are usually expressed as dollars per
ton of cargo for dry cargo, or sometimes as a lump sum for a
shipload. Worldscale rates are used for tanker cargoes (see page
25). Rates fluctuate appreciably wi th supply and demand as can be
seen from the "fixtures" which are publi shed in the shipping
press, such as Uoyds Ust. The voyage charter market is sometimes
called the "spot" market. In each fixture, a certain number of
days will be allowed for loading and discharging the cargo
(" laydays"). If the port time is less than anticipated, the
shipowner pays the charterer "despatch money", if longer, the
charterer pays the shipowner "demurrage" for delaying the ship.
See voyage estimate example, Table 4.
Part 1 - Shipping's Economic Environment - 21
Bulk carrier to carry full cargo of grain from New Orleans to
Rotterdam after ballast voyage from U. K.
SHIP 30,000 tonnes d.w. Summer draft 10.4 m.
37,500 cu. m. grain. Speed 14.5/15.5 knots loaded/ballast
32 tonnes high viscosity fuel per day plus 1.5 tonnes
diesel oil at sea or in port. Daily running coSts £2900
excluding capital charges.
CARGO 28,000 grain. Loading rate 7,000 tonnes per day,
discharging 4,000. Loading charge per tonne.
Freight: per tonne, free discharge.
Brokerage etc. 5 per cent. Assume fl =
TIME Outward in ballast 4,800 miles at 15.5 kn
Loading New Orleans 28,000/7,000
Homeward loaded 4,800 miles at 14.5 kn
Waiting for berth
Discharging Rotterdam 28,000/4,000
Total voyage
40 days
26.7 days x 32
40. °days x 1.5
854 tonnes
60 tonnes
Total port disbursements
U.K. port, leaving f7000 x 1.3
New Orleans: Harbour dues
Cargo charges 1.00 x
Rotterdam: Harbour dues
Cargo charges
20 000
28000 28 000
6 000
30 000
2 000
9 000
54 000
32 000
95 000
Total Other Disbursements
Running costs: 40 x 2900 x 1.3
HVF at SlOO/tonne: 854 x 100
DO at $170/tonne: 60 x 170
Commission 5 per cent of 28 000 x 16.00
28 000 x 16.00
Total over 40 days
Per day
150 800
85 400
10 200
22 400
268 800
363 800
44.8 000
84 200
2 105
Note: Surplus has to cover loan interest and repayments, and provide a return
on shipowner's own capital. If actual loading and discharging times differ
from the assumed rates, demurrage or despatch money will be payable. An owner
will make similar calculations, often us ing computers, for other voyage
charters being offered, and will usually select the one shOWing the highest
daily surplus, unless there are complications such as ship positioning before
or after the voyage. Voyage charter freight rates fluctuate appreciably with
supply and demand.
22 - Engineering Economics and Ship Design
(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 cover
peak demand in winter.
Over a year, the owner's income from ei ther type of voyage
chartering wi 11 be:-
Average cargo tonnage per voyage x Number of loaded voyages
per annum x Average net freight rate per ton of cargo.
(iii) Timecharter (T/C)
The shipowner undertakes to provide a vessel for a period of time
for use by the charterer on the latter's business. Timechartering
is sometimes called period chartering. The period may either be
fixed in time, say three months, one year or even 20 years, or for a
round voyage ("trip" charter). The latter is sometimes used by
liner companies to supplement their existing fleet for peak
periods, the former generally for bulk cargoes. The charterer is
thus responsible for arranging voyages and cargoes during this
period; the shipowner provides the ship and crew and maintains the
vessel. He is thus only responsible for:
Daily running costs
Capital charges.
All voyage expenses, fuel, port charges, canal dues, cargo
handling charges, are to the charterer's account, but in practice
may be paid by the shipowner and then reclaimed from the charterer.
The hire is usually expressed as dollars per unit of capacity (e.g.
ton deadweight, cubic metre etc) per month, or as a lump sum per
day, especially by offshore companies. Hire is payable only for
time in service, i. e. it ceases during repair or breakdown
("off-hire") but it continues to be paid even if the ship sails
empty or is delayed in port.
Timecharters, especially the longer term ones, l1,aye_El_sj:§.):)ilising
effect_ on payrnenJ_s fQ:r-_J:re=ight and are much used by oi 1 companies,
about 40 per cent ofact1ve tankers being so chartered.
Timechartering reduces the amount of own capital needed, gives
long term stability of transport costs, provides flexibility and
marginal tonnage, and a yardstick to measure the efficiency of the
charterer's own fleet (if any). Market fluctuations with supply
and demand are usually less violent than for voyage charters,
especially longer term charters.
Over a year, the owner's income from timechartering will be:
x months on hire x freight rate
(per ton dwt per month)
or: Number of days on hire x daily hire rate.
( i v) Bareboat Charter
The shipowner undertakes to provide a vessel to be operated
entirely by the charterer for a specified period. The charterer
Part I - Shipping's Economic Environment - 23
provides the crew, maintenance and generally uses the ship as if he
owned it, merely paying a hire for the "bareboat". Sometimes
called demise charter. Not used as much as voyage or timecharters,
but is the usual method when a ship operator leases a ship from a
financial institution like a bank. Hire is usually paid per ton
deadweight per month, or a lump sum per month. There may be an
option for the charterer to purchase the ship at the end of or
during the charter.
(v) Contract of Affreightment
The contractor undertakes to provide a specified transportation
capability over a period. Although usually no ships are named,
there will be maximum and minimum limits on the cargo quantities
available, and possible restrictions at loading and discharging
ports. The ships may not actually be owned by the contractor,
whose skills lie in matching a number of charters to his available
fleet, to minimise ballast time. If not already owned, the
necessary ships may be obtained by chartering by any of the above
methods. Sometimes used for large scale transport of minerals,
e. g. iron ore South America to Japan. Freight is usually paid per
ton of cargo actually carried.
N. B. For all types of charter, the brokers' commi ssion must also be
paid out of freight income, typically 2.5%-5%, so that net, rather
than gross, freight rates should be used to determine income.
B. Owner Operated Ships
( i) Industrial Carriers
Vertically integrated industrial concerns may operate their own
ships to transport raw materials or finished goods, e.g. oil,
steel, sugar, aluminium, paper companies. About 30% of the world
tanker fleet is owned by oil companies. Sometimes the actual
management of the fleet is subcontracted to a ship management
company which may own other ships itself. Freight as such is not
necessarily earned: the object may be to minimise transport costs
of the overall industrial process, or occasionally to take
advantage of favourable tax and other allowances.
Other advantages of ownership include: greater control of design
and specification, use of vessel as testbed for new developments
(e. g. coatings), greater flexibi li ty of operation and, of course,
( i i) Common Carriers
Most of the liner companies operate common carrier services, i.e.
they provide a scheduled service on regular routes for any
quantity of cargo, usually general cargo, at published freight
rates. Manufacturers exporting goods c. i. f. (cost, insurance,
freight) require a regular service at predetermined rates, so that
they can guarantee delivery time and cost. Cargo liners carry a
miscellany of general cargoes, none large enough to justify
chartering a whole ship. Occasional parcels of bulk commodities
may be taken to fill ships on a return voyage. Because fixed
24 - Engineering Economics and Ship Design
expenses are high in providing a regular service where ships sail
whether full or nearly empty, and variable expenses are low,
freight rates would tend to be depressed to this latter low level
if competition were not regulated, eventually resulting in the
service becoming uneconomic and being abandoned. Most cargo liner
operators on a particular route are organised into Conferences,
which regulate freight rates and sailing for some time in advance,
often in di scussions with the shippers of cargo. Freight is
usually "Liner Terms", i.e. the shipowner pays for all expenses
quay shed to quay shed including cargo handling. Commission is
payable to cargo agents, as well as rebates to shippers who use
only Conference ships.
Liner freight rates do not always reflect the cost of carriage, as
the value of each commodity, the inward and outward imbalance of
trade, seasonal factors and the high cargo handling charges,
especially for break-bulk cargoes, all influence the rate, while
the effect of distance is not very marked. The general level of
freight rates is usually set so as to give a 'reasonable' rate of
return to a Conference operator, and may be negoti ated on thi s
basis with shippers' organisations and independent accountants.
Competition between operators in a Conference is on quality of
service, not freight rates, e. g. offering faster ships, better
record in respect of cargo damage and pi Ifering, etc. Independent
liner operators ('outsiders') provide competition on some routes,
offering slightly lower freight rates. Cargo liners tend to carry
cargoes both ways (unlike most bulk carrying vessels) but are
usually limited by cubic capacity rather than deadweight.
Consequently many rates are expressed per "measurement ton" of one
cubic metre (or formerly 40 cu. ft.) or as weight/measurement
where freight is charged either per ton weight or per ton
measurement (i.e. volume), whichever is the larger. On some
containeri sed routes, commodi ty box rates may be used, i. e. a rate
per container, irrespective of the quanti ty inside. Al though
Conferences have been criticised as inefficient cartels, no-one
has yet come up wi th an al ternati ve which provides long term
regular services at freight rates acceptable to both shipper and
Over a year, the owner's income wi 11 be:
Maximum cargo capacity avai lable x Average proportion of
capaci ty fi lled x Round voyages per annum x Average net
freight rate per ton x 2. (The 2 derives from the ability to
carry one cargo outward, and another homeward on a round
voyage) .
Al though most freight rates specified in the above methods of
operation are expressed as money terms per ton of cargo, together
with qualifications as to loading rates etc., the tanker business
is sufficiently homogeneous for a freight rate scale to have
evolved. By this means current freight rates are expressed as a
percentage of a basic figure for each route, without detai led
reference having to be made to the exact voyage and conditions
during negotiations.
Part I - Shipping's Economic Environment - 25
The present scale in use is Worldscale which replaced Intascale
and others developed since World War 2. Under Worldscale, a rate
of say W80 (i. e. 80 per cent of the basic rate) is intended to give
a shipowner the same dai ly return whether on a long voyage, such as
Arabian Gulf to Rotterdam (about 30 days) or a short voyage, say
North Africa to Trieste (about 3 days). It is thus possible for a
shipowner to know if a current market rate is 'good' or 'bad'
without making a full voyage estimate, as he knows the break-even
Worldscale rate for each of hi s ships. The actual money freight is
worked out later from a book of tables, published by the Worldscale
Association of London which lists virtually every likely voyage
between any two oi 1 ports and gives the W100 value. The latter is
derived from a ~ o m i n a l 19,500-ton dwt 14-knot diesel tanker to
give a daily return of $1800 after paying all voyage expenses, and
updated every six months. Although intended for voyage charters,
it is sometimes used to fix timecharters. The actual rate
negotiated for any given voyage depends on the market si tuation at
the time of the charter and the size of the ship - in general, the
larger the ship, the lower the rate.
Calculate the freight rate between the Arabian Gulf and N. W.
Europe, for a 50,000 ton dwt tanker at W80 via the Cape or via Suez
Canal, given the W100 rates.
W100 via Cape = $28.00
W80 = 0.80 x 28.00 = $22.40 per ton cargo
(or t17.23 at $1.30 = t1)
Actual income = $22.40 x say 55,000 tons cargo, less say
2.5% brokerage = $1,223,000
W100 via Suez loaded and ballast = $17.00 + 3.00 canal dues
W80 = 0.80 x 17.00 + 3.00 = $15.50 (or t12.77) per ton cargo
Actual income = 15.50 x say 57,000 tons cargo, less say
2.5% brokerage = $923,000
Note that the canal dues are not proportioned. Thus, although the
money freight is less going through Suez, the net daily earnings
will be more or less the same owing to the shorter voyage. Cargo
deadweight via the Cape would be about 1,000 tons less than via
Suez owing to larger bunkers required. The recent enlargement of
the Suez Canal now permits vessels of up to about 150,000 tonnes
deadweight fully loaded or about 380,000 tonnes in ballast.
The shipowner's responsibilities for the various items of
expenditure are illustrated in Figure 6. Capital charges cover
i terns such as loan interest and repayments, and profit, all
related to the capital investment in the ship. The full
calculation of effective capital charges can be complex, as
described in Part 11. Voyage costs cover fuel, port and canal
dues, and sometimes cargo handling charges. Daily running costs
are those incurred on a day-in, day-out basis whether the ship is
at sea or in port; these include crew wages and benefits,
victualling, ship upkeep, stores, insurance, equipment hire and
26 - Engineering Economics and Ship Design
administration. Voyage costs vary considerably from trade to
trade, while daily running costs are largely a function of ship
type, size and flag. Some guidance on estimating ship first costs
and operating costs is given in the Appendix.
t"E"" E"PEo<S£S .... 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 ......... .
R£Tulr; N A.FT£1It TA,c
l .. sUIl.ANc.e.
(DII"It":"Ar.o,", \.


I"'C.OME (AFTE'l O.. OUC.,.'ON DF B;z,QKact.'S CO""'....,I.SION)
AN"" T..... C."",,,,."Ea Mus.T T .... OWN£Iit..'S,
R.i.I...E.V'&'""-iT I ..... T"", .. L01'ooJG .... , A""c P'02o...."OE AN
AC.c.£P""dl,LE R 0 .. RtTU2..... 0 ..... H,s CAPIT'AL...
Fig.6 Division of Responsibility for Operating Costs

The type of charter and the di vi sion of responsibi li ty for cost and
ship's time between shipowner and charterer can influence some
features of the design of the ship and its equipment, e. g.
timechartered tankers may be designed to oil company
specifications. With bareboat charters less than the life of the
ship, the charterer has less incentive than an owner-operator to
reduce fuel consumption, while time in port is more significant
for owners of owner-operated or voyage chartered ships than for
timechartered ships. Owner operators may thus be expected to be
more forward-looking in fitting fuel saving devices or better
equipment to keep port turnrounds short, e. g. bow thrusters or
more elaborate cargo handling equipment. Owner operators often
have the highest standards of equipment and maintenance,
especially if ships are partly self-insured.
Part I - Shipping's Economic Environment - 27
From estimates of the components of ship operating costs and the
corresponding transport performance, it is possible to calculate
freighting costs for a variety of ships, bui 1t up in a manner
similar to that shown in Part Ill, pages 82-84. Figure 7 shows
calculated freighting costs for bulk carriers, excluding cargo
handling costs. I f relying on shore gear having a constant
handling rate, time in port is roughly proportional to size,
unlike tankers where time in port is almost independent of size.
Thus big ships are only economic where handling rates are
commensurate with size of ship - compare rates of 1,000 and 10,000
tonnes per day. Shore costs per tonne may increase wi th ship size,
as deeper dredging, more powerful tugs, faster cargo handling gear
and bigger stockyards are required. An indication of such effects
is shown in Figure 7 where the optimal size for 10,000 tonnes per
day handling rate is correspondingly reduced.
I 151<N(
\\ I

3000 Tpl'\ i
i ":::

I i
10 1Di, TPO IHI,! Pl US IHO
__1_ - -
- - i -
---- ----
1000e lPO IHI com
I lO ooe! IPO
100 1Di: 1PO
- -
SHORE COS 1S 1--- --
- --
- --
- -
- - --
20 &0 &0 100 120
TONHES OEAowmHl I 1000
HO 1&0 200 220 HO 21[
Fig.7 Bulk Cargo Freighting Cost.
Actual bulk cargo freight rates are regularly published in the
shipping press, shipbrokers' reports, etc. They vary with supply
and demand, and can be regarded as oscillating about a level of
freighting cost which gives the average efficient operator an
acceptable rate of return in the long run. However over-supply of
ships leading to long periods of low freight rates can occur owing
to, for example, very attractive shipbuilding loan terms. Such
influences are discussed in Ref .1.22, as is the background to
maritime economics generally. Table 5 indicates that different
economic forces apply to bulk as opposed to liner shipping.
28 - Engineering Economics and Ship Design
Ship Size
Ship Speed
Area of Operation
Type of Carrier
Nature of Cargo
Freight Rates
Scheduled Service
Mass or Volume
Ports Serviced
Day at Sea
per Annum
Own Cargo Handling
Penultimate Source
and Destination
Sma 11 - Med i um
(5000 - 25000 multi-deck)
(5000 - 50000 unit load)
Medi um - Fast
(15 - 26 k.nots)
Specific trade routes
Conference of member lines
Large number of small
Heterogeneous (general)
(Medium unit value)
Administered (level set
to cover costs)
Market shares
Quality of service
Non-conference lines
(constant speed ship)
Range of ports near
major cities
150-220 (multi-deck)
200-270 (unit load)
Yes (multi-deck)
Sometimes (unit load)
Medium - Large
(15000 - 550000)
(12 - 17 k.nots)
Independent or
industrial carrier
Sma 11 number of
large parcels
(often one only)
Homogeneous (bulk)
(Low unit value)
Negotiated (set
by supply &demand)
Price and delivery
(constant power
Usually mass except
certain cargoes and
SBT tankers
Usually one port
each end near
Usually none
except tankers,
and small er
bulk carriers
Part I - Shipping's Economic Environment - 29
30 - Engineering Economics and Ship Design
The general economic environment within which shipping operates
was discussed in Part I. Before considering how to integrate the
related economic factors into the technical design of ships, the
methods of making economic calculations which can be used to
evaluate alternative designs of freight earning vessels must be
taken into consideration. Note that the voyage estimate example
in Table 4 is not an evaluation of the design, but an evaluation of
the profi tabi li ty of one particular voyage for an exi sting ship at
one moment in time, as a basi s of compari son wi th others currently
offered on the market. Engineering economy calculations need to
take account of performance over longer periods.
Money has an appreciable time value. flOO to spend right now is of
more use than flOO not available for, say, ten years. or
reward must be paid if money is to be lent, to compensate the
lender for postponing spending it. The reward, or interest, is
fundamental to all economic calculations, whether or not money is
actually borrowed. Even if one has the cash in hand to buy, say, a
ship, one is foregoing the interest that could be obtained by
investing it in, say, a bank deposi t account.
Interest may either be contracted, e.g. the nominal rate paid on
bank loans, or a rate of return, which is the effective equivalent
interest rate generated by the excess of income over expenditure.
Interest may either be simple or compound, but nearly always the
The basic relationships are shown below using the following
nomenclature (standard notation of American Society for
Engineering Education with acknowledgements to Professor H.
Benford's publications and Ref. 1.5.4) .
A Annual return (e.g. income minus expenditure) or annual
repayment e. g. of principal plus interest) .
F A future sum of money.
P Principal (investment), or a present sum of money.
N Number of years (e. g. life of ship, period of loan) .
i Interest or discount rate per annum, decimal fraction
(percentage rate/lOO).
(Note that capi tal letters are used for absolute values, and lower
case for fractional values) .
Simple Interest
Total repayment after N years = P (1 + Ni)
Part 11 - Making Engineering Economy Calculations - 31
Compound Interest
Wi th interest compounded annually, total repayment F after N years
The Compound Amount factor (CA) is the multiplier to convert a
present sum into a future sum:
F = (CA) P
CA - ~ - (1 + i)N
Fig.S Compound Amount Factor and Present Worth Factor
The corresponding cash inflows and outflows over time can be
conveniently shown as in Figure 8.
Very occasionally, but rarely in the marine industries, interest
may be compounded at less than annual intervals. If interest is
compounded T times per year wi th the interest rate expressed
annually as i, then
For continuous compounding
CA = e
(The compound amount factors for annual and continuous compounding
do not differ very much:-
At 10% over 5 years,
At 10% over 20 years,
1.611 and 1.649 respectively
6.73 and 7.39 respectively)
The reciprocal of the compound amount factor is the Present Worth
factor (PW), and is the multiplier to convert a future sum into a
present sum. It is also called the discount factor.
P = (PW) F
py - ~ - h '"' (1 + i)-N
32 - Engineering Economics and Ship Design
The "present worth" of F (which includes accumulated interest) is
exactly the same as P, i. e. they are effectively egui valent. Owing
to its formulation, CA is always greater than 1; similarly PW is
always less than 1. Note that the present worth and compound
amount factors only apply to single future payments, not to a
If a loan is repaid by regular (e.g. annual) instalments of
principal plus interest, there are two common arrangements:-
(i) Principal repaid in equal instalments, and interest paid
on the declining balance: which is the usual method with
shipbui lding loans.
(ii) Uniform payments: which is the usual method for house
purchase loans, interest predominating in early years,
repayments of principal in later years; see Figure 9.
As the latter concept uses uniform payments, it enables a present
sum of money to be converted into an equivalent amount repaid
uniformly over a number of time periods, usually annual. Hence we
have a Capital Recovery factor (CR) which enables an ini tial
capital investment (say in a ship) to be recovered as an annual
capital charge, which includes both principal and interest. CR is
the ratio between this uniform annual amount (A) and the principal
(P) i.e. A = (CR) P. It can be shown from compound interest
relationships and the sum of geometrical progressions that:
A i (1 + i)N i
eR = w • or rewritten as
r (1 + i)N - 1 1 - (1 + i)-N

Fig.9 Capital Recovery Factor and Series Present Worth Factor
The reciprocal is the Series Present Worth factor (SPW), which is
the multiplier to convert a number of regular (annual) payments
into a present sum; also called annuity factor.
Part 11 - Making Engineering Economy Calculations - 33
P = (SPW) A
P 1 (1 + i)N - 1
SPI.J' .. or = ~ =
ft ",r-. i(1 + i)N
The recommended notation for capital recovery factor (or any of
the other factors) at i per cent for N years is (CR - i% - N). It
may be followed by the numerical value of the factor, e. g. i = 8 per
cent, N =15 years:-
(CR - 8% - 15) 0.1168
Note that the series present worth factor is numerically equal to
the sum of the individual annual present worth factors over the
life of the investment, so is very useful for dealing wi th uniform
cash flows, which can be used for many marine problems, at least in
preliminary evaluations.
Less commonly used in the marine industries, is the Sinking Fund
factor (SF) used to calculate the amount of money needed each year
(A) to repay an amount (e.g. a loan) in the future (Fig.lO) i.e.
A=(SF) F
A i
SF • Y = (1 + i)N _ 1
Fig.10 Sinking Fund Factor and Series Compound Amount Factor
34 - Engineering Economics and Ship Design
The reciprocal is the Series Compound Amount factor (SCA)
i.e. F = (SCA) A
1 F (1 + i)N - 1
SCA .. 'SY = A • - ' - - - " " i ~ - -
Note that SF = CR - i
SCA can also be used to find the total cash involved in a series of
regularly increasing amounts / e. g. the total of crew wages over 20
years, rising at 5 per cent compound per annum, is 33.1 times the
first year I s wages / as the SCA is 33.1.
Tables of Basic Interest Relationships
To simplify the calculations, the following tables are given for a
typical range of years and interest rates:
Table 6
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 the
basic relationships:-
Compound Amount factor (CA)
Series Present Worth factor (SPW)
Sinking Fund factor (SF)
== .::-
== SeA or CR - i
Part 11 - Making Engineering Economy Calculations - 35
YEAR 1 2 3 4 5 6 7 8 9 10
1 0.990099 0.980392 0.970874 0.961538 0.952381 0.943396 0.934579 0.925926 0.917431 0.909091
2 0.980296 0.961169 0.942596 0.924556 0.907029 0.889996 0.873439 0.857339 0.841680 0.826:'46
3 0.970590 0.942322 0.915142 0.888996 0.863838 0.839619 0.816298 0.793832 0.772183 0.751315
4 0.960980 0.923845 0.888487 0.854804 0.822702 0.792094 0.762895 0.735030 0.708425 0.683013
5 0.951466 0.905731 0.862609 0.821927 0.783526 0.747258 0.712986 0.680583 0.649931 0.620921
6 0.9'2045 0.887971 0.837484 0.790315 0.746215 0.704961 0.666342 0.630170 0.596267 0.564474
7 0.932718 0.870560 0.813092 0.759918 0.710681 0.665057 0.622750 0.583490 0.547034 0.513158
8 0.923483 0.853490 0.78H09 0.730690 0.676839 0.627412 0.582009 0.540269 0.501866 0.466507
9 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 0.385543
11 0.896324 0.804263 0.722421 0.649581 0.584679 0.526788 0.475093 0.428883 0.387533 0.350494
12 0.887449 0.788493 0.701380 0.624597 0.556837 0.496969 0.444012 0.397114 0.355535 0.318631
13 0.878663 0.773033 0.680951 0.600574 0.530321 0.468839 0.414964 0.367698 0.326179 0.289664
14 0.869963 0.757875 0.661118 0.577475 0.505068 0.442301 0.387817 0.340461 0.299246 0.263331
15 0.861349 0.743015 0.641862 0.555265 0.481017 0.417:65 0.362446 0.315242 0.274538 0.239392
16 0.852821 0.728446 0.623167 0.533908 0.458112 0.393646 0.338735 0.291890 0.251870 0.217629
17 0.844377 0.714163 0.605016 0.513373 0.436297 0.371364 0.316574 0.270269 0.231073 0.197845
18 0.836017 0.700159 0.587395 0.493628 0.415521 0.350344 0.295864 0.250249 0.211994 0.179859
19 0.827740 0.686431 0.570286 ·0.474642 0.395734 0.330513 0.276508 0.231712 0.194490 0.163508
20 0.819544 0.672971 0.553676 0.456387 0.376889 0.311805 0.258419 0.214548 0.178431 0.148644
21 0.811430 0.659776 0.537549 0.438834 0.358942 0.294155 0.241513 0.198656 0.163698 0.135131
22 0.803396 0.646839 0.521893 0.421955 0.341850 0.277505 0.225713 0.183941 0.150182 0.122846
23 0.795442 0.63.. 156 0.506692 0.405726 0.325571 0.261797 0.210947 0.170315 0.137781 0.111678
24 0.787566 0.621721 0.491934 0.390121 0.310068 0.246979 0.197:47 0.157699 0.126405 0.101526
25 0.779768 0.609531 0.477606 0.375117 0.295303 0.232999 0.184249 0.146018 0.115968 0.092296
30 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 30
1 0.900901 0.892857 0.884956 0.877193 0.869565 0.862069 0.847458 0.833333 0.800000 0.769231
2 0.811622 0.797194 0.783147 0.769468 0.756144 0.743163 0.718184 0.694444 0.640000 0.591716
3 0.731191 0.711780 0.693050 0.674972 0.657516 0.640658 0.608631 0.578704 0.512000 0.455166
4 0.658731 0.635518 0.613319 0.592080 0.571753 0.552291 0.515789 0.482253 0.409600 0.350128
5 0.593451 0.5&7427 0.542760 0.519369 0.497177 0.476113 0.437109 0.401878 0.327680 0.269329
6 0.534641 0.506631 0.480319 0.455587 0.432328 0.410442 0.370432 0.334898 0.262144 0.207176
7 0.481658 0.452349 0.425061 0.399637 0.375937 0.353830 0.313925 0.279082 0.209715 0.159366
8 0.433926 O• .. 03883 0.376160 0.350559 0.326902 0.305025 0.266038 0.232568 0.1677i2 0.122589
9 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 0.072538
11 0.3172n 0.287476 0.260698 0.236617 0.214943 0.195417 0.161919 0.134588 0.085899 0.055799
12 0.285841 0.256675 0.230706 0.207559 0.186907 0.168463 0.137220 0.112157 0.068719 0.042922
13 0.257514 0.229174 0.204165 0.182069 0.162528 0.145227 0.116288 0.093464 0.054976 0.033017
14 0.231995 0.204620 0.180677 0.159710 0.141329 0.125195 0.098549 0.077887 0.043980 0.025398
15 0.209004 0.182696 0.159891 0.140096 0.122894 0.107927 0.083516 0.064905 0.035184 0.019537
16 0.188292 0.103122 0.141496 0.122892 0.106865 0.093041 0.070776 0.054088 0.028147 0.015028
17 0.169633 0.1 .. 5644 0.125218 0.107800 0.092926 0.080207 0.059980 0.045073 0.022518 0.011560
18 0.152822 0.130040 0.110812 0.094561 0.080805 0.069144 0.050830 0.037561 0.018014 0.008892
19 0.137678 O. 116107 0.098064 0.082948 0.070265 0.059607 0.043077 0.031301 0.014412 0.006840
20 0.124034 0.103067 0.086782 0.072762 0.061100 0.051385 0.036506 0.026084 0.011529 0.005262
21 0.111742 0.092560 0.076798 0.063826 0.053131 0.044298 0.030937 0·021737 0.009223
22 0.100669 0.082643 0.067963 0.055988 0.046201 0.038188 0.026218 0.018114 0.007379 0.003113
23 0.090693 0.073788 0.0601 .. 4 0.049112 0.040174 0.032920 0.022218 0.015095 0.005903 0.002395
24 0.081705 0.065882 0.053225 0.043081 0.034934 0.028380 0.018829 0.012579 0.004722 0.0018 .. 2
25 0.073608 0.058823 0.047102 0.037790 0.030378 0.024465 0.015957 0.010483 0.003778 0.001417
30 0.043&83 0.033378 0.025565 0.019&27 0.015103 0.011&48 0.00&975 0.004213 0.001238 0.000382
36 - Engineering Economics and Ship Design
TEAl 1 2 J 4 5 6 7 8 9 10
1 1.010000 1.020000 1.030000 1.040000 1.050000 1.060000 1.070000 1.080000 1.090000 1.100000
2 0.507512 0.515050 0.522611 0.530196 0.537805 0.545437 0.553092 0.560769 0.568469 0.576190
3 0.340022 0.346755 0.353530 0.360349 0.367209 0.374110 0.381052 0.388034 0.395055 0.402115
4 0.25b281 0.262624 0.269027 0.275490 0.282012 0.288591 0.295228 0.301921 0.308669 0.315471
5 0.206040 0.212158 0.218355 0.224627 0.230975 0.237396 0.243891 0.250456 0.257092 0.263797
6 0.172548 0.118526 0.18'0598 0.190762 0.197017 0.2033b3 0.209796 0.216315 0.222920 0.229607
7 0.148628 0.154512 0.160506 0.166610 0.172820 0.179135 0.185553 0.192072 0.198691 0.205405
8 0.130690 0.13b510 0.142456 0.148528 0.154722 0.161036 0.167468 0.174015 0.180674 0.187444
9 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 0.162745
11 0.096454 0.102178 0.108077 0.114149 0.120389 0.126793 0.133357 0.140076 0.146947 0.153963
12 0.088849 0.0945b0 0.100462 0.106552 0.112825 0.119277 0.125902 0.132695 0.139651 0.146763
13 0.082415 0.088118 0.094030 0.100144 0.10645b 0.112960 0.119651 0.126522 . 0.1335b7 0.140779
14 0.076901 0.082602 0.088526 0.094669 0.101024 0.107585 0.114345 0.121297 0.128433 0.135746
15 0.072124 0.077825 0.083H7 0.089941 0.090342 0.102963 0.109795 0.116830 0.124059 0.131474
16 0.067945 0.073b50 0.079611 0.085820 0.092270 0.098952 0.105858 0.112977 0.120300 0.127817
17 0.064258 0.069970 0.075953 0.082199 0.088699 0.095445 0.102425 0.109629 0.117046 0.124664
18 0.060982 0.066702 0.072709 0.078993 0.085546 0.092357 0.099413 0.106702 O. 1142 j 2 0.121930
19 0.058052 0.063782 0.069814 0.OH139 0.082745 0.089621 0.096753 0.10412R O. 111730 0.119547
20 0.055415 0.061157 0.067216 0.073582 0.080243 0.087185 0.094393 0.101852 0.109546 0.117460
21 0.053031 0.058785 0.064872 0.071280 0.077996 0.085005 0.092289 0.099832 0.107617 0.115624
22 0.050864 0.05b631 0.062747 0.009199 0.075971 0.0830106 0.090406 0.098032 0.105905 0.114005
23 0.048886 0.054668 0.060814 0.067309 0.074137 0.081278 0.088714 0.096422 0.104H2 0.112572
24 0.047073 0.052871 0.059047 0.065587 0.072471 0.079679 0.087189 0.0949H 0.1030:3 0.111300
25 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 30
1 1.110000 1.120000 1.130000 1. 140000 1.150000 1.160000 1.180000 1.200000 1.250000 1.300000
2 0.583934 0.591698 0.599484 0.607290 0.615116 0.622963 0.638716 0.654545 0.69444" 0.734783
3 0.409213 0.416349 0.423522 0.430731 0.437977 0.445258 0.459924 0.474725 0.512295 0.550627
4 0.322326 0.329234 0.336194 0.343205 0.350265 0.357375 0.371739 0.386289 0.423442 0.461629
5 0.270570 0.277410 0.284315 0.291284 0.298316 0.305409 0.319778 0.334380 0.371847
6 0.236377 0.243226 0.250153 0.257157 0.264237 0.271390 0.285910 0.300706 0.338819 0.378394
7 0.219118 0.226111 0.233192 0.240360 0.247613 0.262362 0.277424 0.316342 0.356874
8 O. 0.201303 0.208387 0.215570 0.222850 0.230224 0.245244 0.260609 0.300399 0.341915
9 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) 0.323463
1 1 0.161121 0.1&8415 0.175841 0.183394 0.191069 0.198861 0.214776 0.231104 0.273493 0.317729
12 0.154027 0.161437 0.168986 0.176669 0.184481 0.192415 0.208!>28 O. 0.268448 0.313454
13 0.148151 0.155677 0.163350 0.171164 0.179110 0.187184 0.203686 0.220620 0.264543 0.310243
14 0.143228 0.150871 0.158667 0.166609 0.174688 0.182898 0.199678 0.216893 0.261501 0.307818
15 0.139065 0.146824 0.15"'42 0.16lS09 0.171017 0.179358 0.196403 0.213882 0.259117 0.305978
16 0.135517 0.143390 0.151426 0.159615 0.1f>7948 0.176414 0.193710 0.211436 0.257241 0.304577
17 O.1!2"1 0.140457 0.148608 0.156915 0.165367 0.173952 0.191485 0.209440 0.255759 0.303509
18 0.129843 0.137937 0.146201 0.154621 0.163186 0.171885 0.189639 0.207805 0.254586 0.302692
19 0.127563 0.1357&3 0.144134 0.152663 0.161336 0.170142 0.188103 0.20&462 0.253656 0.3020H
20 0.125576 0.133879 0.142354 0.150986 0.159761 0.168667 0.186820 0.205357 0.252916 0.301587
2 I 0.123838 0.132240 0.140814 0.149545 0.158417 0.167416 0.185746 0.204444 0.252327 0.301219
22 0.122313 0.130811 0.139479 0.148303 0.157266 0.166353 0.184846 0.203690 0.251858 0.300937
23 0.120971 0.129560 0.138319 0.147231 0.156278 0.165447 0.154090 0.203065 0.251485 0.300720
24 0.119787 0.128463 0.137308 0.146303 0.155430 0.164673 0.183454 0.202548 0.251186 0.300554
25 0.118740 0.127500 0.136426 0.145498 0.154699 0.164013 0.182919 0.202119 0.250948 0.300426
30 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
YEAR I 2 3 4 5 6 7 8 9 10
1 1.000 1.000 1.000 1.000 1. 000 1. 000 1.000 1.000 1.000 I. 000
2 2.010 2.020 2.030 2.040 2.050 2.060 2.070 2.080 2.090 2. 100
3 3.030 3.060 3.091 3. 122 3. 153 3.J84 3.215 3.246 3.278 3.310
4 4.060 4. 122 4.184 4.246 4.310 4.375 4.440 4.506 4.573 4. b4 I
5 5. 101 5.204 5.309 5.416 5.526 5.637 5. 751 5. 867 5.985 1>. 105
6 6. 152 6.308 6.468 6.633 6.802 6.975 7. 153 7.33!> 7.52 J 7. 7 1b
7 7.214 7.434 7.662 7.898 1.142 1.394 8.654 8. 923 9.200 9. 487
8 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 15.937
1 1 11.567 12.169 12.808 13.486 14.207 14.972 15.784 1&.645 17.560 18. 531
12 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. 953 210.523
14 14.947 15.974 17.086 18.292 19.599 21.015 22.550 H.215 H.019 27,975
15 16.097 17.293 18.599 20.024 21.579 23.276 25.129 27.152 !9. 30 I 31.772
16 17.2H 18.639 20.157 21.825 23.657 25.673 27.888 30.324 33.003 35.950
17 18.430 20.012 21. 762 23.698 25.840 28.213 30.840 33.750 36.974 40.545
18 19.615 21.412 23.414 25.645 %8.132 30.906 33.999 37.450 41.301 45.599
19 20.811 22.841 25. 117 27.671 30.539 33.760 37.379 41.446 46.018 5LI59
20 22.019 24.297 26.870 29.778 33.066 36.786 40.995 45.762 51.160 57.275
2 I 23.239 25.783 28.676 31.969 35.719 39.993 44.865 50.423 56.765 64.002
22 24.472 27. 299 30.537 34.248 38.505 43.392 49.00b 55.457 62.873 71.403
23 25.716 28.845 32.453 36.618 41.430 46.996 53.436 60.893 69.532 79.543
24 26.973 30.422 34.426 39.083 44.502 50.816 58.177 66.765 76.790 88.497
25 28.243 32.030 36.459 41.646 47.727 54.865 63.249 73.106 84.701 98.347
30 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 30
1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
2 2. 110 2. 120 2. 130 2.140 2. 150 2. 160 2.180 2.200 2.250 2.300
3 3.342 3.374 3.407 3.440 3.472 3.506 3.572 3.640 3.812 3.990
4 4.710 4.779 4.850 4.921 4.993 5.066 5.21 5 5.368 5. 766 6.187
5 6.228 6.353 6.480 6.610 6.742 6.877 7. 154 7. 442 8. 207 9.043
6 7. 913 8. 1 1 5 8.323 8.536 8.754
9.442 9.930 11.259 12.756
7 9.783 10.089 10.405 10.730 11. Ob 7 11.414 12. 142 12.916 15.073 17,583
8 11.859 12.300 12.757 13.233 13.727 14.240 15.327 16.499 19.842 23.858
9 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 42.619
1 1 19.561 20.655 21.814 23.045 24.349 25.733 2A. 755 32.150 42. 56b 56.405
12 22.713 24. 133 25.b50 27.271 29.002 30.850 H. 931 39.581 54.208 74.327
13 26.212 28.029 29.985 32.089 34.352 36. 786 42.219 48.497 68.760 97,625
14 30.095 32.393 34.883 37.58 I 40.505 43.672 50.818 59.19b 8b.949 127,913
15 34.405 37. HO 40.417 43.842 47.580 51.660 60.965 72.035 109.687 167.2Rb
16 39.190 42.753 46.672 50.980 55.717 60.925 72.939 87. 442 138.109 218.472
17 44.501 48.884 53.739 59.118 65.075 71.673 87.068 105.931 173.636 285.014
18 50.396 55.750 61.725 68.394 75.836 84.141 103.740 1H. 117 218.045 37L518
19 56.939 63.440 70.749 78.91>9 8lI.212 98.603 123.414 154.740 273.556 483.973
20 64.203 72.052 80.947 91.025 102.444 115.3H0 146. 628 181>.688 342.945 630.165
21 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 10b7.2AO
23 91.146 104.603 120.205 136.297 IB.27& 183.&01 244.487 32&.237 673.626 1388.4b4
24 102.174 116.155 136.831 158.&59 184.1 lIB 213.978 289.494 392.484 843,033 180b.003
25 114.413 133.334 155.620 181.871 212.793 249.214 342.603 471.961 1054.791 2346.803
30 199.021 241.333 293.199 356.787 434.745 530.312 790.948 1181.882 3227.174 8729.985
38 - Engineering Economics and Ship Design
Figure 11 shows the relationship between CR, SPW, Nand i. It can
be seen that CR > i (except for N = ., when CR = i) and that eR < 1
and SPW > 1 (except for N =1), and that SPW < N.
40 '2·5
~ 28
w ... , ~ "
" a: ~
-: 4
a: 2lo
... , ~ "
U \
. ~
~ 20 5
" . ~ "
a: l1.
..J 16
~ " . ~ ' " '
- lr
.. '"'
• 9
~ ... ,,'i-'"
"H- .
.... ---+----
' ~ 5
... 20
28 4 o
8' 12 16 20 24
Fig.ll Capital Recovery Factor vs Interest Rate
The Use of Basic Interest Relationships
Interest relationships make allowances for the time value of money;
and the life of the investment and may be used' to convert an
investment (e. g. cost of a ship) into an annual amount which, when
added to the annual operating costs, may be used to determine the
necessary level of income to give any required rate of return.
Al ternatively, where annual cash flows are known, the
relationships can convert them into present worths, which may be
Part 11 - Making Engineering Economy Calculations - 39
added together to give Net Present Worths (or Values) (NPV), for
compari son wi th the amount of the investment. The future cash
flows are discounted (the converse of 'compounded'), hence the
common name of Discounted Cash Flow calculations (DCF). For an
investment to be worthwhi le, the present worth of the cash flows of
income minus expenditure should be greater than the investment,
taking inflows as posi tive, and outflows as negative, i. e. NPV
should be positive, as discussed in more detail on page 44. Cash
flow implies money moving in and out of the company's bank account,
i . e" not purely bookkeeping transactions.
The examples that follow have been deliberately simplified to
illustrate the basic interest relationships, but such an approach
is still useful, both for general understanding, and as a tool at
the preliminary stage of evaluating alternative investments, e.g.
to eliminate the least promising candidates. It is useful to
sketch the cash flow patterns as shown in Figure 12.
Example (i)
A package of control equipment for an i tern of ship's machinery
comes in two models: a heavy duty model costing £40,000 which will
last the 16-year life of the ship and a standard model costing
£26,000 which lasts 8 years. Which model offers the lower cost
over the ship's life, if maintenance and operating costs are the
same for both models? Assume 12 per cent opportunity cost of
capi tal, i. e. the owner wants as good a rate of return as is
avai lable to him in other investment opportuni ties.
Cash flows shown in Figure 12 (i) must be converted for both options
to present worths by use of the present worth factor.
Option (1)
Pay £40,000 now:
Present Worth = £40,000
Option (2)
Pay £26,000 now, plus £26,000 in 8 years
Present Worth = 26000 + (PW - 12% - 8) x 26000
26000 + (1 + o. 12 to x 26000
= 26000 + 0.404 x 26000
= £36,500
Thus the standard model has the lesser effective cost over the
ship's life. The cost of the replacement standard model would have
to rise to over £34,660 before the heavy duty model has a lesser
present worth, because:
26000 + 0.404 X ~ 40000
X ~ £34,660
Example (ii)
In order to encourage initial sales, the manufacturer of a novel
type of deck crane offers a 'buy now, pay later' deal. The
equipment would cost £120,000 if purchased now, but the
manufacturer is willing to accept instead a lump sum of £130,000
, 40 - Engineering Economics and Ship Design
paid in three years' time. What rate of interest is implied? Does
it look a good deal financially? See Fig .12 (ii) .
Present sum P = 120000
Future sum F = 130000
Compound amount factor =
= 1/SPW)
46,000 =f339,000
= f300, 000
= +f39,OOO
For N • 3
130000 3
120000 • (1 + i)
1 + i = 1. 027
i = 2.7%
This is appreciably less than the rate of interest likely to be
paid for borrowed money, so looks a good deal.
E:mmple (Hi)
In a new diesel propelled bulk carrier, fitting of an exhaust-gas
waste-heat generating plant to provide electrical power at sea is
estimated to cost f300,OOO more than the equivalent system using
only diesel alternators. The equipment reduces auxi li ary fuel
consumption by 1.0 tonne per day at sea, with fuel assumed to cost
f200 per tonne. If the ship operator expects the ship to spend
230 days at sea a year, and is looking for a rate of return over the
16-year life of the ship of at least 11% on the extra capi tal, does
the equipment look a good investment? As a first approximation, it
may be assumed that differences in maintenance costs, weight and
space are negligible. See cash flow pattern in Figure 12 (iii).
Daily saving in fuel cost = 1.0 x 200 = 200
Annual saving = 200 x 230 = f46,OOO
Series present worth factor for 16 years at 11%
(SPW - 11% - 16) = 7.38
(calculate or from Table 7 for CR
Present value of savings = 7.38 x
Present value of extra investment
Net 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 recovery
Annual saving (A)
Initial investment (P)
eR = AlP
= 46,000
= 300,000
= 46,000/300,000 = 0.1533
By solving for i in the equation for CR, or interpolating in Table 7
for a 16-year life, the actual rate of return is found to be about
Part 11 - Making Engineering Economy Calculations - 41
(eR - 10% - 15) •
It would also be wise to repeat the calculation with different
assumptions, e.g. fuel price or daily saving of fuel, to see
whether any likely change would greatly affect the profitability
of the investment (lower fuel prices and/or fewer days at sea a
year would reduce the rate of return). It would thus be worth
going ahead with an engineering evaluation of the technical
influence of such an installation on machinery space layout,
weight, maintenance and reliability, to be followed by a final
economic evaluation when detailed costs and performance are known.
E:romple (iv)
A flag-of-convenience shipowner buys a 200,000 tonne d.w. bulk
carrier for f30M cash (i.e. no loans or taxes). He is offered a
15-year timecharter by a steel company. What is the minimum hire
per tonne deadweight per month that he would accept to obtain at
least 10 per cent rate of return? Assume 11.5 months trading per
The income must be at such a level as to cover operating costs and
capital charges, the latter repaying principal plus interest.
Fig.12 (iv) shows the cash flow pattern.
Assumed annual running costs =f2000000
Capital recovery factor for 15 years at 10 per cent:
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 = 3945000
Annual cash flow required = 2000000 + 3945000 = 5945000
Assume a timecharter rate of T pounds per tonne d.w. per month
Annual income = 200000 x 11.5 x T
For minimum rate, T. 5945000
200000 x 11.5
• £2.58 or $3.36 at £1 • $1.30
E:romple (v)
Problem (iv) could be reversed: given the timecharter rate, say
£2.50, what is:-
(a) Rate of return for a given ship price, say f29M.
Annual income = 200000 x 11.5 x 2.50
Annual expenditure
Net annual cash flow, A
Capital recovery factor = AjP
42 - Engineering Economics and Ship Design
= 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 terati ve
solution, i=9.7%.
(b) Maximum price payable for the ship to obtain the required rate
return, say 10 per cent.
From (a), net annual cash flow =3750000
The present worth of a series of uniform cash flows is given by
SPW x A. Therefore an investment of this amount will provide a
10% rate of return.
Series present worth factor = l/CR = 1/0.1315 = 7.605.
Maximum price payable =7.605 x 3750000 =f.28,517,OOO.

ZIoOOO t .. ooo
Ft" 12 I i)
f1U.12 Iii I
200000 ~ 11-1_ "t [At'" YIA&..
o r-W...l..l...L..J.J....l..l...l....J....'...l..l...L..l..._
o rl-++++++-H+1-+-H-+--
Z 000 000 E A ~ " 'ttA"
FlU 12 Ii ii)
Fig.12 Cash Flows in Examples
SO 1160 000
Ft G12 (i,)
Part 11 - Making Engineering Economy Calculations - 43
Examples (iv) and (v) on pages 42-43 showed that there was more
than one way of looking at a particular problem. These showed four
factors, and having been given three, we had to calculate the
fourth. The factors were:-
1. Rate of return
2. Freight rate (timecharter rate in the example)
3. Permissible price for ship
4. Net present value (NPV)
The last was not stated explici tly, but in structuring the problem
to find the minimum values, we were implying that the present
worths of income and expenditure were equal so that their Net
Present Worth or Value was zero. The numerical results were
different in each case depending on what information was being
processed, but if being used to compare alternative ship designs
as in this case, all would have indicated the same optimal design
if data were consistent, e.g. rates of return were commensurate
wi th freight rates.
The most important economic criteria for marine problems can be
summari sed as:-
(i) Net Present Value (NPV)
If we know the acquisition cost of a ship, the required rate of
return on the capi tal invested (or di scount rate), all the
operating costs each year, the cargo quantity transported each
year and the corresponding freight rate (i.e. annual income), we
can calculate the present worth of each i tern of income and
expenditure and add them to find the Net Present Value. If cash
flows are not uniform, the present worth of each annual cash flow
can be calculated for each of the N years of the ship's life, often
in tabular form as shown on page 50.
The general form of calculating NPV for freight earning vessels
PW (annual c. argo quantity x freight rate)]
- PW (annual operating costs)
- PW (ship acquisition costs)
Typically the result will be expressed as pounds, dollars etc, at
today's prices. If the cash flows are uniform over the ship's
life, series present worth factors provide a useful short cut:-
NPV = SPW (annual cargo quantity x freight rate - annual
operating costs) - ship first cost.
One may regard NPV as an instantaneous capi tal gain if posi tive (or
loss, if negative, thus reducing the net wealth of the company), or
as a discounted profit, or the sum for which the total project
could be sold at its start. Consequently designs wi th the highest
NPVs are sought. In the U. S., NPV is sometimes called the "venture
44 - Engineering Economics and Ship Design
worth". Where no income is generated, NPV is still a useful
measure, but will of course always be negative.
(ii) Required Freight Rate (RFR)
The Required Freight Rate is the freight income needed per uni t of
cargo to cover all operating costs and provide the required rate of
return on the capi tal invested in the ship. I f we know the
acquisition cost of a ship, the required rate of return, all the
operating costs and the annual cargo quantity transported, we can
find the level of freight rate which produces equal present worths
of income and expendi ture, i. e. zero NPV. In general:
~ J (annual operating costs) + PW (ship acquisition cost)]
annual cargo quantity
For uniform cash flows, a useful simplification is possible:-
RFR _ annual operating costs + eR (ship first cost)
annual cargo quantity
The RFR can be regarded as a calculated freighting cost, which can
then be compared wi th actual frei ghting price, i. e. market frei ght
rates. It is thus likely to have units such as pounds per tonne,
dollars per cubic metre etc. For service vessels, RFR may be
calculated in the form of necessary daily hire rate, e.g. for
offshore craft like crane barges. In general, the design wi th the
lowest RFR is best. RFR can sometimes be referred to as a "shadow
For non-uniform cash flows, an initial freight rate has to be
assumed so that an initial NPV can be calculated as in (i) above.
This NPV is unlikely to be zero, so an iterative procedure has to
be used to find the exact freight rate which gives zero NPV.
A rather similar cri terion is the Average Annual Cost (MC), which
excludes the denominator Cargo Quantity. For uniform cash flows,
it is simply: annual operating costs + CR (ship first cost).
Minimum AAC can then be used as a criterion where no income is
generated, e.g. some service vessels, or for items of alternative
equipment which do not affect revenue earning potential.
( i i i) Internal Rate of RetlU'n (lRR) or Yield
In cases where the freight rate or income is known, we can
calculate the Internal Rate of Return, (also called Discounted
Cash Flow Rate of Return, Yield, or Equivalent Interest Rate of
Return, or Investor's Method), which is that discount rate which
gi ves zero NPV. Designs offering the highest IRR are sought. NPV
is calculated as in (i) for an assumed di scount rate, and an
iterative procedure used to find the rate giving zero NPV. There
are also various extensions to the basic method to cater for
special situations.
Part 11 - Making Engineering Economy Calculations - 45
Capital recovery factor is analogous to IRR, and can be used
instead in uniform cash flow situations with equal lives. In the
relationship for CR (see page 33), i is the IRR, but is only equal
to CR when N = CD.
(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 (or
freight rate and cargo tonnage), it may be required to calculate
the maximum permissible price which can be paid for a ship (or
piece of equipment) and still yield a specified rate of return, or
specified NPV. Except for cases where the ship is purchased by a
single payment, an i terative solution is required.
Choice Of Economic Criterion
Net Present V ~ u e is widely used as a criterion especially where
investment funds are limited, but it is best used in those cases in
which income can be predicted reasonably confidently, e.g.
long-term timecharters. It has the computational meri t of being a
single calculation not requiring an iterative solution. A
drawback to its use is interpretation of the results. One
investment may have a NPV of f400, 000 and another f100, 000 but the
former is not four times more valuable than the latter; it is
simply f300,OOO higher. The differences are absolute, not
relative, and this can make comparison of widely different
alternatives difficult. This may be partially overcome by the Net
Present Value Index (NPVI) introduced by Benford (Ref .1.5.2) which
divides the NPV by the investment, producing a ratio which can be
used to compare investments differing greatly in absolute size,
e. g. coastal tankers versus very large crude oil carriers.
Al ternati vely a Profi tabi li ty Index may be calculated: NPV of cash
inflows/NPV of cash outflows. There still remains the problem of
compari son when NPVs are c lose to zero or negative, and of
forecasting income in a fluctuating business like shipping. NPVI
used as a measure of merit is analogous to IRR, since it is
effectively a 'profi t' divided by first cost. See page 52 for
choice of discount rate in NPV calculations.
Required Freight Rate is useful in the many cases where incomes are
unknown. In an internationally competitive business like
shipping, rates of return oscillate about a long-term trend, and
over a ship's life it is not unreasonable to expect that freight
rates will provide a return on an efficient ship tending to the
average trend. If this did not occur, shipowners would not
reinvest in new tonnage, demand would ul timately exceed supply and
produce its own correction in the form of higher freight rates,
unless there is too much non-commercially run tonnage available
(e. g. state supported fleets). Freight rates do not remain
permanently in peaks or troughs so it would be unwise to design
ships with, say, speeds based on extreme levels. RFR is
particularly useful when comparing alternative ship sizes, as a
single freight rate cannot be expected to apply to all sizes - the
market ensures that economies of scale are eventually passed on to
46 - Engineering Economics and Ship Design
the consumer. RFR can be compared with predicted market rates to
see if the results appear realistic. Low discount rates may lead
to over-design, e. g. ships faster than is 'economic', since
capi tal cost is being assessed more 'cheaply' than operating
costs. High discount rates may result in required freight rates so
high as to be unattainable under normal market conditions, so the
design is likely to be uncompetitive in the sense of being able to
find business.
Average Annual Cost is analogous to RFR where the alternatives
have equal transport capability, and can be also used for items of
equipment which do not affect a ship's earning potential.
Internal Rate of Return gives a more recognisable comparison between
Widely different alternatives, especially where funds available
for investment are relatively unrestricted, e.g. how do tankers,
pipelines, refineries or filling stations compare as oil company
investments, and how do they compare with the return on
alternatives like Government stocks or some other yardstick? It
is a useful method for additional pieces of equipment, especially
those not significantly affecting a ship's income, where it can be
measured against some target rate of return for the degree of ri sk
involved (see below) .
Like NPV, there is the problem of forecasting income, but in
addi tion, IRR is not related to the absolute amount of the
investment. For example, is a 20% return on a f1M investment
(f200,000) to be regarded as 'better' than a 15% return on a f2M
investment (f300, OOO)? Are two investments of f1M feasible and of
equal ri sk to one of f2M? IRR is, however, not the same as the
profit on historic capital shown in a company's accounts, but is
more like the rate of return on a fixed interest rate investment
like a government stock. In general, the design with maximum CR
will be that with the highest IRR, if lives are equal. In theory,
there will be multiple solutions to the calculation of IRR where
cash flows alternate in sign, but this is not often a problem in
marine work. (See Ref. 1.15) .
Incremental rate of return is a variant which calculates the IRR on an
addi tional investment, e. g. an extra piece of equipment on a ship,
or the difference between two projects' cash flows to show whether
the rate of return on this' incremental' investment is at least as
high as that on the basic ship. In this case, only the cash flows
and extra first cost associated with the 'increment' are used in
calculating the rate of return, so simplifying the appraisal, as
6A/6P -+ CR' -+ i' .
Permissible price can be used when assessing newbui lding prospects or
the purchase of second-hand ships, comparing this price against
current ship prices and expected freight rates. It can also be
used to assess new items of machinery or equipment, whose
operational costs and savings can be estimated.
Part 11 - Making Engineering Economy Calculations - 47
h .. SU.'''IC.t(looJ1'
D4'1'/II.. FoR
C. .... C.ULATtOW
CAL t.1.IL..AT E
Fig.13 Decision Chart for Choice of Economic Criterion
Figure 13 shows the normal circumstances under which one of the
criteria may be selected for ships, according to the amount of
information known. The engineer's task is primarily that of
selecting the best alternative, leaving to management the problem
of whether to invest at all and if so, when. In the marine field, ,
where it is not always possible to predict income over the life of
a ship, the author's preference is for Required Freight Rate as a
basic cri terion for comparing al ternati ve ship designs. In the
case of closely competing alternatives, a range of assumed freight
rates may then be taken, so that NPVs and IRRs can be calculated to
see whether the order of merit of the al ternati ve designs
indicated by RFR is changed. This can be useful where there is a
range of designs, whose characteristics are gradually altered,
rather than in discrete steps, e.g. selecting ship speed, rather
than alternative machinery types. Where equipment, rather than
the entire ship, is being considered, income may take the form of
cost savings,. and IRR (or incremental rate of return) is a useful
cri terion - especially where ship performance is not significantly
affected, e. g. speed, payload, or port time.
The criterion of payback period is sti 11 sometimes used in industry.
This is the number of years it takes the net revenue (income -
expenditure) to accumulate to the level where it equals ('pays
back') the investment. While payback period is numerically equal
to SPW for uniform cash flows, (PIA), the value of i should still be
calculated for the appropriate N. A variant calculates the number
of years before the discounted net revenue equals the investment.
This is analogous to rate of return, but solving for N instead of i.
Payback period should not be used for non-uniform cash flows, as
all variation in income and expenditure for years beyond the
payback period is completely ignored, taking little account of
cost escalation or change in performance with time. Its use as a
primary criterion is therefore not recommended, but it can be
presented as a supplementary result or a simple shorthand for
results derived more rigorously, especially if the result is
attractively small!
48 - Engineering Economics and Ship Design
Even if non-economic factors are the primary reason for purchasing
a ship in the first place, e.g. national prestige, technical and
economic criteria still have their place in assisting the
selection of the best of the alternative ship designs, machinery
and equipment.
Although it is possible to make good use of the uniform cash flow
relationships in preliminary calculations and obtain results of
about the correct order of magni tude, cash flows in most practical
cases of ship investment are not uniform. The most important of
these irregular cash flows are:-
(i) Loans for less than the life of the ship
(ii) Differing relative rates of growth in main items of
income and expendi ture (escalation)
(iii) Tax allowances for (capital) depreciation and loan
(iv) Subsidies.
Other variations occur but, although altering the absolute values
in the economic calculations, are unlikely to change significantly
the relative values ('ranking') between alternative designs, as
they tend to affect all designs in a similar manner. The
variations would have to be taken into account where the
differences in the designs affect one particular factor, e. g.
different scrap values between steel, aluminium and GRP hulls.
(v) Scrap value
(vi) Irregular pattern of building instalments
(vii) Special surveys or major overhauls
appreciable cost and time out of service
(viii) General decrease of speed wi th increasing age
(ix) Long term charters less than ship's life.
Al though corrections may be applied to the uniform cash flow cases
to cater for some of the items quoted, the more general procedure
is to make complete year by year calculations. A table is
constructed to show for each year of life, the items of income and
expendi ture generating a before-tax cash flow. After making
allowances for tax, the after-tax cash flows are multiplied by
each year's present worth factor, and totalled to give the
discounted cash flow over the ship's life and a resulting NPV.
Part 11 - Making Engineering Economy Calculations - 49
Example of Discounted Cash Flow Tabular Calculation
Consider a 40,OOO-tonne deadweight oil products carrier bought by
a flag-of-convenience shipowner, for a total of i18,OOO,000 cash.
It is operated on a five-year timecharter at i9. 00 per tonne
deadweight per month after commissions, and then sold for
i13, 000,000 cash. Assume that crew costs are i700, 000 in the first
year, rising by 10% per annum and other operating costs are fixed
at i600,OOO per annum. Calculate NPV at 10% discount rate to
assess whether the investment is profi table.
Assume 11.5 months trading per annum:
Annual income = 40000 x 9.00 x 11.5
= i4140000
Present worth factor = (1 + 0.10)-N
Year Ship Crew Other Income Cash PW DCF
Cost Cost Costs Flow 10%
0 -18000 -18000 1.000 -18000
1 -700 -600
+4140 +2840 0.909 +2582
2 -770 -600
+4140 +2770 0.826 +2288
3 -847 -600
+4140 +2693 0.751 +2022
4 -932 -600 +4140 +2608 0.683 +1781
5 -1025 -600 +4140 +2515 0.621 +1562
6 +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) the
ship is 'profitable', having a positive cash flow of i8,426,OOO,
the yield is less than 10% because the NPV is negative. This
investment is thus less profitable than others which induced the
shipowner to set a 10% rate of return as target. The actual rate of
return is found by iterating the last two columns wi th 9% di scount
rate: about 9.4%.
The previous example shows how increasing costs reduce the
profitability of an investment .. During the years of industrial
expansion of the post-war period, the price of every commodi ty and
service increased significantly, although previously, rapid
inflation was a feature mainly of wartime periods. Up until about
1970, there was an underlying rate of inflation of about 2-5 per
cent per annum in most developed countries, i.e. to maintain the
purchasing power of money in real terms, money prices had to rise
by, say, 4 per cent. This was an average rate: some prices rose
more, some less (e.g. crew wages rose by about 8 per cent p.a. in
money terms for many years, which was about 4 per cent p. a. in real
50 - Engineering Economics and Ship Design
terms) . Oil fuel prices, however, generally remained roughly
static, i. e. falling at up to about 4 per cent p. a. in real terms.
During the 1970s there was a rapid escalation in nearly every item
concerned with ship operation, at around 15-25 per cent p.a., but
with oil fuel going up tenfold in price. These high escalation
rates have fallen back into low single figures in the 1980s in the
world's stronger economies.
Freight rates for a given ship and cargo have generally followed a
broadly similar pattern, although the underlying trend has often
been obscured by market fluctuations, increasing ship efficiency
and the reductions arising from the economies of scale as larger
ships have been introduced. Voyage charter rates do not include
escalation clauses, nor do the maj ori ty of timecharter rates,
which cover short and medium periods, i.e. they remain fixed for
the duration of the charter. However, sometimes escalation
clauses covering increases in certain operating costs are included
in the few long-term charters. Liner conference freight rates
have been adjusted regularly over the years as elements of running
costs have increased, particularly bunker costs.
In the majority of economic studies concerned with actual ships,
it is suggested that money terms are used throughout (i.e. the
actual cash amounts moving through the company's bank account,
including escalation), as this is the form usually used by
shipowners in evaluating projects, whose cash flows from charter
income and loan repayments are expressed in money terms. Use of
money terms also forces attention on differential escalation rates
(if all costs and income rose at equal rates, it would be easy to
work in real terms), on secondhand values (ships are often sold
long before the end of their physical life), and on likely rates of
return, both before and after tax. It also makes hindcasting
easier, checking on the results of previous evaluations. General
forecasts of inflation, plus analysis of past data, can be used to
assist in estimating escalation rates, but if no such data are
available, the following figures give some indications of the
ranges found at different times for Bri tish ships.
It is equally possible to work in real terms, i.e. in money of
constant purchasing power, say 1986 dollars, but adjustments need
to be made when some costs may be quoted in money terms, e. g.
progress payments when bui lding ships, whi le others may be
estimated in real terms, e. g. crew costs.
Average Escalation Rates, per cent per annum
1950 & 1960s 1970s
Maintenance and repair costs. of one ship,
allowing for deterioration with age
Crew costs
Other daily running costs including insurance
Residual oil fuel price
Port and canal charges
Cargo handling costs per unit
Cargo liner freight rates
Voyage and short terms charters, applied as a
succession of charters for a single vessel.
8-12 12-25
5-8 15-20
3-6 8-15
0-3 20-30
3-7 5-15
5-8 10-20
3-5 10-15
0-3 6-12
Part 11 - Making Engineering Economy Calculations - 51
Different countries have experienced different rates, not only
expressed in domestic currency, but also when converted via
fluctuating exchange rates into other currencies such as dollars.
Shipbuilding prices, and thus indirectly secondhand ship prices,
have also experienced some long term escalation, say 3-6% p.a.
1950s &. 1960s and 5-10% 1970s, but are much influenced by exchange
rates and world competition, and indeed have been falling in the
Discount Rates and Rates of Return
Fundamentally, the discount rate applicable to DCF calculations is
the opportunity cost of capital, i. e. a rate of return at least as
good as the next best available investment. It may also be
compared with the average cost of the company's capital,
shareholders' and borrowed funds, though this is not always easy
to determine. The discount rate should also be higher than the
interest rate on loans, as these are prior charges, and the
investment should generate a higher rate of return to provide a
margin. It should also be higher than the return of risk-free
government stock. High risk investments require higher discount
rates; they are also necessary in periods of rapid inflation,
otherwise real rates may be negative. The real rate of return in
percentage points is approximately equal to the money rate of
return minus the rate of inflation - more accurately, see page 53.
Shipping, in common with most other forms of transport, has for
many years shown l o w ~ r rates of return than most other industries.
Hence a realistic attainable discount rate applicable to ship
calculations tends to be relatively low. Until the early 1970s,
actual long-term charter rates implied rates of return in money
terms of 6 to 9%, the exact values depending on ship first cost,
market situation, tax, credit terms and resale value. The rate of
return in real terms was thus only about 3 to 6%. The U. K.
Government currently use about 5% in real terms before tax for new
major capital investment, i.e. nearly 10% in money terms.
Analysis of the profitability of industrial companies in the UK
(excluding those involved in North Sea oil) shows the annual
average between 1970 and 1984 to have fluctuated between about 3
and 8% in real terms (although of course individual companies
experienced a much wider variation). International competition,
subsidies, flags-of-convenience, national prestige, cheap loans,
and underestimates of escalation of running costs, all tend to
increase the supply of shipping and keep the rate of return below
what it should ideally be, and lower than many shore-based
industries offering equal or less risk.
While it is the job of a company's management to specify the
appropriate discount rate for any particular project (usually in
the form of a target or hurdle rate), it is useful for the engineer
to have some appreciation of possible rates. For general ship
investment problems, rates in the region of 10 to 15% in money
terms after tax are suggested at present, which might be reduced by
two or three points if long term inflation can be kept down to the
levels prevailing before 1970.
52 - Engineering Economics and Ship Design
While these are not high in real terms, market conditions and
competition do not usually allow significantly higher rates of
return to be obtained for long. other operators will move into
that sector of shipping and increase the supply and decrease the
freight rate. If a shipowner requires higher rates of return, in
general he will not find them in the shipping industry unless he is
in a special situation.
Since many economic evaluations are made in money terms, it is
important to use a discount rate higher than the assumed rates of
escalation of cost items, to represent a real rate of return. If
uniform cash flow calculations are being made, the omission of
cost and freight escalation implies that the calculation is being
made in real terms. In such cases lower discount rates are
appropriate, say 4 to 8% for entire ships.
Higher rates are appropriate for equipment above the bare minimum,
on the grounds that it is an 'optional extra'. Depending on the
degree of risk associated with the equipment and its anticipated
performance, a discount rate say 5 to 10 points higher in money
terms might be used.
Combined Discount and Escalation Rates - Example
For uniformly increasing cash flow examples, discount and
escalation rates can be combined for use in Series Present Worth
type calculations. In non-uniform cases, they need to be applied
separately to the annual elements of the DCF calculation table.
What is the present worth of an annual freight income starting at
f100,OOO and at 3% per annum over 10 years, discounted at
Present Worth Factor after one year
Multiplier for actual income after
one year, escalation rate (e)
Present worth of first year's income
= (1 + i)
= 1.10
= (1 + e)
.. 1.03
Effective discount rate (r) is given by the solution of the
J 1.03
(1 + r) - T:"I'U'
1 + e
1 + 1
(l + r) 1 + i .. 1.068
• 1 + e
r - 6.8%
Part 11 - Making Engineering Economy Calculations - 53
Series Present Worth factor for 10 years is given by:
(SPW - 6.8% - 10)
(1.068)10 - 1
0.068 (1.068)10
1.93 - 1
0.068 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 Series
Compound Amount factor as follows:
(SeA - 3% - 10) = 11.46 x 100000
= £1.146.000
Thus, effective SPW may be calculated directly from the
1_(1 + 1-)N
1 + e
(1 - e)/(l + e)
Note that for low rates of interest and escalation, the effective
rate is approximately (i-e)% because
1 + 1
1 + e = (1 + 1 - e)
Note also that this assumes that escalation starts from year zero,
i.e. the first actual year's income includes the first year
,. may be considered as the real rate of return, i the money rate of
return, and e the rate of inflation/escalation.
54 - Engineering Economics and Ship Design
To stimulate their shipbuilding industries, most countries
throughout the world offer loans for ship purchase, subsidised
from central sources at below-market rates of interest. The loans
reduce the effective cost of the ship, and encourage owners to
place orders. Credit terms officially available are broadly
similar in each major (O.E.C.D.) country, for ships typically 80
per cent of the contract price for 8.5 years at 7.5 per cent
interest. For offshore mobile units, typically 85% loans are
available but only for five years. Exceptionally favourable terms
may sometimes be granted, e. g. for developing countries as
'overseas aid'. Loans for secondhand vessels are usually made on
normal commercial terms. Interest payments are allowed to be
deducted before tax liability is calculated on profits earned
during the ship's life.
Various initial and legal fees are charged in addition to loan
repayments and interest, usually about 1 per cent of the total
loan. Generally the credit is advanced to the owner as building
instalments become due, so that interest becomes payable before
the ship is delivered unless arrangements are made to defer it.
Repayment is usually in equal amounts at six-monthly intervals
after delivery, plus interest on the declining balance. A more
detailed discussion of shipbuilding credit is given in Ref.1.15.
Al though favourable credi t terms are an important marketing factor
for shipbuilders (and have cont:ributed to the world over-supply of
ships), they do not usually affect the order of merit between
technical alternatives.
Figure 14 shows that as the credit proportion approaches 100 per
cent, the IRR on the shipowner's diminished equity capital
approaches infinity, but NPV or RFR continue to give meaningful
results. While this might suggest that shipowners should borrow
near 100% of their capital needs, in fact this is risky, as in
adverse market conditions, prior charges such as loan servicing
would be excessive, which could force the owner into liquidation
wi th insufficient cash flow. An appropriate balance of own
capital (e.g. shareholders' or equity funds) and debt (loans or
credi t) is necessary for financial stability.
o PIiR c:.ENT. 100 CREDIT P I t O P O ~ T I O N .
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 claim
investment grants on new ships. In order to stimulate capital
investment, the Government would refund the shipowner 20 per cent
of the ship's first cost. This system has now been abolished, but
in certain other countries, including the U.S., subsidies are
given for construction and/or operating costs. In economic
calculations, subsidies can generally be treated by reducing the
actual cost by the amount of the subsidy and amending tax
allowances accordingly. Similarly, subsidies to shipbuilders are
simply allowed for by using the contract price to the owner after
the subsidy is given, e.g. after Intervention Fund payment.
Unequal Lives
Where investments have unequal lives, it is necessary to make a
correction to NPV calculated in the normal way, as otherwi se
longer life investments would appear unduly favourable. The
correction converts the NPVs into equivalent annual cash flows
over equal lives, which may then be compared with one another
(Ref .1.4.2 contains a useful discussion on the subj ect) .
Which is the better freight contract for the owner of an
existing ship: one with an NPV of flM, with a duration of 8
years, or one with fl. lM over 10 years? Owner's opportunity
cost of capi tal 10 per cent.
Superficially, the 10-year contract looks better, but no
allowance is being made for possible earnings in years 9 and
10 after the capital has been recovered from the 8-year
contract. However, each NPV can also be regarded as having
been produced by a series of equivalent uniform annual cash
flows. These may be calculated by the use of the capital
recovery factor.
(CR - 10% - 8)
(CR 10% - 10)
= 0.1874
= 0.1627
Equivalent annual cash flows:
8-year contract: 0.1874 x 1,000,000 =f187,400
10-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 easier
to make lives equal, but give the longer life alternative the
advantage of a higher di sposal or secondhand value at the same age
as the shorter life vessel.
56 - Engineering Economics and Ship Design
The present tax structure applicable to British shipowners is
basically as follows:-
Corporation Tax is levied at a particular rate on the "trading
profi t" (or before-tax cash flow). Thi s taxable profi t is
Income Operating Expenses - Depreciation (or Capital)
Allowances - Interest on Loans
Tax is assessed after the company's annual accounts are made up and
are thus paid 1 - 2 years in arrears of the corresponding cash
flows. Annual income can therefore be divided as shown in Figure

Fig.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 loan
principal, dividends, fleet replacement or any other permissible
use. Dividends, however, are paid to shareholders without any
further deduction to tax (as occurred under the old system);
allowance is made in the shareholder's own tax liability for the
amount already paid under Corporation Tax (tax credit). Unti I
1984, the tax rate was 52%, now reduced to 35% as from 1986.
Depreciation (or capital) allowances
When using the basic interest relationships, e.g. CR, it is not
necessary to add any further ,amounts for 'depreciation'. The use
of CR recovers the capital invested over the life of the ship, plus
the required rate of return. However, depreciation affects the
amount of tax payable by a company. Regularly occurring expenses,
such as operating costs, may be deducted in full before tax is
levied, but purchase of an asset the life of which is greater than
one year, e.g. a ship, is treated on a different basis by means of
depreciation allowances, strictly called' capi tal allowances' .
Part 11 - Making Engineering Economy Calculations - 5'1
Depreciation is not an actual cost or expenditure of cash, but a
book transaction used both for tax and for accounting purposes.
For accounting purposes, depreciation must comply with the
Companies Act and it is used to assess the 'profit' available for
distribution to shareholders (and reserves) after applying a rate
on fixed assets that maintains capital intact in money terms. See
Figure 16. The calculation of depreciation for tax purposes is
nearly always different, and as it affects the actual cash flows
and final net income, it is the aspect considered here.
C . A P I ' T A ~
R.ESIDu .... 1.. Ott.
S .... I..V.... GE ¥II.LuE.
o y£ .... ~ ~
Fig .16 Straight-line Depreciation
Traditionally, depreciation (or capital) allowances have been
calculated either as 'straight line' (annual allowance = ship
cost/ship life) or 'declining (or reducing) balance' (annual
allowance = percentage of residual value of ship each year), or
other variants which, in effect, write off the initial cost over
the expected life of the investment. In many cases, 'cost' maybe
acqui si tion cost minus expected residual value, e. g. assumed scrap
value. In the U.S. a method called 'sum-of-the-year-digits' is
sometimes used. If the initial value or historic cost is P, and
the residual or salvage or scrap value is S, and the life of the
asset N years, then:-
(i) Straight line: annual allowance =
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)
The declining balance rate, R is given by: R. 1 _ (;)N
58 - Engineering Economics and Ship Design
Such methods can be used for accounting purposes, and some
countries' tax authorities use variants of them. In 1984, the
declining balance method was insti tuted for Bri tish shipowners for
tax purposes. Following a transi tion period, the system adopted a
declining balance rate of 25%. Thus first year allowance is 25%,
second 18.25%, third 14.06%, fourth 10.55% etc. Thus it takes
eight years to accumulate to 90%, a typical amount allowing 10%
residual value. Until 1984 British shipowners were allowed to
depreciate their ships for tax purposes at any rate they liked,
wi th 100% first year allowances and 'free depreciation'. In
practice, this meant writing the ship off as fast as profits
permitted, i.e. extinguishing all liability for tax until the
depreciation allowance had been exhausted. If there were profits
from other ships in the fleet, or other activi ties of the business,
it was possible to write off the entire cost of a new ship against
tax liability on these other profits in the first year, e.g. on a
f. 1,000,000 ship, f 520,000 tax could be saved. From then on, tax
was paid on the full profit. This could be called the 'Full
Depreciation' or 'Full Tax' position. The first year tax saving is
now limited to 25%, but in association with a lower rate of
Corporation Tax (35%), i. e. £87,500 on a £lM ship. Any unused
allowance (e.g. because of insufficient profits) can be carried
forward and used in subsequent years.
A more general case for economic studies was to assume that
depreciation could only be allowed against the profits of the
particular ship or project being studied. This is equivalent to a
newcomer to shipping, so can be called the 'New Entry' position.
At typical freight rates, it then takes some 6 to 12 years before
tax becomes payable, but with the time value of money, thi s is not
worth so much as wri ting off in one year, but was better than
wri ting off over say 20 years. In all cases, tax balancing charges
are usually levied if the disposal value of a ship exceeds its
wri tten-down value for tax purposes, i. e. tax allowances have been
granted on the full cost of the ship, but the disposal income needs
to be set against this, so is potentially taxable (see page 67) .
The 100% allowance system encouraged the leasing of expensive
ships whereby a financial institution like a bank actually owned
the ship, and could claim the full tax allowance against its other
profi ts in the fi rst year. The ship was then bareboat chartered to
a ship operator at a slightly lower rate than would otherwise be
possible. British shipowners have been campaigning for a return
to the system of free depreciation. Nearly every mari time country
gives special tax treatment to ships, usually including some form
of accelerated depreciation.
EzampZes Involving Alternative Tax Regimes
A large anchor-handling/tug/supply vessel costing f6M cash on
delivery is to be built for charter. The owner anticipates a
timecharter hire rate averagingfSOOO per day. Annual operating
costs are expected to be l855,OOO. Annual on-hire days 340.
Vessel life 15 years, zero residual value. Calculate NPV at 8%
discount rate with corporation tax at 35% under six different tax
Part 11 - Making Engineering Economy Calculations - 59
Figure 17 sketches the cash flow patterns.
~ N .. 'T"",.
o ...
RI ,,-,ttoJ
Afl£t TA.X
-ANt.E ~
~ ~ . . . . DEPRHIA'TIO>l £ ~ .. ,P.
To """lA.L.
".,Co.'''' TA_A.Lt
Fig.17 Comparison of Cash Flows Under Different Tax Regimes
Annual income
Annual expenses
Annual cash flow
(surplus before tax)
5000 x 340
Case 1. No Tax
PW of cash flows = (SPW-8%-15) = 8.56 x 845,000 = + f7,233,OOO
PW of ship cost = (PW-8%-0) =1.000 x 6,000,000 = f6,OOO,OOO
NPV of investment = + f1,233,OOO
Case 2. Straight Line Depreciation
Annual allowance for
Taxable profit
845,000 - 400,000
Tax at 35%
0.35 x 445,000 =
Annual cash flow after tax
845,000 - 156,000
PW of cash flow after tax
8.56 x 689,000
+ £5,900,000
PW of ship cost
NPV of investment
- £100,000
60 - Engineering Economics and Ship Design
Case 3. Declining Balance at 25% (Single Ship or New Entry)
A tabular presentation in thousands of pounds shows how the
depreciation allowance is used to make taxable income zero, as
long as cash flow before tax exceeds the 25% allowance for that
Year ~ a s h flow Written Depreciation Taxable 35% Cash PW DCF
~ e f o r e down all owance income tax flow 8%
tax value
0 6000
. 1
845 5155 845 0 0 845 0.926 782
2 845 4310 845 0 0 845 0.857 724
3 845 3465 845 0 0 845 0.794 671
4 845 2620 845 0 0 845 0.735 621
5 845 1775 845 0 0 845 0.681 575
6 845 1067 708* 137 48 797 0.630 502
7 845 800 267 578 202 643 0.584 375
8 845 600 200 645 226 619
I 0.540
9 845 450 150 695 243 602 0.500 301
10 845 338 112 733 257 588 0.463 272
11 845 254 84 761 266 579 0.429 248
12 845 190 64 781 273 572 0.397 227
13 845 142 48 797 279 566 0.368 208
14 845 107 35 810 284 561 0.340 191
15 845 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 before
tax. In year 6, accumulated 25% allowances =4933, so allowance in year 6
limited 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
Part 11 - Making Engineering Economy Calculations - 61
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%

flow down iation lated income tax flow 8%
value allowance allowances after
tax tax
0 6000
1 845 4500 1500 1500 -655* -229* 1074 0.926 995
2 845 3375 1125 2625 -280'" -98* 943 0.857 808
3 845 2531 844 3469 1 0 845 0.794 671
4 845 1898 633 4102 212 74 771 0.735 567
5 845 1423 475 4577 370 130 715 0.681 487
6 845 1067 356 4933 489 171 674 0.630 425
7 845 800 267 5200 578 202 643 0.584 376
8 845 600 200 5400 645 226 619 0.540 334
9 845 450 150 5550 695 243 602 0.500 301
10 845 338 112 5662 733 257 588 0.463 272
11 845 254 84 5746 761 266 579 0.429 248
12 845 190 64 5810 781 273 572 0.397 227
13 845 142 48 5858 797 279 566 0.368 208
14 845 107 35 5893 810 284 561 0.340 191
15 845 0 107 6000 738 258 587 0.315 185
Total 12675 6000 6675 10339 6295
* Other profits available to make up the £845,000 surplus to the full
depreciation allowance for years 1 and 2, giving tax savings shown.
PW of cash flow after tax
PW of ship cost
NPV of investment
= +£6,295,000
= -£6,000,000
= +£295,000
62 - Engineering Economics and Ship Design
Case 5. Free Depreciation (Single Ship or New Entry) (UK pre-1984)
A tabular presentation shows how the depreciation allowance is
used to make taxable income zero each year until the allowance has
been exhausted.
Year Cash flow Depreciation Taxable 35% Cash flow PW DCF
before tax all owance income tax after tax 8%
1 845 845 0 0 845 0.926 782
2 845 845 0 0 845 0.857 724
3 845 845 0 0 845 0.794 671
4 845 845 0 0 845 0.735 621
5 845 845 0 0 845 0.681 575
6 845 845 0 0 845 0.630 533
7 845 845 0 0 845 0.584 493
8 845 85 760 266 579 0.540 313
9 845 0 845 296 549 0.500 274
10 845 0 845 296 549 0.463 254
11 845 0 845 296 549 0.429 236
12 845 0 845 296 549 0.397 218
13 845 0 845 296 549 0.368 202
14 845 0 845 296 549 0.340 187
15 845 0 845 296 549 0.315 173
Total 12675 6000 6675 2338 10337 6225
PW of cash flow after tax
PW of ship cost
NPV of investment
= + £6,255,000
= - £6, 000, 000
= + £255,000
Part 11 - Making Engineering Economy Calculations - 63
Case 6. Free Depreciation (Full Depreciation in First Year) (UK pre-1984)
There are profits from other sources sufficient to write the ship
off in the first year, i.e. over f6,OOO,OOO. Tax is then payable
normally over the rest of the ship's life:
Normal taxable profit
Tax at 35% = 0.35 x 845,000
Annual cash flow after tax = 845,000 - 296,000
PW of cash flow after tax = 8.56 x 549,000
Free depreciation: 35% of f6,OOO,OOO
PW of free depreciation at Year 1
x (PW - 8% - 1) 0.926
PW of cash flow to shipowner
PW of ship cost
NPV of investment
= f845,OOO
= f296,OOO
= f549,OOO
= + f4, 701, 000
= + f2, 100,000
= + f1, 945,000
= + f6, 646, 000
- - f6, 000,000
= + f646,OOO
The above examples indicate the general influence on after-tax
profitability of alternative tax systems, together with the
internal rate of return which can be found by iteration with
discount rates of 10, 12% etc.
1. Case 1. No tax +1,233,000 11.2
2. Case 6. Free depreciation (first year)
+ 646,000 10.3
3. Case 4. Declining balance (other profits)
+ 295,000 8.9
4. Case 5. Free depreciation (new entry)
+ 255,000 8.8
5. Case 3. Declining balance (new entry)
+ 216,000 8.7
6. Case 2. Straight line depreciation 100,000 7.7
The pre-1984 cases are included to show the principle of the
calculation of free depreciation. In practice, the corporation
tax rate was 52% at that time, which would have given NPVs of
-f263,OOO and +f361,OOO in cases 5 and 6 respectively. Case 2
would have become -f747, 000.
Tax payments are usually made a year or more in arrears. If this
effect had been included, the NPVs above would have been slightly
Although most cash flows occur fairly regularly over the 365 days
of the year, it is usually sufficiently accurate to simplify the
calculation by assuming that they all occur at 23.59 on 31st
December. Two possible exceptions may sometimes be made:
(i) building instalments may often be very large and several
may occur wi thin a 12-month period
(ii) repayments of loans may be calculated at their usual
six-month intervals. In a particularly detailed
calculation, it would be worth incorporating the exact
timing of these large cash flows, by putting N at its
exact value.
Note the small size of the present worth factors for cash flows a
long time ahead, e.g. 0.315 for Year 15 in Cases 3, 4 and 5. Hence
64 - Engineering Economics and Ship Design
the influence of any errors in forecasting future cash flows are
reduced in the calculation.
The case of straight line depreciation permits a short-cut
calculation of the effect of taxation on annual cash flows. It is
easily shown (e.g. Ref.l.5.2.) that the capital recovery factor
after tax (CR' ) is given by:
CRI = CR(l - t) + tIN
where CR = CR before tax, A/P
t = tax rate as a decimal fraction
N = life of ship, years
For example, Case 2 above provided a return of £845,000' before tax
on an investment of £6M, or a CR before tax of 14.08%. The CR after
tax is:
0.1408 (1 - 0.35) + 0.35/15 = 0.0915 + 0.0233 = 0.1148
This is the same as the CR after tax calculated from Case 2, line
689,000/6,000,000 = 0.1148 = 11.48%
A CR of 11.48% over 15 years is equivalent to a true rate of return
of about 7.1%, i. e. less than the 8% specified, hence its negative
NPV (-100,000).
In some companies, project evaluation incorporating tax
considerations is assessed by a separate department only after a
proj ect has been shown by operating departments to be sufficiently
attractive in the first place. Thus although the engineer should
be aware of the general influence of tax on profi tabi li ty, he need
not be an expert in the calculations.
The following example illustrates most of the complexi ties of real
life cash flows involved in ship purchase and operation. The ship
in the example is a 100,000 cubic metre liquefied gas carrier
operating in a consortium with a 12-year timecharter. The ship
price is $100,000,000 with a 80% loan for eight years at 8%
interest. The shipowner wishes to calculate if the proposed
charter will be profi table, in providing a rate of return after tax
of at least 12% in money terms. He has to make his own assumptions
as to escalation of operating costs, and expected secondhand value
at the end of the charter. The tax situation illustrated is U.K.
new entry wi th declining balance, but others could be substituted.
Although it is possible to combine all cash flows associated with
building and operation into a single table, the important features
are best illustrated by separating them.
The following notes should be read in conjunction with the
calculations in Tables 9 and 10:
Part 11 - Making Engineering Economy Calculations - 65
(a) Building Account (see Table 9)
1. Year °is contract signing, end year 3 delivery.
2. Bui lding instalments: 5% on contract signing, others as
construction progresses.
3. Owner pays his 20% in
patterns to Columns 2
instalments. Note that other
3 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 at
six-monthly intervals.
7 . Cumulative sum of Column 4 minus Column 6.
8. Loan interest at 8% on Column 7, payable at end of each time
interval. Note some intervals are six months.
9. Owner's cash outflow, i.e. owner's 20% + owner's expenses +
loan repayments + loan interest. Column 3 + Column 5 + Column 6
+ Column 8. $138.4M can be regarded as the total 'hire
purchase' price.
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 sold
secondhand thereafter.
2. Timecharter rate of $2M per 30-day month, after commissions.
Assumed 340 days on-hire per annum (11.333 months), with one
extra month off-hire in Year 8 for special survey and two extra
months in Year 13. Estimated secondhand value after twelve
years' service 30% of shipyard price ($30M). This is
equivalent to 15% of newbuilding cost at that time if
shipbuilding prices escalate at 6% per annum.
3. Annual crew costs currently estimated at $1.2M, but increases
are covered by an escalation clause.
* Column numbers refer to Table 9
66 - Engineering Economics and Ship Design
4. Annual maintenance, repair and stores costs currently
estimated at $l.lM, but assumed to escalate at 8% per annum
from Year O. Regular annual provision made for special survey
5. Annual insurance, admini strati on etc. costs currently
estimated at $1.4M but assumed to escalate at 5% per annum from
Year O.
6. Total annual operating costs, i. e. Column 3 + Column 4 + Column
5. (Under a timecharter, no fuel or voyage costs) .
7. Cash flow before tax, i. e. Column 2 - Column 6.
8. Interest from Column 8 of Building Account. Figure for Year 4
includes interest from Years 1 to 3, not yet set off against
profi ts for single ship.
9. Maximum capital (depreciation) allowance 25% per annum, based
on $103M including owner's costs, declining balance. Tax
si tuation equivalent to new entry, i. e. no other profi ts to set
allowances off before the ship begins earning.
10. Cumulative depreciation total, i.e. written off value cannot
be more than thi s for tax purposes. Cumulative sum of Column 9.
11. The actual depreciation allowance is adjusted to make taxable
profit zero each year as long as the cumulative sum actually
used in Column 12 is less than the allowance available in
Column 10. Until Year 11, this is Column 7 Column 8.
Thereafter, allowance is limited to 25% allowance in Column 9.
12. Cumulative sum of depreciation allowance used in Column 11.
This does not reach the allowance available in Column 10 until
Year 11.
13. Total tax allowance, i. e. Column 8 + Column 11.
14. Taxable profit = Column 7 - Column 13. The total surplus over
the life of the vessel totals $82. 5M before tax.
Year 16 includes a tax balancing charge. The depreci ation
allowance has been based on $99.737M by Year 15, but $30M has
now been recovered, with allowances of only $3. 263M as yet
unused. Hence the excess allowance of $26. 737M is recovered by
the taxman.
15. Tax at 35% of Column 14, assumed paid one year in arrears.
16. Cash flow after tax, i. e. Column 7 - Column 15.
17. Present worth factor at 12% discount rate.
18. Discounted cash flow.
Part 11 - Making Engineering Economy Calculations - 67
Thousands of Dollars ....
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
Instalments 20% Orawetown F.xpenses Repayments Outstanding Interest Cash Worth
lir Fees M% Outflow Factor
11.5 lUll011 10(lOO ~ l l O 101100 U SUO O.1J449 472
1 IOOIlO sono SOOO SOO 151100 400 5lJOO (J.8nl) 5268
1.5 15000 1SOOO )IlOOO Mm 6011 O.M37 506
2 20000 SOOO 15000 SOO 4S000 I :WO 6700 O. JlJ7'l 5341
:!.5 :lOUOO :WOUII bSUUII 1KOO 1800 U. 75JJ lJ56
'l 20UOO 50110 1501111 1000 80000 2ftOO 8600 O.711H 6121
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 14lJM
10000 411000 4000 14UOO 0.4523 ft]JZ
10UUO 30UOO ]:.!O() 1320() 0.40)') 5331
10000 WOOO :.!400 12400 0.3b1l6 4411
1000U 10000 IMIO 11 Mill 1I.3no :Ins
lUlIlJO 0 HlIO IIHlOO O.2H7S 3105
"0tal lOUUIIO
200m) 8000(l 30110 8U(lOO 3541llJ 13840U 7430'J
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 [lCF
Incolle 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
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 8'186
7 22661 1200 1885 2144 522'1 1H.:l8 4UOO 10863 70410 13438 441151 17438 0 0 17438 0.4523 7 8 ~ 7
8 20667 1200 2036 2315 5551 151 I 5 )lOO 8141 78557 11'115 55972 15115 0 0 15115 0.403'1 61115
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
(Q 13 18661 1200 2991 3402 1593 llO73
1933 91199 1933 97199 I'Jn 9140 4539 6534 0.22Q2 1 I , Q ~
14 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 4155
17 9358 -9358 0.1456 -1362
Total 296002 14400 28398 32294 15091 220910 35400 103000 138400 82516 28881 192029 72311
(c) Result
Present Worth of Operating Account =
Present Worth of Building Account =
Net Present Value =
+ $72,371,000
$ 1,938,000
As the NPV is negative, the investment yields less than 12% rate of
return after tax. To find the actual rate of return, the last two
columns in the Tables are re-calculated with one or two lower
discount rates, and the results interpolated to find the rate
giving zero NPV. The internal rate of return turns out to be
11.0%. The prospective owner then needs to decide whether this is
adequate. If not, he must seek m o ~ e favourable conditions, for
association with other activities to give earlier use of
tax allowances
a lower ship contract price
more favourable loan terms
a higher timecharter hire rate
lower operating costs
further escalation clauses
earlier delivery
selling when secondhand prices are high
good timing of foreign exchange.
In practice, such calculations are not often done by hand, but
computer programs used to evaluate a variety of alternative
assumptions and fiscal situations.
The annual and cumulative cash flow patterns are shown in Figure
18, i. e. Column 16 of Operating Account minus Column 9 of Building
Account. A positive annual cash flow occurs from the first year of
operation, i.e. earnings are sufficient to repay loan principal
and interest. However the cumulative cash flow shows that the
owner needs up to about $30M of his own funds to carry the
investment through its first few years. In practice, most owners
have more than one ship, built at different times whose cash flow
patterns overlap, thus reducing the year to year fluctuations, as
well as influencing the overall tax situation.
70 - Engineering Economics and Ship Design
OClL.L.A s:t.S.
... .0
I \
I \

r- ...........
2 4- ill S 10
I 12 14 IUt \n.AltS

-' ...

<l \
I at

,. III
,," C



, 7-
c )(
It ,;' 0
./ ..J

"' .......
-30 u
Fig.18 Cash Flows for Complex Example
Part 11 - Making Engineering Economy Calculations - 71
It is more important to appreciate the general form of the
calculation of Tables 9 and 10 than to become expert in the
arithmetic. There are, of course, a number of computer programs
available for DCF calculations, some more applicable to ship
conditions than others and some more suitable for evaluating the
complexities of alternative financing methods. The BMT computer
program ECEVAL can be used where comparison of technical
alternatives is the principal aim. This program was used to
produce the curves in Figure 19 which illustrate the effect on NPV
of alternative conditions applying to the same ship design. The
basic ship is a large tanker wi th the following characteristics:
260,000 tonnes deadweight
Steam turbine, 15.5 knots
23,000 mile round voyage
£15,000,000 first cost
80% loan for 8 years at 7% interest
Discount rate 10%
Corporation tax rate 40%
Depreciation of single ship as fast as its profit permit
( 'new entry')
Ship life 16 years
Freight income escalating at 3% per annum.
1.0,000 To .. ..,( O''''O...,I£IGoW'T ,. ... .,K5 •.


• J f---+-'7""--+-

·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
72 - Engineering Economics and Ship Design
Whi le some of the conditions no longer apply to present ships, the
purpose is to show that alternative financial conditions have a
marked effect on overall profitability. It can be seen that the
NPV results vary linearly with freight rate, and are broadly
parallel to one another. There is thus little change in ranking,
apart from variants with no tax liability having a steeper slope
as, when freights are high, the corresponding increased profits
are not incurring any tax. The importance of obtaining loans at
relatively low rates of interest is shown - well over flM in NPV
terms on a flSM investment. Sufficient profi ts from other sources
to permit full depreciation in the first year give considerable
benefits - nearly f2M in NPV. The reason for the No Tax case not
being the best at all freight rates is that such a first year
depreciation case includes the savings of tax OL other activities
of the company which have provided the other profi ts, permitting a
full write-off in one year (a situation no longer avai lable in the
OK). Low first cost is also very significant - a reduction of 20%
(f3M) is worth nearly f2M in NPV.
In general it can be accepted that, for any chosen design having
the required capability, i. e. technical performance is identical, a
higher rate of return will be achieved by:
• purchasing at lowest first cost
• borrowing on favourable terms
• paying as little tax as possible, e. g. by accelerated tax
• obtaining cover against escalation of costs
• achieving a long life, assuming that greatly superior designs
do not become available in the earlier years, i.e. physical
deterioration rather than economic obsolescence is the main
reason for di sposal.
Figure 19 underlines the danger of over-simplifying economic
evaluations for detailed studies of whether or not to invest; the
difference between best and worst is over f4M, equivalent to a 30%
difference in freight rate. The complexities, however, tend to be
less important to the engineer who is considering technical
alternatives, which all tend to be affected in a broadly similar
way. The main exception is where t h e r ~ are large differences in
capital intensity, e.g. a very advanced small crew automated ship
versus one wi th no automation, and large crew.
All the calculation examples have been based on fixed input data
but, of course, there will be uncertainty about some of the items,
e.g. fuel prices, and risk about the operation of the ships, e.g. a
future ship type may render the present design economically
obsolete. It is possible to introduce such stochastic effects in
the calculation as discussed in Ref.l. 7 .1, but it is usually found
that the order of merit of the al ternatives is not affected
thereby. Stochastic effects can be more readily included in the
overall systems approach discussed in Part Ill, Sections 3 and 4.
Part 11 - Making Engineering Economy Calculations - 73
For engineers, the author's recommendation for using economic
evaluation techniques are:
(i) Use capital recovery factor and series present worth
factor in association wi th uniform cash flows and single
payment acquisition cost for preliminary screening of
ship and equipment alternatives. This will quickly
eliminate the 'non-starters' without requiring
extensive data input and calculation. It will also give
resul ts of the correct order of magni tude and thus form
a useful 'first shot' in more detailed iterative
calculations. It will often be adequate for modest
items of equipment, whose investment level does not
justify great detail. Such calculations are likely to
be made in real terms.
(ii) Make full DCF calculation for evaluation of promising
designs from (i) appearing on the short list, especially
where closely competi tive. The designs are likely to be
enti re ships or maj or on-board systems such as main
propulsion machinery. It will in general be necessary
to allow for economic complexities such as loan terms
and escalation, so the calculations are likely to be in
money terms requiring a higher di scount rate than (i).
Similar techniques may also be used to evaluate investment in
other marine capital equipment, e.g. shipbuilding plant or
offshore facilities.
74 - Engineering Economics and Ship Design
Earlier Parts have given a broad picture of the economic
environment within which marine transport operates, and the
mechanics of making economic calculations. Ship design links the
two, i.e. the marine transport or service requirements must be
developed into a series of feasible ship designs, which must then
be evaluated for their technical and economic performance,
covering the following:
Trading pattern and operating environment ~
Range of feasible technical designs ~
Estimation of building and operating costs, and income ~
Economic evaluation of alternatives.
Although a superficial glance might suggest that such a process is
a matter only for ship operators, this is not so; the shipbuilder
is also concerned, in two principal ways:
Specialist knowledge. To design the optimal ship, extensive
experience is required of the influence of different design
features on first cost. The builder is much better able than
the shipowner to quantify accurately the cost of alternative
hull proportions, materials, machinery arrangements, etc.
Commercial competition. Since ship operators are concerned to
maximise the difference between present worths of income and
costs, rather than minimising ship first cost, there has
arisen a greater need for a shipbuilder to show not that his
design is necessarily the cheapest, but that it is the most
profi table. This approach has been used by the aircraft
industry for some time, and is particularly applicable to
standard ship designs.
Traditionally, ship design from the builder's viewpoint has meant
the receipt of an enquiry from a shipowner, accompanied ei ther by a
statement of requirements or an outline design. In the former
case, a design is worked up, often using a basis ship; in the
latter, the design is checked out. Time usually prevents anything
but a single design being investigated. Then the cost is estimated
and a price submitted to the shipowner. If the tender is
successful, a contract is placed,' and the design worked up into a
complete building design. There are thus two principal stages of
(i) Preliminary or tender design
(ii) Detai led or post-contract design
Stage (ii) will not be considered here, because the principal
design features will have already been settled and calculations
are largely in the form of analytical procedures and detailing for
production. The importance of stage (i) is often overlooked, but
Part 111 - Application To Ship Design - 75
it is at this creative stage that the application of engineering
economics has its greatest pay-off, since there is then greater
scope for selecting the most economic design variables, such as
The traditional approach survived during the many years in which
developments in ship types were slow, e.g. 1910 to 1960 in Fig.4.
It has proved inadequate for the highly competitive years since
then, during which ship types have changed significantly, because:

Design was usually based on previous ships, yet there was no
eXisting experience of the new ship types
Generally only one design for one size and speed was
No economic evaluations were made either for the single
design or any alternative
Traditional cost estimating methods did not reflect the
changing ship types and production methods.
A modern approach aimed at improving designs of ships requires
good collaboration between potential owners and builders.
Shipbrokers can contribute to this dialogue, while it is often
desirable for consultants to be used to investigate the range of
possibi li ties (especially for the smaller ship operator) on
account of their independent commercial status, and the
avai labi li ty of sui table staff.
A comprehensive process includes:-
(i) Investigation of transport demand, corresponding market
research and feedback of operational experience.
(ii) Concept formulation: range of possible technical
solutions, ship types, configurations, sizes and speeds.
(iii) Preliminary technical design of a number of alternatives
(often using specialised computer programs) including
dimensions, machinery, etc.
(iv) Estimates of first cost, operating costs and potential
revenue earning abi li ty of each al ternative.
(v) Economic evaluation of the alternatives, under a variety
of assumptions.
(vi) Selection of the optimal design, either by judgement, or
mathematical programming techniques.
(vii) Discussion of the proposed design (and any sui table
alternatives) with clients.
(viii) Contract, detailed design and construction of the final
76 - Engineering Economics and Ship Design
Figure 20 shows some of the more important stages from a
shipbuilder's viewpoint.
IM..llllU TIl ....SPO..T Df ....NC
CDNeE"" ••Il•.•TIO'"
Roun ""'0 C.. Il... o
c ....... a c.""'"S'T le s
[e-OWO"",,IC. [VA1.U... TtO....
Or ALUIl.UT , ...£ S
GoIl ..£ .....L A.. Il .. NG£tolENT
PROl:E CullE S
F"••T£ EL.E"'E N"l
r"....L. 5oC.jNTL..Na.s
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r:ltl.l.aO..&D, CA.p,.,c.,nES, 1-1 ...... 15,
PCtw.. MA\.. S,.R.EMGTW,
lOC.A\. STIIIWean"'l, V,atATtDN,
.5..041_ MOTIOWS l M ..... OIU"JkING, ETC..
Fig.20 An Integrated Design Process
The practising ship designer should be interested in every aspect
of these stages, but here we are concerned mainly with stages
(iii), (iv) and (v). The relationships between these activities
are shown in the design spiral, Figure 21. The important feature
of the design spiral concept is that each successive cycle is made
with an increasing degree of complexity, but a decreasing number
of possible designs. The spiral starts with known information on
cargoes and routes, generating a matrix of several hundred
potential designs, with different numbers of ships, lengths,
breadths, depths, drafts, speeds and hull form characteristics.
Before the economic evaluation is made, each combination of
principal particulars has its design features evaluated in terms
of capacity, deadweight, trim and stability, and cost. After the
first cycle, the matrix is reduced in size by the application of
technical criteria, e.g. stowage factor too small or insufficient
stabili ty, and of economic criteria, e. g. inadequate rate of
return. The second cycle focusses on the optimal region and
Part 111 - Application To Ship Design - 77
enlarges it, examining a few tens of designs in greater depth,
using the results of the first cycle as first approximations. The
results of the second cycle may be sufficient for giving price
indications to a shipowner for a range of possible designs. For a
more detailed estimate, a third cycle may be made in still greater
depth, but for only a single design or a very small number of
designs. (Note that an inwardly converging spiral is sometimes
used to illustrate the concept of iteration in design
calculations, e.g. main dimensions adjusted until sum of masses
equals buoyancy).

@ \

/"'\ A
C.G • = <'Il'£ (s) iT<" / \
SUTICAi. • ,,/ \ I Hc.eT
""{ ..... 'e"'-......... / / "\ .....-"'...... \
OCCl< -..... / "'- \ ...< <'Il'£ (A) / Hue;
-..... ,< / OATA \
'--- "'" \ / " ----- 0 HULL
G\ , ---... / / E.STI ....T[
OUTFIT \!V OATA '--- "'- \ ./' \ HeT""'Ai. _ SOOT ...... FORM
..... - GIOOU.' '--- "'"\ / / ----- ..... eURV. 1
WT.. c:.\G,COST - :: _ _ c, \
_ - - ............-:/ ,......... - - O,5P1,.T. - _
_ _:::.::: ----- / I \\ " ......... '--- I """""STATIC' 0 DISPLACEMENT
,,'Ee •STOOl. - CHE<:' \ .....- .....- / \ "-....... J J
ENDURANCE G c:.APAeIT\,.. \ /' / / 1/ I \ \ "-" ". 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 "-... / / S.f - c-,:,,.. \\ G)
POWERING 5CAN1'c_. •...AI.
.............. I \
P'ULL CALCN._.__ e.-a
Fig.21 The Design Spiral
Such a system is ideal for computers, where each intersection of
spoke and spiral can be a sub-program, increasing in complexity as
each spoke is traversed outwards, e.g. steelmasses are initially
estimated from principal dimensions and coefficients, and
78 - Engineering Economics and Ship Design
subsequently from estimated scantlings. The early cycles should
treat each function as continuous, as at thi s stage relative
values are more important than absolute values. The later cycles
will use the step functions that may apply in practice, e.g. diesel
engines available with integer number of cylinders. The
application of step functions too early may lead to the area to be
enlarged proving non-optimal when more accurate design
information has been generated.
It should be noted that principal dimensions are the independent
variables. Deadweight, although a convenient and simple measure
of ship size, is a merging of three one-dimensional measures which
does not reflect the relative importance of length, breadth and
draft (or depth for volume-limited ships). There is an infinite
number of ships which can be designed to have equal deadweight, but
one of these will prove to be more economical than all the others,
gi ven particular operating and financial circumstances. Route
characteristics generally have a strong influence on the principal
dimensions which, in conjunction wi th hull fullness, may determine
displacement and, for a particular ship type, largely determine
lightship also. Hence, deadweight tends to be a drop-out from the
calculation and should not require to be attained exactly in a
broad-based design system. What is required is the optimal ship
wi thin a general band of deadweight and speed, allowing the
individual dimensions to take up whatever values produce the most
profi table ship within any given market constraints, such as
availability of cargoes and port facilities.
Such a design system is most easily applied to the straightforward
ship types (such as bulk carriers) which usually dominate the
number of enquiries; in practice, this frees valuable design
effort for the more complex ship types, where a wider range of
design features needs to be investigated, e.g. ship motions for
offshore craft.
Having briefly looked at the design process and where technical
and economic factors come together, a more detailed discussion of
the comparison of alternative ship designs follows, as this is the
usual situation facing the designer.
The alternatives need not be entire ships; they may of course
involve individual features, such as a comparison of different
cargo handling systems or different materials for piping systems.
Such features are straightforward to analyse economically, when
they do not affect earning oapacity, as in the latter case. The
alternative first costs and maintenance costs are evaluated in
terms of annual cash flows and converted to present worths to find
the system with the highest NPV (in this case income is not
involved, so the least negative value is looked for), or
incremental rate of return, if cost savings are being related to
extra first cost.
In practice, most alternative designs differ not only in building
and operating costs, but in performance, so that care must be taken
Part III - Application To Ship Design - 79
to include second-order effects. For example, better cargo
handling gear many not only save on operating costs, but may save
port time, offering the prospect of carrying more cargo per annum.
Here, those alternative features which have a significant effect
on the overall design are mainly considered.
The secrets of success in comparing alternative designs are to
obtain sufficiently realistic data and to use an appropriate
method of economic analysis. These seemingly simple requirements
are not sati sfied without some careful effort; there are many
examples, published and otherwise, which violate these principles
and therefore produce results which are likely to be misleading.
The scope for error multiplies with the size and complexi ty of the
alternatives; short-cuts and doubtful assumptions may be
tolerated for low investments in small items of equipment, but are
liable to produce serious errors when entire ships or maj or
systems are being compared. Some of the most common pitfalls
• Emphasis on costs alone rather than the difference of
income minus costs, i. e. profit.
• Failure to recognise that the engineer is usually more
concerned to evaluate differences correctly than absolute
values, e.g. ranking the alternatives, rather than deciding
whether to make any investment at all.

Failure to distinguish between differences
separately influence earning capacity or payload,
from mass or from volume considerations.
• Failure to establish a sufficiently realistic model of ship
operation, e. g. by implicitly assuming that ships carry 100%
payloads 100% of the time, or by not recognising that some
ships operate at constant speed, while others operate at
constant power or constant fuel consumption.
• Failure to consider the whole service life of the design, in
particular any fall-off in performance and increase of
operating costs with time.
• Failure to include second-order effects, e.g. reduced fuel
consumption not only reduces costs but also fuel load which
may enable more cargo to be carried.
• Confusion over treatment of depreciation; it is not an item
of expendi ture but a bookkeeping and tax calculation device.
• Mixing cash flows in real and in money terms, e.g. using
rates of return in money terms, but excluding cost escalation
(which implies real terms).
• Failure to take account of financial complexities in cases
where these are significant (e.g. cheap loans, accelerated
depreciation, subsidies, or taxation) although they do not
usually alter the order of meri t of technical alternatives.
80 - Engineering Economics and Ship Design
The above considerations mean that the most elegant technical
analysis is useless unless the economic analysis is sufficiently
realistic, and vice versa. Most of the practical difficulties
boil down to obtaining realistic data to include in the analysis,
rather than the mechanics of making the analysis. The fact that
certain data may be missing or of doubtful value does not prevent
an analysis being made - rather, special attention should be
devoted, firstly to see whether the factor concerned is critical
or not and, if it is, secondly to assess the sensitivity of the
resul ts thereto. The area of uncertainty is then more explicitly
appreciated, which simplifies the answer to questions of the type
'What level can we tolerate in this factor before this design loses
its superiority over the alternatives?'
A General Approach To The Evaluation Of Economic Performance of Freight
Earning Vessels
In any marine transport system, the principal parameters to be
considered are:-
• Cargo type, quantity and unit value
• Distance and physical characteristics of route
• Operating system, e.g. unitised, bulk, dedicated vessels.
Secondary parameters include:-
• Number of vessels in fleet
• Vessel size
• Vessel speed, or transit time
• Cargo stowage and handling rates
• Fluctuation in cargo availability
• Availability of return or backhaul cargoes
• Terminal restrictions
• Port time - facilities, shifts etc.
• Inland transport
• Power requirements
• Vessel first cost, new or secondhand
• Shore investments
• Operating costs dependent on throughput
• Operating costs not dependent on throughput
• Fuel costs and availability
• Financial conditions: taxes, loans, subsidies etc.
• Life of system components
• Alternative services and competition.
In more specific terms, especially applicable to the movement in
ships of bulk commodities available in large quantities, these
parameters may be expressed as:-
• Cargo payload
• Load factor* (see footnote on next page)
• Round trip distance
• Speed
• Effective cargo handling rate
• Number of ports of call and duration
• Daily fuel consumption at sea and in port
• Service days per annum
Part 111 - Application To Ship Design - 81

Ship cost
Crew costs
Maintenance, insurance and other daily running costs
Bunkering pattern
Fuel cost per tonne
Port charges
Cargo handling charges
Freight rate
Expected rate of return
Tax rate
Ship life
Depreciation (capital) allowances
Credit facilities
Anticipated escalation.
The essential first step is to establish the technical performance
of the vessel (and any alternatives) from design calculations, and
collect operational and economic data.
(a) Ship Data
sea fuel
Type of ship and general characteristics
Deadweight, tonnes (usually to summer draft)
Cargo cubic capacity, m
(bale, grain, liquid etc.
or other capacity as appropriate e.g. containers)
Service speed, knots, loaded and ballast
Service power, kW or HP
Specific fuel consumption (sfc), grams
per kWh or HPh
Auxiliary and port fuel consumption per day
Gross and Net Tonnage (GT, NT)
(b) Operational Data
Cargoes to be carried, average stowage factor
Cargo load factor (% full when cargo on board)
Steaming load factor (% miles loaded)
Typical round trip steaming distance, naut,ical
Number of ports of call per round trip
Average duration of each port call, days
Days 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 cargo
Total miles steamed
82 - Engineering Economics and Ship Design
product gives
overall load
factor (LF)*
( c ) Economic Data
Type and duration of charter, where appropriate
Average freight rate and any escalation clauses (if known), less
Ship first cost, for single ships (or multiple ships if fleet)
Any necessary extra initial costs for the vessel in question, e. g.
outfi t of containers
Expected life of ship
Expected disposal value**
Required rate of return, money or real terms
Loan terms**
Tax conditions**
Exchange rates, if income and expendi ture are not in same uni ts
Crew costs, annual including benefi ts, victualling etc.
Upkeep costs, annual including maintenance and repair, stores etc.
Other costs, annual including insurance, administration etc.
Fuel cost per tonne, main and auxiliary machinery
Port costs, average per port per GTjNT, or total per round trip
Cargo costs per uni t, including loading, discharging, claims etc.
Annual escalation of each cost i tem**
( d) Derivation of Annual Cash Flows· of Income and Expenditure
(i) Sea days per round trip (SD)
= Miles/(24 x Service speed, knots)
N. B. Speed should be a reali stic value allowing for average
weather, fouling, ballast legs, canal passages etc.
(ii) Port days per round trip (PD) = Number of ports of call
x Average duration.
N.B. Allow for waiting and berthing time, delays etc.
(iii) Number of round trips per annum (RTPA)
= (365 - Offhire days)
(SD + PD)
(iv) Sea fuel per day (tonnes) = Service power x sfc x 24/10'
+ auxiliary fuel (if any).
(v) Total fuel consumed per round trip (FPRT)
= Sea fuel x SD + port fuel x PD
N.B. Maximum fuel load carried (MFL) will depend on location
of bunkering ports and prices, amount of reserve fuel,
bunker capacity of ship, operator's policy etc. Typical
reserve about 20% of total carried or 4-6 days steaming,
whichever is the smaller.
(Vi) Maximum Payload = Mass limited: Dwt - MFL - stores, water
etc. or Volume limited:
Cargo capacity/average stowage factor
** In 'short-cut studies', these items wi 11 not normally be
included, since uniform cash flows are likely to be assumed.
Part III - Application To Ship Design - 83
N.B. Check both to find the limiting condition, if it is not
obvious. Consider if ballast is required in a load
condition, e.g. Ro-Ro vessels.
(vii) Cargo carried per annum (CCA) = Max. payload x RTPA
x LF x 2
N.B. The 2 derives from the ability to carry one cargo
outwards and another homewards on a round trip, thus
potentially earning two lots of freight income.
(viii) Cargo costs per annum = CCA x Cost per unit
N.B. Ensure consistency of cargo units, e.g. tonnes, m
container etc. 'Tons' for cargo liners may be 'freight
tons' , partly volume, partly mass.
(ix) Port costs per annum = Number of calls x RTPA x Cost per
GT x GT (or NT for certain ports)
(x) Fuel costs per annum = FPRT x RTPA x Cost per tonne.
N.B. Allow at some stage for consumption of more expensive
fuel, e.g. diesel oil in port, either here or at (v).
(xi) 'Daily' costs per annum = Crew + Upkeep + Other costs
(xii) Voyage costs per annum = Cargo + Port + Fuel costs
(xiii) Capital Charges (CC) =
Uniform cash flows: CR x (First cost - PW x Disposal value)
Non-uniform: Full DCF calculation year by year
N.B. CR for other initial costs like containers may be
different if their life is shorter.
Freight Revenue
(xiv) Voyage charter or Common carrier: CCA x Freight rate per
unit after commissions etc.
(xv) Timecharter: Dwt x Months on Hire per Annum x Freight Rate;
or Daily Rate x Days on Hire per Annum.
N.B. If TIC, no cargo, port or fuel costs, and round trips
and cargo carried per annum not important.
Calculation Of NPV, RFR, Etc.
The author's phi losophy in most cases is to make an ini ti al
short-cut economic analysis by hand, assuming uniform cash flows
so that CR and SPW may be used. This has the following advantages:
• A feel for the range of likely answers is quickly obtained;
• Much less initial effort and data collection is required.
84 - Engineering Economics and Ship Design
In many cases, it may not be necessary to take the economic
analyses any further, as the simplified calculations will quickly
screen the alternatives into 'obviously-on', 'obviously-off', or
'requires further investigation' categories. In the latter case,
full DCF calculations, probably now in money terms, usually
carried out by computer, should be undertakenj in which case the
analyst already has a reasonable idea of the magnitude of the
likely answers - a useful check on the computer, or more correctly
its input and output. In the case of modest investments, e. g.
small items of equipment, it may well not be necessary to go any
further than the CR-type approach - indeed the data may not be
readily available to do any more, e. g. insufficient records to
estimate escalation of maintenance costs or deterioration of
performance with time. In these less complex cases, it is rare for
the CR-type approach not to rank the al ternatives in their correct
order of merit - the engineer's job. Of course, a manager deciding
whether or not to make the investment will consider the financial
complexi ties, such as loans and taxes - but while the engineer will
be aware of their influence, his is not the final decision.
In practical calculations of al ternative ship designs, many of the
above parameters may remain constant for all alternatives, e.g.
cargo handling cost. Others may require extensive preliminary
technical calculations, e.g. cargo payload requires the accurate
estimation of deadweight and power from principal dimensions.
Estimating both first and operating costs must also reflect the
differences between the al ternative designs.
The example which follows has been deliberately simplified, partly
because the assumed constraints determine the ship size and engine
power, but it does show that differences in performance between
the two designs have been allowed for throughout.
Approximately 1.25M tonnes of mineral ore per annum require to be
transported between mine and smelter 2,000 miles apart. Compare
the economic performance of a self-unloading bulk carrier of about
60,000 tonnes d.w. with a conventional ship using existing shore
discharging plant. Port limitations restrict the ship to 225m
overall length and 13m draft. Available machinery fixes ship
speed at about 15 knots. Flag-of-convenience shipowner requires
10 per cent rate of return over 16-year life of ship.
Both Alternatives:
Breadth restricted to 32.2m for possible Panama Canal
. transits.
Adequate cubic capacity exi sts for the cargo stowage factor.
Dimensions 210m b. p. x 32. 3m x 17. 7m depth x 13. 1m draft. Same
hull form.
Fuel consumption 50 tonnes heavy fuel + 2 tonnes diesel oil
per day.
Time at loading port 1.5 days.
Two 8-hour shifts per day worked at discharging port, plus one
day manoeuvring and miscellaneous time per call.
Basic ship price f18M.
Part III - Application To Ship Design - 85
Shore Discharging Gear:
1,000 tonnes per hour, at cost of 90p per tonne.
Self Unloading Gear:
2,000 tonnes per hour.
Weight of gear plus structure 2,300 tonnes
Additional cost f9.08M.
Additional maintenance i90,OOO, engineers i50,OOO p.a.
Additional diesel oil consumption during discharge 0.5 tonnes
per working hour.
Addi tional three days out of service per annum.
Displacement, tonnes
Lightship, tonnes
Summer deadweight, tonnes
Voyage Details
Round trip steaming days
Hours to discharge
Discharging days
Loading days
Days per round trip
Heavy fuel per round trip, tonnes
Diesel oil per round trip, tonnes
Fuel load carried for round trip
(includes 20 per cent reserve)
Other deadweight items
Total non-cargo deadweight
Maximum payload, tonnes
Days in service per annum
Round trips per annum
Cargo carried per annum, tonnes
Operating Costs per Annwn
1. 50
Crew f
Other 'daily' running costs i
Maintenance of self-unloading gear
Heavy fuel costs (f120/tonne)
Diesel oil cost (f180/tonne)
Port charges (f20,OOO/RT)
Cargo handling charges
Total Operating Costs
Ship first cost, f
Capital recovery factor
Capital charges
Total Annual Cost f
Cost per Tonne Cargo, f
86 - Engineering Economics and Ship Design
Thus the cost per tonne is identical. If the cargo quantity per
annum had been fixed, the result would have been a reduced load
factor for the self-unloader, giving a higher unit cost. If shore
discharging costs had been below/above 90P, the conventional ship
would have been better/worse. If an actual freight rate were fixed
at above £5.566, the self-unloader would have been more
profitable, because of its greater annual tonnage; if below, the
conventional ship.
The simplified calculation above shows the two systems evenly
matched. It would thus be desirable to make a more rigorous
calculation along the lines of Tables 9 and 10 to include year by
year tabulations of:-
Escalation of items of expenditure
Credit arrangements
Accelerated depreciation allowances
Different building times and instalments
Residual value
Sensitivity of results to changes in principal assumptions,
e.g. fuel prices.
A third possibility may also be investigated: new shore
di 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 frequent
application of engineering economics, but not all published
examples take into account properly both the technical and
economic factors. Typical sources of error include:-
(i) Incorrect translation of volume and mass differences
into usable payloads for varying operational profiles.
(ii) Use of test-bed or manufacturer's provi sional data
instead of service figures for fuel or lubricating oil
(iii) Over-optimism about maintenance and repair costs and
time out of service.
(iv) Use of service power ratings or grades of fuel not
typical 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 costs
with time.
(vi) Omission of periods of operation at partial load or wi th
high auxiliary loads.
(vii) Fai lure to examine results for different operating
assumptions, e. g. higher fuel prices.
Part III - Application To Ship Design - 87
Typical prime movers considered in such compari sons include:-
Geared steam turbine: oil or coal fired
Direct drive slow speed diesel
Geared medium speed diesel
Gas turbine - industrial type or aircraft type
Nuclear reactor plus steam turbine.
Alternative transmissions may also be considered, e.g. direct,
geared, electric, with or without controllable pitch propellers.
Single or multiple propellers may be included. Each alternative
may have different:-
Specific fuel consumption
Type and cost of fuel
Mass and volume of machinery
Mass and volume of bunkers
First cost as installed
Running costs: fuel, maintenance etc.
Propeller r.p.m. and ship speed
which are of particular interest to the naval architect.
Other factors of particular interest to the marine engineer
Auxiliary power requirements and alternative means of
providing same, e. g. shaft driven alternators
Degree of automation
Manning requirements
Noise and vibration
Lubricating oil requirements
Bunkering arrangements
Time out of service for breakdown and repairs (off-hire)
Number of models or frame sizes available
Availabili ty of construction and repair faci li ties
Slow steaming capabili tyjpart load specific fuel consumption.
The following example shows how a basic comparison between slow
speed and geared medium speed diesel may be carried out for a
single screw lS-knot 28, aaa-tonne deadweight bulk carrier. The
slow speed (direct drive) ship is conventional, with diesel
alternators prov.iding the electrical power at sea, while the
medium speed ship has a gearbox-driven alternator and a
controllable pitch propeller. See Figure 22. It should be
emphasised that, while the figures used are typical, any
conclusion indicated should not necessarily be regarded as a
general one, as the data applicable in any particular case may well
differ. Especially in borderline cases, unquantifiable factors
like the availability of experienced engineers may affect final
88 - Engineering Economics and Ship Design
Fig.22 Alternative Machinery for Bulk Carrier
As with all technical and economic evaluations, the establishment
of realistic (rather than precise) data applying to the ship in
service is the foundation ofa proper evaluation. In some cases,
especially where data is uncertain, e.g. price of fuel in the
future, it is wise to investigate a range of values to determine
the sensi tivi ty of the results to any future change. Note the
typical number of significant figures usedi not too much spurious
accuracy, but enough to reflect the differences between the
Part 111 - Application To Ship Design - 89
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 rating
Propeller r.p.m.
Continuous service rating
Power deductions. KW (2)
Power delivered to propeller. KW(HP)
Corresponding speed: loaded. Knots
ba11 ast (3)
Total weight of machinery. tonnes
Summer deadweight. tonnes (4)
Main engine fuel viscosity, cSt at 50°C
(Redwood seconds at 100°F)
Specific fuel consumption, g/kWh
(g/HPh) (5) (6)
Main engine fuel at sea, tonnes/day
Auxiliary fuel at sea. tonnes/day (7)
Port fuel. diesel oil. tonnes/day
Lub. oil, system, g/kWh (g/HPh) (6)
Lub. oil. cylinder, g/kWh (g/HPh) (6)
Lub. oil. system. kg/day
Lub. oil. cylinder, kg/day
Economic Data
(costs in pounds)
One 6-cylinder
slow speed
direct drive
7360 (10.000)
87.5% =6440
6310 (8580)
380 (3500)
182 (134)
0.27 (0.20)
0.68 (0.50)
One 12-cylinder
medium speed
diesel geared
to single screw
7720 (10.500)
85% =6560
5900 (8020)
180 (1500)
197 (145)
1.22 (0.9)
Cost of machinery installation (8)
Total cost of ship
Annual cost of machinery
maintenance and repair (6)
Annual running cost excluding fuel.
lub. oil and port costs
Cost of heavy fuel per tonne (9)
Cost of diesel fuel per tonne
Cost of fuel at sea per day
Cost of fuel in port per day
Cost of system lub. oil per kg.
Cosy of cylinder lub. oil per kg.
Cost of main engine lub. oil per day
at sea (10)
Port costs per round trip
3,400.000 3.000,000
12.000,000 11.600,000
120.000 150,000
1,000,000 1.030.000
120 122
190 190
3752 3782
570 570
0.80 0.85
128 163
30.000 30.000
90 - Engineering Economics and Ship Design
Operational Data
Slow Speed Medium Speed
Miles per round trip
Proportion of miles in ballast, %
Average loaded cargo/maximum, %
Load factor %
Average speed, knots
Steaming days per R.T.
Port days per R.T.
Total days per R.T.
Days on-hire per annum
Round trips per annum
Critical draft point
Bunkering pattern
Reserve fuel. days
Number of steaming days to next
bun ker port I
Main engine f u ~ l carried. tonnes
Diesel fuel carried, tonnes
Total bunker load, tonnes
Other deadweight items. tonnes
Summer deadweight, tonnes
Cargo deadweight. tonnes
Cargo cubic capacity, grain,
cubic metres
Total cost of sea fuel per R.T., f
Total cost of port fuel per R.T., f
Total cost of 1ub. oil per R.T., f
Annual Results
(Mass Limited)
( 11)
( 11)
( 11)
Loading port
for round trip
Cargo carried per annum, tonnes
Annual running costs, f
Annual 1ub. oil costs, f
Annual fuel costs, f
Annual port costs, f
Total operating costs, f
Capital recovery factor, (CR-10%-20)
Annual capital charges, f
Total annual costs, f
Cost per tonne cargo. f
Equivalent timecharter rate f
(Volume Limited)
Cargo carried per annum. m'
Cost per cubic metre. f
Alternatively for Known Freight Rate
964000 ~
241000 ~
Freight rate. f per tonne
Annual income. f
Annual surplus before capital
Surplus/investment (eR)
Rate of return before tax. %
N.P.V.• f
charges, f·
+ 630000
+ 179000
Part III - Application To Ship Design - 91
Notes on Comparison of Slow Speed and Mediwn Speed Diesel
1. Typical service ratings from actual experience.
2. Slow speed diesel: transmission losses only (2%).
Medium speed: gearing and transmission losses (4%) plus 400 kW
al ternator power take-off at sea.
3. Average service speed after allowance for weather, fouling and
age. Same propeller diameter and propeller r.p.m., although if
a larger diameter propeller could be fitted, the geared medium
speed diesel could be better matched in r.p.m. Controllable
pi tch propeller in medium speed diesel ship gives higher
ballast speed relative to loaded.
4. Both ships have same main dimensions and di splacement. Assumed
difference in lightship is due to machinery and 50 tonnes extra
steel, resulting in increase in medium speed diesel
5. Adjusted from manufacturer's figures based on diesel oil for
the actual heavy oil used in service (typically about 8%
increase) .
6. Typical of service conditions, including differences between
7. Diesel fuel for alternators for slow speed diesel ship, gearbox
driven in medium speed ship.
8. Higher MCR of medium speed ship and c.p. propeller slightly
reduces the usual cost differential in pounds per kW for engine
plus gearbox.
9. Price differential between grades of fuel is about 2-3%.
10. Assumed in-port and generator lub. oi 1 consumption not greatly
different between the designs and comparatively small.
11. Typical of bulk carrier trading.
Load factor = (100 - Ballast percentage)
x Cargo percentage/lOO.
12. Weighted average of loaded and ballast speeds.
13. Medium speed two days more off-hire reflecting greater number
of cylinders and slightly more breakdowns in service.
14. If a draft restriction is encountered, whether at load or
di scharge port or en route, the maximum payload should be
calculated by reference to the deadweight at this draft, less
fuel and non-cargo items, relative to the last bunkering port.
15. Number of days bunkers carried x tonnes per day at sea ..
Assumed port fuel comes out of reserve.
92 - Engineering Economics and Ship Design
16. Maximum deadweight - fuel - other items.
A bulk carrier carries a wide range of cargoes like grain,
coal, ore etc whose stowage factors are such that the ship is
usually limi ted by deadweight rather than cubic capaci ty. Twin
medium speed diesels may give a slightly shorter engine room,
gi ving slightly more cargo capacity, but in thi s case there is
li ttle difference in machinery length wi th single engine.
If there were a difference in cargo capaci ty, the corresponding
payload in trades wi th low densi ty cargoes could be calculated,
and a weighted average taken.
17. From earlier lines for daily costs x number of sea or port days
for round trip.
18. Cargo deadweight x number o ~ round trips x load factor x 2 for
cargoes potentially both ways.
19. From earlier lines for round trip costs x number of round trips
per annum.
20. Capital recovery factor for 10% rate of return before tax and
20 year life. Rate of return is implicitly in real terms, since
uniform cash flows are assumed.
21. Total annual costs divided by annual cargo. Thi s is rather
higher than recent freight rates, as not only do low freight
markets last longer than high, but most existing ships will
have been built at lower prices and therefore able to accept
lower freight rates, if their technical performance is not
greatly inferior. The potential value of secondhand price at
early di sposal is not taken account of, but could be important
if there was a degree of novelty about one of the machinery
22. Total annual costs excluding fuel and port charges divided by
(summer deadweight/1.016 for long tons x months on hire (12 x
on-hire days/365».
23. Appropriate for volume-limited trades such as light grain or
packaged timber, although in this case, the order of merit is
not changed.
24. Solution for i in formula for CR.
25. Annual surplus x SPW - First cost.
Thus in both mass-limited and volume-limited trades, the slow
speed diesel offers a freighting cost about 2% less, largely due to
its lower specific fuel consumption. On some voyages, the ships
may not be fully loaded to capacity, and therefore payloads equal,
in which case the advantage increases slightly. On timecharter,
where freight is paid per ton deadweight per month, the slow speed
ship requires a slightly higher rate to compensate for its higher
first cost. A change in the assumed oil fuel price would not
affect the results significantly, as both designs have much the
same specific fuel consumption. If however the designs had much
Part III - Application To Ship Design - 93
different sfc' s, a lower fuel price would have benefi tted the
design with the higher sfc, e.g. steam or gas turbine, and vice
Since the designs are so close in economic performance, it would be
desirable to make a full discounted cash flow calculation, over
the full lives of the ships, especially if there was a definite
proposal to build. This would take into account the various
practical financial factors such as loans, taxation and
escalation, as well as any anticipated differences in long term
performance, e.g. loss of speed and increase in maintenance and
repair costs and time with increasing age. Furthermore, actual
shipyard quotations may show a different variation in first cost
than that assumed, depending on market conditions at the time.
Different assumptions on for example, fuel price differential, 380
vs 180 cSt, or round trip distance or draft limitations may have a
small influence. If propeller diameters and r.p.m. are not equal,
there may be a benefit to the lower r.p.m. ship.
There may also be other less tangible factors to take into account
such as experience of the company's engineering staff and
compatibi li ty wi th exi sting ships in the fleet.
The results of the economic evaluation are useful in reducing the
area of uncertainty where judgement has to be applied in making the
final decision, rather than in automatically determining that
Sensitivity, Uncertainty and Trade-oHs
The previous examples indicate that the results may be sensitive
to changes in the data, because there may be uncertainty about many
of the technical and economic parameters. For example, it is not
possible to predict exactly over the life of a ship fuel prices,
maintenance costs, port time etc. The simplest way of
investigating such uncertainties is to repeat the calculation wi th
different values of key parameters, and assess how sensitive the
resul ts are to such changes.
Figure 23 shows a typical presentation of such calculations (which
might be for alternative fuel saving designs), with the economic
measure of merit plotted against the key parameters (see page 117
for the most important parameters). Where the curves for
alternative designs do not cross, the ranking is not changed, but
where there is a crossover, the decision to be made is whether the
operating situation is likely to' be to the left or right of the
94 - Engineering Economics and Ship Design
4: a::

~ ~ :
- ....
= et
Fig.23 Typical Presentation of Results
It is also possible to use the results of sensitivity calculations
to make trade-offs, e. g. how much extra in first cost can one
afford to pay to obtain a reduction of fuel consumption. The
decrease in NPV from say a 10% increase in first cost can be
compared with the percentage decrease in fuel consumption needed
to generate a corresponding increase in NPV. The second edition of
thi s book gives some examples of such trade-offs, for example
whether better materials with lower maintenance costs justify
higher first cost.
There are more elaborate techniques for incorporating uncertainty
into technical and economic calculations. Ref. 2.30.2 reviews such
techniques which take account of probabi li ties. These may be at a
basic level of assigning mean values and variances to, for
example, costs or weights, or more complex simulation models,
using either Monte Carlo methods or analytical functions. The
more complex methods require more data, time and effort for
analysis, and are therefore better reserved for later stages of
development, once the simpler methods have indicated that the
proposed design looks economically promising. The advantage of
such techniques is that point value results are no longer produced
(e.g. implying 100% certainty that the internal rate of return
will be, say, 12.5% in money terms), but a range of values, e.g.
Part 111 - Application To Ship Design - 95
that there is 15% probability that the IRR will be between 10 and
11%, 22% between 11 and 12% etc., which gives a better feel for the
uncertainty inherent in all techno-economic problems.
The position has now been reached when the factors involved in
selecting the optimal size and speed for a ship can be examined.
Optimal Ship Size for a Given Speed
For a bulk cargo trade where there are no restrictions on ship size
or cargo availability, the economies of scale in building and
operating costs indicate that the optimal ship is in general the
largest possible, offering the lowest transport costs. The
si tuation is shown diagramatically· in Figure 24. The top half
shows a typical curve of freighting costs per tonne, FC, against
ship size; one particular freight rate, FD, is shown. The lower
half shows the annual cost (or present worth), i.e. multiplying
the unit cost curve by the payload at each ship size. MaximumNPV
is obtained at CD wi th the maximum permissible size of ship for the
trade. Thi s size may be determined by a number of physical
restrictions, particularly depth of water, such as:-
Loading or discharging
e.g. harbour entrances, locks,
turning basins, berth limitations,
air draught, storage facilities,
cargo handling equipment.
Shallow water en route
Repair dry docks
Shipbuilding berths and docks
There may also be limitations on cargo availability. In this case,
an upper bound is set on freight income, G'E
, after all the cargo
has been lifted. Here the maximum return occurs at AI BI; any
increase above this optimal size merely increases expenditure
(which includes capital charges), while income remains constant
along B' El.
96 - Engineering Economics and Ship Design
I i'......a

-rL.... - _!,
r III 1: tIl
;: 0.
a % c %
Ott) r",
Fig.24 Optimal Sh ip Size
A similar effect is obtained if the loading or discharging rate is
slow compared with the size of ship. Port time increases with
size, reducing the number of voyages per annum and hence
restricting income. Figure 7 illustrates this effect, and also
shows how the optimal size reduces if shore costs increase with
size of ship. The effect is also seen with tankers where the
'shore cost' line might include dredging costs, tankage costs,
addi tional tugs or special anti-pollution measures (Reference
3. 13. land 2.22) .
The more general case of limited cargo availability is well
illustrated by Benford in Ref.3.2.3. Ship size depends on
forecasts of cargo tonnage offering, inbound and outbound.
Physical limitations may apply as above, e. g. entrance lock sizes.
The value of the cargo may also be significant in relation to the
ship: e. g. general cargo at £500-5000 per tonne cargo, ship
£600-1200 per tonne d.w. (Compare bulk cargo £15-150 vs.
£200-400). Hence optimisation should be based on economic
calculations of ship plus the cargo in transit, unless the
operation is such that inventory costs do not fall on the
shipowner, e.g. timechartered ship (Ref.3.2.2).
Part 111 - Application To Ship Design - 97
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:
The influence of several of these factors can be seen when
comparing the large size of container ships with break-bulk cargo
vessels. The first seven factors are the most significant.
A dynamic view should be taken of physical restrictions, weighing
up the possibility of changes during the ship's life. This is
particularly so in the case of draft: it may be worth paying a
little more for a deeper drafted ship, even though it may not be
able to use all this draft on more than a small proportion of the
voyages in its life. If there are no restrictions on length or
breadth, a larger ship at reduced draft may well have a greater
payload and offer lower freighting costs per tonne than a smaller
ship down to her marks. Choice of optimal size is then a trade-off
between the known costs of greater size against the chances of
being able to use the size sufficiently often over the ship's life
to justify this cost.
Optimal Speed for Ship Size
In transport situations, there is often demand for the greatest
practicable speed to be adopted. Figure 25 illustrates
diagramatically the effect of ship speed on total costs and total
income. Broadly speaking, increasing ship speed does not have a
great effect on hull first cost (apart from an influence through
reducing the block coefficient, so increasing dimensions to keep
payload constant). Likewise, crew costs, and many of the other
operating costs are not much affected by speed. Installed power
does, however, increase roughly as the cube of speed, so total fuel
consumption and fuel cost go up roughly as the cube, while
machinery first cost goes up roughly as the square of the speed.
Meantime, however, transport capability, even with zero port
turnaround time, can only increase directly proportional to the
speed. Thus as indicated in Figure 25, there is an optimal speed
for ships, which is a function of both technical and economic
factors: at what point the increased capital and operating costs
outweigh the increased revenue. It is possible to show, making
simplifying assumptions, that speed is in theory an optimum when
fuel costs amount to half the total of other operating costs,
excluding cargo expenses, but in practice more detailed
calculation is necessary.
98 - Engineering Economics and Ship Design
_------ I
- ----------,
C.APIT... L C>lAe.r.El>
- ---
CR.""", 1.. ... NC( ETC.
- --
' ... PlT... L C...... C.caES
Fig.25 Optimal Speed of a Sh ip
The case of ships is complicated by practical effects of port time
and machinery performance at reduced powers, as well as by the
relationship between hull fullness and speed-length ratio. Bulk
carriers have relatively low speed, partly because of the need for
large deadweight and high block coefficients, but mainly because
of the low value and "repeatability" of the cargo, i.e. they can
often be considered as interrupted pipelines delivering to buffer
stores. General cargoes, particularly manufactures, are of much
higher value, implying high interest charges and are often
consignments which are needed for specific use on delivery
(inventory costs). Freight costs are only around 5-10 per cent of
c.i.f. costs, and thus general cargo not only needs higher speed,
but can afford to pay for it without increasing delivered price
relatively as much as wi th bulk cargoes.
The heavy lines in Figure 26 illustrate the typical case. The
optimal speed occurs where there is the greatest difference
between the annual income and annual expenditure. The 'lens'
shape indicates that the curve of maximum profi t is shallow in the
region of the optimum; 'flat laxity' is a phenomenon frequently
found in such situations. The effect of three other factors is
also illustrated: increased freight rates increase the slope of
the income line, so increasing the optimal speed; similarly,
reduced fuel costs (or reduced power requirements) swing the
expenditure line down, increasing optimal speed; while increasing
cargo value and inventory costs also increase optimal speed.
Part 111 -Application To Ship Design - 99
Fig.26 Factors Influencing Optimal Speed
Some general factors which encourage higher speeds of ships are
summarised below. The converses are also generally true.
High value cargoes as described above. Note the converse:
low value cargoes cannot afford to travel at high speeds.
High freight rates: the ship carries greater amounts of
high-earning cargo over a period. Note the converse: when
freights are low, ship speeds are often reduced, e. g.
tankers in times of surplus.
Cheaper fuel (or fuel costs rising slower than other items
of income and expendi ture ) .
Short port turnaround time: increasing the proportion of
time at sea when the higher speed can be used.
Competi tion: especially where freight rates are fixed,
e.g. liner conferences, so non-price factors become more
High interest rates: so that high capital charges on the
ship are spread over more voyages.
High daily operating costs, e.g. crew: increasing
productivi ty per uni t t i m ~ .
Increased trade: but larger ships would be a better
solution, which themselves permit higher speeds
(speed-length ratio).
Shortage of building funds or building capacity: greater
transport capabi lity per uni t investment.
100 - Engineering Economics and Ship Design
Lower specific fuel consumption: fuel weight and cost
Availability of machinery of requisite high power.
Reduced cost of main machinery: e.g. from economies of
scale in manufacturing, improved materials etc.
Reduced volume or weight of machinery plant or bunkers:
effect not very marked.
Improved hull form design: reduced power requirements.
Improved propulsive performance: reduced power
Smoother hulls: both when new and in service, e.g. better
Improved sea performance: reduced speed loss due to ship
motions, weather routing etc.
Studies of nuclear-powered container ships demonstrate a number of
these points; their optimal speed will be higher than
conventionally-powered container ships, although their maximum
rate of return may be lower depending on assumptions about
building costs, fuel prices, etc., as indicated in Figure 27. As
the curves such as those in Figure 27 are usually quite flat in the
region of the optimum, in many cases practical and commercial
considerations may be allowed to dictate the selection of exact
size or speed, e.g. the stepwise availability of diesel engines.
Thus the penalty for departing from the true optimum may be quite ,
small. The optimum may, of course, move during the ship's life,
e.g. with changing fuel prices, so it is generally preferable to
err on the side of sizes and speeds somewhat greater than the
theoretical optimum; this tendency is often reinforced by
competi tion and the desire to offer potential charterers an
attractive ship, and a general desire to reduce capi tal investment
per annual tonne-mile, even at the cost of increased operating
expenses over the ship's life.
; SI4I"
Fig.27 Comparison of Diesel and Nuclear Propelled Cargo Ships
Part 111 - AppUcation To Ship Design - 101
The optimal speed for an existing ship under various conditions of
fuel price and freight rate is different from and may well be
higher than that of a new ship. In comparison with Fig.25, the
capi tal charges on both hull and machinery are fixed (' sunk
costs' ), whi le there is al so an upper limit, of course, on maximum
speed. In general, it can be said that the optimal speed for an
existing ship is its design speed, unless fuel prices are very high
and/or freight rates very low - a si tuation common over many of the
years 1974-85. Reference 3.10 discusses these factors in more
Speed, as such, may not always be the appropriate design
parameter, especially on short distance scheduled services, when
transi t time may be used, in association with port turnaround
time, e.g. 24-hour frequency may be required for ferries.
Nevertheless, it is still possible to calculate the schedule
giving the optimal speed, but usually in the context of a fleet of
vessels providing a service, as discussed on page 107.
Overall Optimisation of a Single Ship
The separate optimisation of ship size and speed has been
discussed to illustrate some general points, but in practice they
must be combined to yield an overall optimal design. Figure 28
illustrates the general situation where ship size and speed can
vary over a wide range. A section through AA would indicate the
effect of optimal speed for a given size. Closing the contours as
shown in the dotted portions normally requires that some
increasing constraints are placed as ship sizes increase, e. g.
that load factors decrease as large vessels find it increasingly
difficul t to obtain full cargoes, or that shore costs ri se steeply
- the effects shown in Figs. 24 and 7 respectively. Figure 28 also
shows contours of equal transport capacity, so it can be seen that
the line of minimum cost for any specified cargo quantity follows
this tangent line rather than the lowest points of the equal cost
contours. Reference 2.19 di scusses thi s aspect in more detai 1.
11<' •
• '2£
Fig.28 Optimal Combination of Size and Speed
102 - Engineering Economics and Ship Design
The simplest case to consider in overall optimisation is that of a
single ship, particularly participating in general worldwide
trading where the ship does not have to be too closely tailored to
cargo availability and fleet requirements. The majority of bulk
carrying vessels fall into this category, where a design is sought
which maximises return at any given level of freight rates. In
general, this is achieved by the design offering minimum RFR,
given a particular sector of the market and an assumed range of
trades in which the ship might participate, and where the addi tion
of one single ship is not sufficient to influence the transport
requirements of any particular trade. The problem is then one of
unlimi ted cargo availability as far as any particular shipowner is
concerned, or an open competi tive system rather than a closed
system. (Ref. 2.34).
Of course, before thinking about an actual ship design, an
operator will have decided on the general market within which he
assesses the best prospects to lie, e.g. because of increasing
demand and limited supply. In effect he decides from his market
research to operate in one particular sector of Fig. 28 with
constraints associated with that trade, e.g. large combination
carriers, reefers, or offshore supply vessels.
Optimisation of any particular ship type, especially well-defined
types such as bulk carriers or tankers, then involves the finding
of that combination of design variables which gives the highest
value of the selected economic measure of meri t, e. g. RFR, subj ect
to various constraints such as dimensional limitations, strength
and stability standards. For most specific ship types, carrying
or earning capacity, whether deadweight, cubic capacity or deck
area, is largely a function of the principal dimensions, length,
breadth, depth and draft. The last two are usually closely related
through the freeboard rules. In addition, block coefficient and
speed are required to define the ship more exactly, even though
speed, length and block coefficient are often closely related
(maximum block coefficient is usually a function of Froude
number) . Thus, for any given ship type, there are only a few
primary design variables which very largely define the size and
speed, as shown below, although a rather greater number of
secondary and tertiary variables.
1. Primary Design Variables
Number of ships in fleet
Depth to principal deck
Block coefficient
2. Secondary Design Variables
Number and arrangement of cargo and equipment spaces
Number and height of decks
Type and capacity of cargo handling gear
Machinery type and location
Number and type of propellers and r.p.m.
Fuel, if not oil
Structural configuration and material
Part 111 - Application To Ship Design - 103
Hull form characteristics
Superstructure arrangement
Tankage allocation: water ballast, oil fuel etc.
3. Tertiary Design Variables
Number, dimensions and type of hatches
Crew number and accommodation
Auxiliary machinery
Location and arrangement of specific equipment
Manoeuvring devices
Extent of automation
Types of coatings.
Note that other important features of the design depend on the
above variables. These include:
Maximum and cargo deadweight or payload
Cargo cubic capacity
Fuel consumption, at sea and in port
Lightship masses
Longitudinal strength
Trim and intact stability
Damaged stability
Thus 'check' calculations are made of these features and if a
deficiency is found, one or more of the design variables must be
There are a number of mathematical techniques for finding the
minimum of a function of several variables, e. g. RFR as a function
of some of the above design variables. Reference 3.26 discusses
techniques of non-linear optimisation for use in computer-aided
ship design whi le References 3.9, 3.13.1, and 3.15 are examples of
their application. Most of the practical techniques of
constrained optimisation work best with a moderate number of
variables. Therefore, it may sometimes be desirable to separate
some of the secondary and tertiary variables to later stages of the
optimisation process (multi-stage optimisation). In some cases,
the range of choice of the variable itself is smalli the
conclusions from a separate study are therefore likely to be valid
over all the range of choice of the variables being studied, e.g.
choice of machinery type or coatings. In such cases, the coupling
between primary and the other design variables is small, and
sub-optimisation is valid. Of course, such alternatives still
need to be evaluated economically by the normal methods. Other
variables may be more subjective in their choice, and not easily
quantified, so that the currently preferred solution can simply be
adopted as standard, e. g. superstructure arrangement.
The general approach then is to interpret the ship's trading
pattern in terms of cargo volumes, distances and port or other
restrictions, and select ranges of possible dimensions, block
coefficients and speeds for the first cycle of the design spiral.
104 - Engineering Economics and Ship Design
Several hundred designs may be generated either by automatic
search routines or by straightforward parametric studies. Some of
the designs are likely to be eliminated on purely technical
grounds, e.g. inadequate stability, but most will require the use
of an economic criterion to reduce the number of possible designs.
If freight rates can be predicted, the criterion would normally be
maximum NPV, but it is often found that minimum RFR is more
realistic if comparing different sizes and speeds, as actual
market freight rates vary with the ship size and speed in a not
very predictable manner. The optimal region of combinations of
length, breadth, depth, draft, speed and block coefficient may
then be 'magnified' on the second and third cycles of the spiral by
increasing the level of complexity of design, using the initial
resul ts as first approximations. The final cycle based on perhaps
a single ship is, primarily, to develop the technical design and
cost estimate in more detail, but economic evaluations can be
applied to make detai led trade-offs of, say steelmass against
fabrication cost, or additional equipment against reduced
operating costs.
" I

TMAT ....."".f...
Or Po.,..
WILL WA..,,,
.UA.'IR "MAN '-- ----"'--_""""-__
_,: /""5
C _,
L _r-"
Dl.p,,,,, 0". YJ...'IIl:. (T')
(Olt c,.,It.(i.O

'I' P....u).
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0'. SO 1-- '""-=
(&\IcK t.AIU.OU)
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Sow ... CLAO'T (T)
s..... OlLAn ITI
Fig.29 Selection of Optimal Design Draft
It is undesirable to apply too many absolute constraints on
variables in the early as it is usually found that the most
economic solution is simply to build to that constraint. This
particularly applies to draft limitations in the bulk trades, but
also to breadth limitations, e.g. for any large ship using the
Panama Canal. Unless a vessel is being designed to operate all its
life on a given route with fixed limits (e.g. canals or locks), it
is essential to recognise the probabilistic nature of ship
operations; there is always a chance that extra dimensions may be
usable at some stage in a ship's life. The distribution of
available depths of water in ports throughout the world where the
Part 111 - Application To Ship Design - 105
ship is likely to call might be as shown in Figure 29A. A very deep
draft ship will only be able to call at very few ports, while a
shallow drafted ship may not be taking full advantage of the water
depths available. With planned port improvements, it might be
postulated that the 1995 situation may be different, as shown by
the broken line. Either distribution may be converted into a
cumulative probability curve as shown in Fig.29B. The
corresponding load factors are shown in Fig.29C; very deep draft
ships are likely to have longer ballast steaming times and more
part cargoes than smaller ships which are more flexible. Fig.29D
shows' how the economies of scale in operating costs (including
capi tal charges) may be offset by declining income per tonne cargo
resulting from lower load factors. The optimal draft for a range
of port and cargo availabilities can then be estimated (higher for
1995 as indicated) by simulating the operation of a range of
possible ship designs through a chosen spectrum of possible ports
and cargoes. The selection of design draft therefore requires an
assessment of the probabilities of being able to use the extra
draft sufficiently often to pay for its extra cost. Figure 30
shows the results of one such study, which takes into account both
port and cargo availabili ty. It can be seen that the optimal ship
is not neccessarily the biggest deepest draft vessel. The limited
depths of water available and some high stowage factor cargoes
combine to reduce the value of extra deadweight and draft.
11 PV.
(EH). d
1"- ...
' ..
/ 11rn
.... -
/ ./
50000 60000 70 000 10000 ONT.
Fig .30 Optimal Deadweight with Limited Cargo Availability
and Water Depth
The incorporation of such probabilistic considerations in a
practical design process requires a broader approach - the systems
approach as discussed in Section 4.
106 - Engineering Economics and Ship Design
Fleet Transport Capabilities
While many ships are designed to trade to a wide range of ports
with a wide range of cargoes, e.g. vessels such as bulk carriers
likely to be chartered out for most of their lives, others can be
designed for a more specific trade, especially owner-operated
ships. In such situations, the quanti ties and types of cargo
moving on particular route(s) can usually be estimated at the
design stage. The problem is then of limited cargo availability.
It is then possible to explore the range of:-
ship types
number of ships in fleet
ship cargo capacities
ship speeds
terminal facilities
which will together provide the required transportation
capability. There is a very large number of potential solutions,
even before considering the range of detailed design
characteri stics of individual elements, e. g. ship dimensi ons.
There will however usually be a number of considerations which
wi 11 limit the range of practical solutions. For example,
technical and economic factors usually combine to limit speed to a
range of about 10 to 25 knots, while frequency of service may be an
important marketing factor, limiting the possible combinations of
speed and size of ship. Furthermore, the possible number of ships
may only take an integer value - usually identical ships (or nearly
so) will be required - and operational flexibility may demand a
certain minimum number, e.g. not a single ship. It is therefore
often not too difficult to define a more limited spectrum of
feasible fleets which all have the required transportation
capaci ty, in terms of, say, tonne-mi les per annum, and to select a
smaller number of them for more detailed study.
It is required to find the nwnber, capacity and speed of the various
fleets of bulk carriers which could transport 2.5 million tonnes
of mineral ore 1500 mi les between mine and smelter, with no return
Annual transportation capacity =2.5 x 1500
. =3750 million tonne-miles.
A quick appreciation of the possible range of ship sizes and
numbers can be gained by using an approximate annual productivi ty
figure from Table 11 which relates to typical ship voyages and
speeds. The potential productivi ty of a bulk carrier is say 45,000
tonne-miles per annum per tonne deadweight. (Note that actual
productivi ties may be appreciably less in poor markets, when less
cargo is available).
Approximate tonnage of fleet required = 3 7 ; ~ O ~ O l 0 6 '"' 83,300
Part 111 - Application To Ship Design - 107
This might be made up of:
one ship of about
two ships of about
three ships of about
four ships of about
five ships of about
six ships of about
seven ships of about
84,000 dwt
42,000 dwt
28,000 dwt
21,000 dwt
17,000 dwt
14,000 dwt
12,000 dwt etc.
It might therefore be decided to investigate in more detail fleets
of up to eight ships, with speeds ranging from say 10 to 18 knots
(the cargo is implicitly of low value so very high speeds are
likely to be uneconomic). It is also necessary to take into
account the terminal facilities for loading and discharging, and
if these do not already exist, the cost of their construction
relative to ship size.
Each ship's capability can now be investigated in greater detail.
Page 84 shows that:
Annual cargo per ship = 2 x Maximum cargo payload
x Average load factor x
Round trips per annum
Assuming no return cargo, cargo payload as 95% of maximum
deadweight and N ships in the fleet:-
Annual capacity, tonnes = 2 x (0.95 x DW) x 0.50 x RTPA x N
2,500,000 = 0.95 x DW x RTPA x N
or DW = 2 630 OOO/(N x RTPA) ... (1)
RTPA = (365-offhire days)/(sea days + port days)
Assuming 15 days offhire and speed V,
RTPA = 350/(1500 x 2/(24 x V) + port days)
As a first step to estimate port days, either a typical value for
bulk carrier time in efficient ports could be assumed, say 2-3 days
per call, or more realistically a possible cargo-handling rate,
say 1000-2000 tonnes per hour for bulk cargo. Such rates would
correspond to about 1 day in port for the smaller ships and about 3
days for the larger. '
Assuming for simplicity that loading and di scharging port time are
each 2 days, ship size can now be recalculated for a range of
possible number of ships and speeds. Only three combinations are
shown to indicate the process, but Figure 31 shows the range of
possible fleets.
Number of ships
Speed, knots
Sea time 3000 miles, days
Port time, 2 calls, days
Round trip days
RTPA (350 days)
Ship DW from (1)
Frequency of service, days
108 - Engineering Economics and Ship Design


"'- ,ro
z , "' .... ION TOWWtS pta ....u
1,'00 P11U", 0l1li£ ""A"(



- ---

.. E3
--- --- - --- --- --

-- -- - -




f- -


• s"',."
.3+-9.."'5 _


V7 -;
I' ,

-1---- - - -- -- - - -
10 11 It 13 14
" I'
Fig .31 Spectrum of Possible Bulk Carrier Fleets
Note that
fixed annual cargo capacity and fixed port time.
capaci ty are related and independent of speed,
Frequency (days)
• Round trip days
Number of ships
Annual capacity in one direction = Average ship capacity x
Number of ships x RTPA
Average ship capacity
_ Annual capacity Round trip days
Number of shIps x 350
Annual capacity x frequency
• 350
Part 111 - Application To Ship Design - 109
It might be considered too risky to have a single ship fleet, and
operationally inconvenient to have less than one ship per week (7
day frequency). Similarly a frequency of less than 2 days would
require more than one berth, as port time is 2 days. The remaining
combinations of size, speed and number of ships all look feasible,
with between 2 and 6 ships, 15,000 to 50,000 dwt, 10 to 18 knots,
frequency 2 to 7 days.
More detailed studies would then be put in hand for exploring the
design parameters of ship and shore installations for fleets of 2,
3, 4, 5 and 6 ships, at an appropriate level of detail, evaluating
the comparative economics and finding the overall optimum of ships
plus shore installations, usually in terms of minimising transport
cost per tonne cargo (RFR).
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 2500
2. 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 11
4. Total IIllles per round 16 000 11 000 5 000 12 000 15 000 2 000 1000
tr Ip
115 000
5. 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 2
7. Average days per cal I 2.5 6.0 2.0 1.7 11.0 1.0 2.0
8. Port days per round trip 5 18 6 10 36 2.0 4.0
9. Per cent port time 9 37 30 29 46 26 51
10. Sea days per round trip 116 31 111 211 39 5.2 3.6
11- Sea days per annum 317 221 245 2
17 182 253 171
12. Tota I days per round trip 53 49 20 311 75 7.2 7.6
13. RTPA (350 days) 6.60 7.14 17.5 10.3 4.67 46.6 44.9
14. Average per cent miles 50 60 50 lOO 95 100 60
15. Per cent full of cargo 96 90 90 70 75 50 90
16. Overa 1I load factor 116 54 45 70 71 50 54
per cent
583 000 375 000 80 000 194 000 112 011
17. 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 45
19. Tonne-miles per annum (H) 12 370 2420 1460 2250 600 194 56
20. 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
110 - Engineering Economics and Ship Design
General Cargo Ships
The position wi th general cargo ships is similar in principle, but
there are more considerations to take into account. In particular
the performance of fleets of unitised cargo ships is markedly
different from that of break-bulk ships. Unless there is a clearly
defined type appropriate for the trade, it may thus be necessary to
compare fleets of one or more of the following types:-
Container ships
Roll-on/roll-off ships (RoRo)
Pallet carriers
Barge carriers
Break-bulk cargo vessels
Combination types,
e.g. container/RoRo, multi-purpose
tween-decker, containerjbarge carrier.
As most cargo liners operate in Conferences, there may be
restrictions' on the number of a company's ships or minimum
frequency of port calls for a particular service. Furthermore I as
freight rates are fixed within each Conference, competition tends
to take the form of higher speeds or better performance in handling
particular cargoes.
Higher speeds are also encouraged by the higher average value of
general cargo compared with bulk, which adds potential inventory
costs. The cargo movements will also fluctuate with the state of
trade, as well as seasonal effects. Even with unitised cargo,
there are nearly always more than two ports served. An adequate
margin is therefore necessary in fleet capacity, taken in
conjunction with an appropriate load factor. Where cargoes of a
wide range of stowage factor are being carried, allowance must be
made to provide adequate cubic capacity, and if necessary deck
Figure 32 shows how sea transport cost per container varies for a
particular trade route wi th number of ships, size and speed. Since
several combinations all offer virtually the same freighting cost,
other factors would be then considered before undertaking detai led
design studies e.g. competition, physical limitations on ship
dimensions, machinery requirements etc.
Part 111 - Application To Ship Design - 111
3 - SNIP fLEEl z 2400 HO (NOlS
OHIIW. . SIll PflEET , 1150 HO 19 0 UOlS
DPlIIoUl 5- SKIP flEEl , 1320 Ho UOlS






... /


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16 22 26 3D
Fig.32 Container Ship Fleets Transport Cost
The Systems Approach
Much has been written on the subject of the systems approach to
design but, in essence, it can be regarded as an integrated
quantified approach to problem solving using appropriate tools.
It reduces the complexity of a real-life system to manageable
proportions, yet still retains the essential features which affect
performance and economics.
Systems Analysis is used to define the problem:
The system under study, e. g. crude oi I transport system
The relevant sub-systems, e. g. machinery system
The objectives of the system, e.g. to minimise transport
The gathering of basic information.
112 - Engineering Economics and Ship Design
System Design is concerned wi th:
Forecasting, e. g. the demand for oi 1
Model building, i.e. a simplified representation of the
real system, such as a mathematical model
Simulation of the system or replication of the essential
features of operating a complex system
Optimisation of the system, e.g. selection of the design
variables, i.e. those under the control of the designer,
such as ship main dimensions.
At the ship design level, the systems approach encompasses stages
such as set out in Table 12. At the supra-system level, the
problem of looking at alternative transport concepts rather than
conventional tankers might be studied, e. g. pipelines, towed
flexible containers etc. At the sub-system level, al ternati ve
cargo handling systems might be studied - the results of which
could be fed back at the ship design level. System boundaries need
to be considered, particularly by reference to financial and
contractual cornrni tments at various stages.
Part 111 - Application To Ship Design - 113
The Systems Approach to Ship Design
Formulate problem and
Construct conceptual model
showing logical relationships
Identify independent
Identify dependent variables
Find optimal design of bulk carrier
for a given trade route with minimum
transportation 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 return
CC: daily, fuel, port etc. costs
Cargo quantities and characteristics,
port facilities, route restrictions,
fuel price etc.
First cost: steel, outfit, mach1y cost
+I ~ P O t . ,
·· t d
lmenSl0ns 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 handling
rate, 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 combination
of 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, Vetc .
114 - Engineering Economics and Ship Design
Some Other Techniques
In addition to optimisation techniques and sensitivity analysis,
other techniques which have applications in systems engineering
(broadly, concerned with inter-relationships between elements of
new systems) and operational research (broadly, concerned with
improving the performance of existing systems) include:
Forecasting: Estimating the demand for some product, for example
ship types such as product carriers, or trade flows, such as iron
ore. A range of techniques may be used, ranging from canvassing
expert opinion, e. g. the Delphi technique, to trend analysis
(perceived relationship between demand and time), to economic
analysis, and to model-building. These techniques are listed in
the order of movement away from judgement towards quantified
techniques (Refs.2.13 and2.36).
Allocation: Assigning resources to jobs by matching supply and
demand points to minimise total costs, e.g. which ships to use on
which trades. Such transportation problems can be solved via
linear programming (Ref. 2.41) .
Scheduling: Sequencing and routing, by allocating not only ships to
transport demands, but the sequence in which the demands are met
using what route. Can be applied to find optimal allocation of
ships in a fleet to a number of contracts of affreightment, to lift
the required cargoes in the required time at minimum cost
(Ref.2 .42) .
Probability concepts: Many of the aspects of ship design exhibit
uncertainty, in the sense that the probabili ty of the actual value
equalling the predicted value is rarely unity, e.g. steelmass,
speed on trial, outfit manhours etc. Where it is possible to
establish mean values and variances, probability theory can be
used to estimate the likelihood of the actual value being within
some acceptable tolerance of the predicted (Refs .1.7.1 and 3.43) .
The Taylor series approach and hybrid method are extensions of the
concept (Refs.2.30.2 and 2.31).
Simulation: A process of replicating the operation of a system over
time. Particularly useful for transport problems which are too
complex for mathematical expression, where a 'motion picture' of
variation in performance with time is required (e.g. to identify
bottlenecks), and where stochastic variables are present, e.g.
variation in cargo handling time. Random influences may be such
that deterministic (steady state average) values do not give
sufficient insight into the range of possible outcomes. The
probabili ty of delays may need to be quantified so that the
probability of attaining the specified performance can be
assessed. Simulation is a powerful tool, but generally requires
appreciable effort to develop a model and collect data (Ref.2.43).
Queueing theory: Some systems may be simple enough to calculate
directly the probability of delays to minimise the cost of
providing some service, e. g. number of berths required to handle a
given flow of ships, knowing the arrival rate of ships and service
time requi red to handle them (Ref. 2.44) .
Part III - Application To Ship Design - 115
Inventory: The problem of evaluating usable but idle resources,
such as stockpiles or goods in transit. Inventory cost can
comprise: interest on stock held, plus cost of providing a
stockholding facility, plus risk of obsolescence, plus cost of
re-order and delivery. Only the first item is usually applicable
to cargoes carried on ships, when it can be added to ship transport
cost or RFR in determining the best design features, such as speed
(Ref. 3.2.2) .
Replacement analysis: Addresses the problem of the best time to
replace equipment, whether now or to defer the decision to a later
date. In the ship context, the problem compares the improved
performance and lower operating costs of a new ship wi th declining
performance and increasing costs of an old ship (Ref. 3.2.4) .
Decision theory: Attempts to assess the risks associated with
alternative courses of action, e.g. buying, selling, leasing
different vessels. Decision making under risk may be aided if
probabilities can be assigned to expected (monetary) outcomes of
different policies. Utility analysis takes account of such
considerations, as well as the decision maker's propensity for
ri sk taking (Ref.l. 8) .
Problems with multiple objectives: Not all problems can be assigned a
single measure of merit to indicate the 'best'. If several
objectives have to be satisfied, e.g. reducing the transport cost
and minimising amount of foreign exchange and maximising
employment, one method using linear models is goal programming,
assuming that priori ties can be assigned to the goals and
penal ties for deviating from them (Ref. 2.45) .
Ill-defined problems or fuzzy sets: Techniques have been developed for
choosing amongst a range of possible design alternatives; where
both objectives and constraints cannot be precisely defined. For
example, speed should be much larger than 12 knots, but available
engines are such that speed should be between 10 and 18 knots. The
set which satisfies the various goals and constraints and
maximises some 'membership value' or measure of merit is deemed
optimal (Ref.2.46).
Each of such techniques has an economic dimension, in that they can
be used to investigate various aspects of establishing the best
choice of ship or design feature. The economic evaluation
techniques already described may be used in conjunction wi th them,
for example, RFRs in allocation problems, NPVs of alternative
designs in replacement analysis or decision theory.
Broadly speaking, such techniqu'es, e. g. simulation, should be
deferred to later stages of analysis, particularly if the simpler
methods do not model the real life situation well enough, or give
sufficient insight into problems of the design concept under
consideration. There is a trade-off between the generality of a
method, and the complexity and need for quantification of
uncertainty. Not all are necessarily applicable to every design
problem, but an awareness of the existence of a technique, its
potential usefulness and availability of further information or
computer programs is important.
116 - Engineering Economics and Ship Design
One feature implici t in the systems approach is the trade-off - the
extent to which improvement in performance of one element can be
attained at the expense of either increased cost, or decreased
performance of another element. Figure 33 illustrates some
examples in the case of two variables.
C I - I " ' ~ " ' C 'TERISTIC
Ship Size
Specific Fuel Consumption
Frame Spacing
Fuel Quality
Fig.33 Examples of Trade-offs
Shore Cost
Fuel Cost
Material Cost
Fuel Cost
Ship Cost
Machinery Cost
Labour Cost
M&R Cost
Some techniques used in the systems approach are described in
References 1.8 and 2.23, while References 2.7 to 2.11,3.2.3,3.7,
3.15 and 3.21 are examples of their application.
The Relative Importance of Technical and Economic Features
Analysis of the results of the ECEVAL program for typical ships
enables the relative importance of different features of a ship's
performance to be evaluated. Table 13 shows the economic benefit
accruing to a lOO-ship fleet representative of twelve types in the
Bri ti sh merchant navy, ranging from VLCCs to offshore supply
vessels. The increase in NPV resulting from a 10% improvement in
various design, building or operating features has been
calculated, while holding other features constant, except those
directly related. For example, if installed power requirements
could be reduced by 10%, say from improved hull forms or higher
propulsive efficiency, the overall benefit from the 100 ships
would be a sum of money wi th a present worth of f.S9. SM. That is, up
to this amount could be afforded if a 10% gain could thereby be
achieved. Even if only, say, 1% gain is considered attainable, up
to f.S.9M could be spent - on research and development (in areas
such as hydrodynamics, propulsion devices and coatings
technology) and increased first cost - and still yield a net
benefi t for the 100 ships.
Part 111 - AppUcation To Ship Design - 117
Relative Importance of a 10% Improvement in Different Features of
Ships' Performance
/ Freight rate
1 336.8 316.1
Load factor 2 206.4 187.7
Steaming distance
3 187.6 167.1
First cost
4 87.0 87.0
Port turnaround time
5 68.3 66.2
Dry cargo handling cost per tonne 6 65.9 65.9
Power requirements
7 59.5 44.1
Fuel cost per tonne 8 59.2 38.6
Specific fuel consumption 9 55.2 36.3
Crew costs 10 49.7 49.7
.Building time
11 36.4 36.4
Lightship displacement 12 35.6 28.0
Hull steelmass 13 34.5 29.4
Port charges 14 32.3 32.3
Upkeep costs 15 26.5 26.5
Hull construction labour cost 16 19.4 19.4
Other running costs 17 14.4 14.4
Steel cost per tonne 18 10.4 10.4
Time out of service 19 9.8 9.8
Increasing freight rates by 10% shows the greatest improvement
because it applies to the entire income side of the economic
calculations, but of course it is outside the control of the
shipowner and shipbuilder. Increasing load factor is also
valuable, obtainable by greater versati li ty of design (e. g.
multi-purpose ships) or better management of operations (e.g.
computerised ship scheduling). The effect is less than that of
freight rate, as cargo handling costs and port time will also be
increased, and offset some of the gain. While reducing steaming
distance appears very worthwhile, 10% reductions in practice are
not possible overall. Fractional gains are, however, possible
from better course-keeping or more accurate navigation or the
opening of short-cut channels. With capital charges forming such
a large element in freighting costs, reduced first cost is always
worthwhile, providing that performance is not jeopardised.
Reduced power requirements, resulting in both reduced machinery
cost and reduced fuel consumption, are well worth striving for,
especially because of the rapid rise in oil prices since 1973,
despi te the reduction in 1986. The table is based on a heavy fuel
price of f100 per tonne, escalating at 5% p.a. Substituting a
cheap fuel price of f50 escalating at 8% p.a. moves crew costs
above power requirements in order of merit. Compared wi th the 1971
table published in Ref.1.12, all items concerned with fuel costs
have moved up in importance.
Reduced building time from contract to delivery is only assessed
by its effect in bringing forward in time all the cash flows, and
118 - Engineering Economics and Ship Design
is therefore influenced by the assumed discount rate (12%). The
competi tive advantage to owner or bui lder of shorter delivery
times is not easily quantified as it depends on the current market
si tuation. Reduced port turnaround time benefi ts all ships, while
reduced cargo handling costs are also of great benefit,
particularly in the general cargo business. In the dry bulk
trades, typical cargo handling costs have been included even
though not paid by the shipowner, but by the shipper or receiver.
Liquid cargo handling costs are not usually separately identified.
Reduced hull steelmass has become relatively less important than
in 1971, owing to more ships becoming volume-limited rather than
mass-limited, e.g. segregated ballast tankers. Reduction in ship
running costs are, of course, worth striving for; crew costs show
up as the single most important factor. Al though important to the
shipbuilder, 10% reductions in steel prices or hull labour costs
do not have a very large effect on the overall ship, as they only
contribute together in the region of one-third of ship first
costs. The apparently poor showing of reduced time out of service
(off-hire) is largely due to the basis of the calculation. The 10%
improvement relates to the difference between the theoretical
maximum and the actual, not to the absolute value, i.e. 365 days
per annum in service and, say, 350 days, when 10% improvement is
only 1.5 days.
Table 13 assumes a standard improvement of 10%, but clearly gains
of this amount are not equally attainable for each feature in the
table. It would be far more difficult and costly to reduce, say,
first cost by 10% than, say, time out of service. The figures in
the table can be scaled for attainability, for example a 5%
reduction in power requirement (f29.7M) is more valuable than a
15% reduction in hull labour cost (f29.1M) taken over the fleet's
life. The benefit for a specific ship can be estimated by running
the ECEVAL program with full sensitivity output.
However, because Table 13 relates only to existing ship types, it
does not highlight the potential benefits from improved
transportation methods and novel configurations of marine
vehicle. Furthermore, it does not identify unquantifiable
benefi ts, e. g. in safety or environmental protection.
Some Concluding Comments
Most engineers will use engineering economics as a tool for
comparing alternative designs. For comparisons to be realistic,
it is essential to compare like with like, to compare any
'challenger' design, not with poor old designs, but with the best
of current developments of the present designs, and to the same
required standards of performance.
For preliminary calculations, when simplicity is important, the
use of Series Present Worth and Capital Recovery factors wi 11
indicate whether it is worth pursuing the economic calculations in
any depth. If the designs appear promising economically, it is
usually necessary to take account of the economic complexities
described in Part 11 before any actual investment decision can be
made. The essential nature of design is a compromise as reflected
in the summation of performance curves giving flat optima overall,
Part 111 - Application To Ship Design - 119
as shown in Figure 33. Flat laxity has the advantage that the
subsequent application of step functions will not be crippling,
whether technical (such as machinery selection) or operational
(such as scheduling). It also means that factors difficult to
quantify, such as vibration or safety, or intangible factors such
as appearance, can be allowed to influence final decisions wi thout
excessively distorting the results.
The engineer is more concerned with relative than absolute values,
so that lack of precise information does not prevent economic
calculations from being attempted as long as the relative orders
of magnitude are realistic. Any analysis is only as good as the
data input. The wise engineer will build up not only a personal
database of technical information, but also of economic
information. Well presented technical recommendations have a
better chance of acceptance, when there are many competing
alternatives. It is also important for engineers to appreciate
the various definitions, e. g. costs are not the same as prices (at
least not if you wish to remain in business), and depreciation is
not an item of expenditure, but a bookkeeping and tax calculation
device. The manager's problem is rather different, especially the
capital budgeting decision of allocating resources to different
projects (or none at all). In this case, absolute values are
crucial, insofar as ri sk and uncertainty permit reasonable
calculations to be made. Broader problems, especially those
involving the wider transport scene, are increasingly requiring
the use of more sophisticated models, including stochastic
variables, e.g. in simulation.
It is now widely appreciated that designs with minimum first cost
are not necessarily those with minimum life cycle costs. It may
well be worth paying appreciably more in first cost to obtain
continuing savings in maintenance and improved performance over a
ship's life, e.g. high duty coatings, despite the difficulty of
convincing some decision makers. The effects will usually be
different between mass or volume-limited ships, and between
constant speed or constant power ships, and between good markets
and bad markets.
The competitive conditions in shipbuilding and ship operation
highlight the differences between those designs which are merely
adequate and those which have the highest standards of technical
and economic performance,over the widest range of operating
120 - Engineering Economics and Ship Design
R Contains useful reference material
* Recommended reading
1.1* COUPER, A.D. The Geography of Sea Transport. Hutchinson
1.2 BRANCH, A.E. Economics of Shipping Practice and
Management. Chapman & Hall, 1982.
1.3 CHRZANOWSKI, I. An Introduction to Shipping Economics.
Fairplay Publications, 1985.
1.4.1 GOSS, R.O Studies in
Uni versi ty Press, 1968.
Maritime Economics.
(Includes 1.4.2)
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. Collected
papers of Goss. Cambridge University Press, 1977.
(Includes 2.5.1 & 2.5.2).
BENFORD, H. Principles of Engineering Economy in Ship
Design. S.N.A.M.E., 1963.
BENFORD, H. Fundamentals of Ship Design Economics.
University of Michigan, Dept. Nav. Arch. & Mar. Eng.,
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 Ship
Design. University of Michigan, Dept. Nav. Arch & Mar.
Eng., Rpt. No.223, Aug 1980.
1.5.6* BENFORD, H. The BI acksmi th Ship Econorni st. Uni versi ty of
Michigan, Dept. Nav. Arch. & Mar. Eng., Rpt No.270,
1.5.7 BENFORD, H. A Naval Architect's Introduction to
Engineering Economics. Uni versi ty of Michigan, Dept.
Nav. Arch. & Mar. Eng., Rpt. No. 282, Dec .1983.
1. 6 WALSH, W. R. Own or Charter - A Suggested Method of
Analysis for Oil Companies. Marine Technology, October
1. 7.1* KLAUSNER, R. F. Evaluation of Risk in Marine Capital
Investment. Marine Technology, October 1970.
A Selected Bibliography - 121
1. 7.2 KLAUSNER, R. F. What an Engineer Should Know About Capi tal
Budgeting. University of Michigan, Dept. Nav. Arch. &
Mar. Eng., Rpt. No.083, 1970.
and NORMAN, V. D. (Edi tors) . Shipping
Inst. 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
PACKARD, W.V. Sea Trading. 3 volumes: The Ships; Cargoes;
Trading. Fairplay Publications, 1985.
METAXAS, B.N. The Economics of Tramp Shipping. Athlone
Press, 1971.
BUXTON, I.L. Engineering Economics Applied to Ship
Design. Trans. R.I.N.A. Vol.114 (1972) pp.409-428. (Also
the Naval Archi tect, October, 1972).
HETTENA, R. Economics of Liquid and Dry Bulk Shipping.
Shipbuilding in the U.S. Seminar, Webb Institute, July,
ALDERTON, P.M. Sea Transport - Operation and Economics.
Thomas Reed Publications Ltd., 3rd Edi tion, 1984.
SLOGGETT, J . E. Shipping Finance. Financing Ships and
Mobile Offshore Installations. Fairplay Publications,
NERSESIAN, R. Ships and Shipping: A Comprehensive Guide.
Pennwell Books, 1981.
BETH, H. L., HADER, A. and KAPPEL, R. 25 Years of World
Shipping. Fairplay Publications, 1984.
WALSH, R.G. Estimated Return-on-investment of Oil
Tankers. 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 Design
Techniques course notes. Module El. University of
Newcastle upon Tyne, Dept. Naval Architecture &
Shipbuilding, 1978.
EIDE, E. Engineering Production and Cost Functions for
Tankers. Elsevier Press, 1979.
Ships' Costs. Special issue of Maritime Policy and
Management. Taylor and Francis, January 1985. Includes:
1.21.1 BENFORD, H. Ships' Capital Costs: The Approach of
Economists, Naval Archi tects and Business Managers.
122 - Engineering Economics and Ship Design
1.21.2 BUXTON, LL. Fuel Costs and their Relationships with
Capi tal and Operating Costs.
1.22* STOPFORD, R.M. Maritime Economics. To be published by
AlIen & Unwin 1987.
1.23 GRAHAM, M.G. and HUGHES, D.O. Containerisation in the
Eighties. Lloyds of London Press, 1985.
2.1.R Dry Cargo
Ship Demand to 1985.
6 volumes published by
Maritime Transport
Graham & Trotman,
2.1. 3
2.1. 4
2.1. 6
Food and Drink
Raw Materials
Ship Demand
International Symposium on Middleterm and Longterm
Forecasting for Shipbui Iding and Shipping. Stichting
Maritime 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. United
Nations, 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 of
the Sensitivity of Total Vessel Costs to Certain
Operating Conditions. National Ports Council T & R
Bulletin No.7, 1970.
GOSS, R.O. and JONES, C.D. The Economics of Size in
Dry Bulk Carriers. Government Economic Services,
Occasional Paper No.2. H.M.S.O., 1971. (See 1.4.3.)
GOSS, R. O. The Cost of Ship's Time. Government Economi c
Services, Occasional Paper No.10. H.M.S.O., 1974. (See
1.4.3. )
HUBBARD, M. Comparative Costs of Oil Transport to and
within Europe. J.Inst.Petro1., London. January, 1967.
J. Iron Steel Inst., London, November, 1966:-
A Selected Bibliography - 123
NIJMAN, D.G. Optimum Size of Ore Carriers.
MEREDITH, W. G. and WORDSWORTH, C. Size of Ore Carriers for
the New Port Talbot Harbour.
KELLEY, D.H., SHIPP, P.J. and RIGBY, D.A. Calculating the
Optimum Size of Iron Ore Carriers.
2.8 HILLING, D. Barge Carrier Systems: Inventory and
Prospects. Benn Publications, 1977.
ENGVALL, L-O and ENGSTROM, H. A Method for Selection of an
Optimum Fishing Vessel for Investment Purposes. F.A.O.,
Rome, 1969.
CHAPLIN, P.D. and HAYWOOD, K.H. Operational Research
Applied to Stern Freezer Trawler Design. Inst. of Marine
Engineers, Miscellaneous Section, March, 1968.
KENDALL, P.M.H. and TAYLOR, R.J. Theory of Optimum Ship
Size. Journal of Transport Economics and Policy, May,
TINSLEY, D. Short Sea Bulk Trades. Dry Cargo Shipping
wi thin European Waters. Fairplay Publications, .1984.
2.13 WING, J.F. and HI LLMAN, J.F.
S.N.A.M.E. Spring Meeting, 1972.
Trade Forecasting.
McCAUL, J.R., ZUBALY, R.B. and LEWIS, E.V. Increasing the
Productivity of U.S. Shipping. S.N.A.M.E. Spring
Meeting, 1972.
MOORE, C.G. and POMREHN, H.P. Technological Forecast of
Marine Transportation Systems, 1970 to 2000. S.N.A.M.E.
Los Angeles Section, February, 1971.
FRANKEL, E.G. and MARCUS, H.S. Ocean Transportation.
M.I.T. Press, 1973.
KOENIGSBERG, E. and LATHROP, D. S. Transocean Tug-Barge
Systems. A Conceptual Study. Matson Research
Corporation, 1970.
LAING, E . T . Containers and thei r Competi tors. Marine
Transport Centre, University of Liverpool, 1975.
KUVAS, J. Transport Capacity and Economics of Container
Ships From a Production Theory Point of View. Trans.
R.I.N.A. Vol.l17 (1975) pp.107-120. (Also the Naval
Archi tect, April 1975).
2.20 OVREBO,
S.H. Short Sea and Coastal Tramp Shipping in
Institute for Shipping Research, Bergen, 1970.
2.21 BIRD, J. Seaports and Seaport Terminals. Hutchinson,
124 - Engineering Economics and Ship Design
HARDING, A.S. and YOUNGER, M.J. Ship Operations Viewed
from the Quayside. Trans N.E.C.I.E.S. Vol.88 (1971-1972)
DATZ, I.M. Planning Tools for Ocean Transportation.
Cornell Maritime Press, 1971.
FOSS, B. Coastal Shipping. Norwegian Shipping Academy,
2.25.1 Transport and Handling in the Pulp and Paper Industry.
Vol.l. Proceedings of First PPI Symposium. Miller
Freeman 1974.
2.25.2 Ditto, Volume 2, 1976.
2.25.3 Ditto, Volume 3,1979.
2.26 AVI-ITZHAK, B. Speed, Fuel Consumption and Output of
Ships. Ship Repair and Maintenance International,
January, 1975.
2.27 ELSTE, V.H., SWIGART, J.E. and SWIFT, P.M.
Overseas Trade: Great Lakes and Seaway
Analyses. Marine Technology, January, 1976.
Seaway and
2.28 SWIFT, P.M. & BENFORD, H. Economics of Winter Navigation
in the Great Lakes and St. Lawrence Seaway. Trans.
S.N.A.M.E. Vol.83, 1975, p.229.
2.29 GALLIN, C. et al. New Standard Ships or Secondhand Ships?
An economical evaluation using computer techniques.
International Conference on Computer Applications in
Shipbui lding (ICCAS). North Holland Pub., 1976.
2.30.1 SEN, P. Optimal Ship Choice Under Uncertain Operating
Conditions. Trans R.I.N.A. Vo1.120, 1978, p.137.
2.30.2* SEN, P. Methods for Incorporating Uncertainty in
Preliminary Ship Design. Trans. N.E.C.I.E.S. 1985-1986.
WOLFRAM, J. Uncertainty in Engineering Economics and Ship
Design. Trans N.E.C.I.E.S. Vol.96, 1979-80, p.77.
CARACOSTAS, N. Containership Economics for Effective
Deci sion-making Analysis. Marine Technology, October
1979, p.353.
2.33 LIND, O. &
Laid-up and
ERICHSEN, S. Economics of Technological
of Tankers and the Competition between
New 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.
A Selected Bibliography - 125
2.35 BUXTON,
I.L. The Influence of Ship Operation on Design.
8th School. Ship Design for Fuel Economy, course
Gothenburg; Chalmers Technical University, 1983,
Medium to Long Term Analysis of the Shipping Market.
Japan Maritime Research Institute, Tokyo, October, 1984.
PEARSON, R., and FOSSEY, J. World Deep Sea Container
Shipping. Gower Press, 1983.
WAAGE-NIELSEN, E. Problems Facing Operators of Ro-Ro
Systems. 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, Uni versi ty of Liverpool, 1980.
Port Development: A Handbook for Planners in Developing
Countries. 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 of
Tankers to Meet a Fixed Schedule. Naval Research
Logi sties Quarterly, 1954-55.
2.43 Terminal Operations: Enter a New Generation Planning Tool.
Cargo Systems, May 1983.
2.44 BUHR HANSEN, S. Optimising Ports through Computer
Simulation Sensitivity Analysis of Pertinent Parameters.
O.R. Quarterly, 1972.
2.45 SEN, P. and BARI, A. Inland Waterway Fleet Replacement:
Evaluation with Multiple Objectives. Trans. R.I.N.A.,
2.46 NEHRLING, B. Fuzzy Set Theory and General Arrangement
Design. LC.C.A.S., Trieste. 1985. North Holland
3.1* WATSON, D.G.M. and GILFILLAN, A.W. Some Ship Design
Methods. Trans R.LN.A. Vo1.119, 1977, p.279. (Also in
the Naval Archi tect, July 1977. )
3.2.1 BENFORD, H. General Cargo Ship Economics and Design.
University of Michigan, 1968.
3.2.2 BENFORD H. Bulk Cargo Inventory Costs and their Effect on
the Design of Ships and Terminals. Marine Technology,
October 1981, p. 344.
126 - Engineering Economics and Ship Design
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 for
Ships and Shipyards. Trans. R.I.N.A. Vol.114 (1972).
(Also the Naval Architect, October 1972) .
3.3 FARIDANY, E.K. LNG Review.
Operations, Ship Technology,
& Market Prospects for LNG.
Ltd, Wokingham, 1977.
A Study of Marine Cargo
Project Finance, LNG Prices
Energy Economics Research
Carrier Projects.
et al. Optimisation of LPG and LNG
Gastech Conference, Hamburg, October
3.5 BUXTON, 1. L. and SNAITH, G. R. The Development of the Bulk
Carrier. Institution of Civil Engineers Symposium,
November, 1969.
3.6 SCHONKNECHT, R. et al. Ships and Shipping of Tomorrow.
MacGregor Publications, 1983.
3.7 GETZ, J.R., ERICHSEN, S. and HEIRUNG, E. Design of a Cargo
Liner in Light of the Development of General Cargo
Transportation. S.N.A.M.E., Jubilee Meeting, 1968.
3.8 MEEK, M. Operating Experience of Large Container Ships.
Trans. Inst. Engrs. Shipbldrs in Scotland, Vol. 118
1974-1975, pp.55-76.
3.9* ERICHSEN, S. Optimi sing Containerships and
Terminals. S.N.A.M.E., Spring Meeting, 1972.
version: Uni versi ty of Michigan Report 123) .
3.10 ZACHARIADES, A. What Influences Optimal Ship Speed?
Marine Engineers Review, May 1983.
3.11 VOSSNACK, E. Aspects of Cost from the Shipowner's Point of
View. Symposium on "Developments in Merchant
Shipbui lding". Delft Uni versi ty, May, 1972.
3.12 GALLIN, C. et al. Ships and their Propulsion Systems:
Developments in Power Transmi ssions. Lohmann &
Stolterfoht Gmbh, 1981. 419 pp.
3.13.1 FISHER, K.W. Economic Optimisation Procedures in
Preliminary Ship Design. (Applied to the Australian Ore
Trade). Trans. R.I.N.A. Vo1.114., 1972 pp.293-320. (Also
the Naval Architect, April, 1972.)
3.13.2* FISHER, K.W. The Relative Costs of Ship Design
Parameters. Trans. R. I.N.A. Vol. 116, 1974, pp. 129-155 .
(Also the Naval Architect, July 1974) .
3.14 UNIVERSITY OF MICHIGAN. Computer Aided Ship Design
Lecture Notes, published 1970.
A Selected Bibliography - 127
NOWACKI, H., BRUSIS, F. and SWIFT, P.M. Tanker
Preliminary Design - An Optimisation Problem with
Constraints. Trans. S.N.A.M.E., Vol.78, 1970.
LAREDO, A. et al. Design of the First Generation of
550,000 dwt Tankers. Trans. S.N.A.M.E. Vol.8S, 1977,
LAMB, T. A Ship Design Procedure. Marine Technology,
October, 1969.
HOLTROP, J. Computer Programs for the Design and Analysis
of General Cargo Ships. International Shipbuilding
Progress, February, 1972.
HERBERT, R.N. Design of the SCA Special Ships. Marine
Technology. 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 of
paper in Marine Technology, April, 1965).
KRAPPINGER, o. Great Lakes Ore Carrier Economics and
Preliminary Design. Marine Technology, April, 1967.
SNAITH, G.R. and PARKER, M.N. Ship Design with Computer
Aids. Trans. N.E.C.I.E.S., Vol.88, 1971-1972.
FEMENIA, J. Economic Comparison of Various Marine Power
Plants. Trans. S.N.A.M.E., Vo1.81, 1973.
THORVALDSEN, S. Computer Aided Ship Design and Evaluation
of Sea Transportation. Norwegian Maritime Research,
No.2, 1975.
COLLIN, L.T. and BERGSTROM, K. Comparison of Power Plant
Performance. WEGEMT 8th School, Gothenburg. Chalmers
Technical University, 1983, Vo1.2.
PARSONS, M. G. Optimization Methods for Use in
Computer-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 of
Ships. University of Michigan, Dept. Nav. Arch. & Mar.
Eng. Rpt. No.79. 1968.
KOMOTO, M. & YABUKI, S. The Effect of Higher Fuel Prices on
the Design of Ships. International Marine and Shipping
Conference, 1976. Institute of Marine Engineers.
CARREYETTE, J. Preliminary Ship Cost Estimation. Trans.
R. I.N.A. Vol.120, 1978 p.235-258. (Also in the Naval
Architect, July 1978.)
128 - Engineering Economics and Ship Design
3.31.1 GALLIN, C. Fuel Economy, Propul sion Efficiency and Diesel
Engine Installations. Motor Ship, Sept 1980.
3.31. 2 GALLIN, C. Al ternati ves for Economical Diesel Propul sion.
Motor Ship, May 1981.
3.31.3* GALLIN, C. &: HIEDERICH, O. Economical and Technical
Studies of Modern Ships. Shipbui lding and Marine
Engineering International, April, 1983, p.157.
International Symposium on Advances in Marine Technology.
June 1979 Trondheim. University of Trondheim, 1979, 2
Vols. (general papers on ship design aspects) .
CZIMMEK, D.W. &: JORDAN, C.H. Optimization of Segregated
Ballast Distribution and its Impact on Tanker Economics.
Marine Technology, April, 1981.
REINERTSEN, W. Economic Trends in Ship Design. Motor
Ship, May 1982, p.77.
HAKKINEN, P. Evaluating the Economics of Main Machinery:
An Integral Approach. Motor Ship, Aug 1982, p.38. (see
Ref. 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,
Ship-Trans-Port, Rotterdam, Sept 1982. Netherlands
Maritime Research Institute &: Port of Rotterdam, 1982.
(includes SWIFT, P. Next Generation of Energy Carriers.
MILCH, S. &: BORGE, L. Fuel Saving Vessels: A Case Study.
Norwegian Maritime Research (No.4) 1981.
SHIPSHAPE: A New Ship Design Program from Norway. Motor
Ship, Dec. 1983.
KERLEN, H. How Does Hull Form Influence the Building Cost
of Cargo Vessels? Second International Marine Systems
Design Conference, Danish Technical University, Lyngby,
May 1985.
HUTCHINSON, B. Application of Probabilistic Methods to
Engineering Estimates of Speed, Power, Weight and Cost.
Marine Technology, October 1985.
ERICHSEN, S. and JAEGER, A. Handbook in Marine Design. To
be published 1987.
A Selected Bibliography - 129
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.
A wide variety of collected tablesj
Institute 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 (Annual
Series) .
Statistics. Published annually, and included in Annual
Reports 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 ship
type). (Quarterly).
BRITISH PETROLEUM. BP Statistical Review of World Energy
(Annual Series).
4.8.1R UNITED NATIONS. Monthly Bulletin of Statistics. (Various
issues contain speci al annual tables) .
4.8.2R UNITED NATIONS. Maritime Transport Study. Commodi ty
Trade by Sea Statistics. 1975-78. UN. Statistical Paper
Series D, Vol. 27-30. Geneva, 1983.
4.8.3R As 4.8.2 but for 1979-82. UN, 1986.
4.8.4 UNITED NATIONS. Review of Maritime Transport (Annual).
4.9 BRITISH PORTS AUTHORITY. Port Statistics. (Annual
series, formerly published by National Ports Council).
Statistics 1979. (Details of sources of national trade
and other statistics)
4.10.2 NETHERLANDS MARITIME INSTITUTE. Employment of the Deepsea
Conventional and Specialised General Cargo Fleet. 1979.
publi shed in Ref. 2.1.
Statistics up to 1972
4.12R O. E. C. D. Maritime Transport (Annual Series).
130 - Engineering Economics and Ship Design
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
DREWRY, H.P. Shipping Statistics and Economics. London.
(Monthly report on the freight markets etc) .
DREWRY, H.P. Shipping Studies. Series of consultants
reports. Over one hundred published from 1972, covering
a wide variety of topics such as Combined Carriers, World
Grain Trade, VLCC Ports etc.
CALVERT, J. and McCONVILLE, J. The Shipping Industry:
Statistical Sources. Ci ty of London Polytechnic, 1983.
The subject of economic evaluation of alternative designs,
particularly machinery, fuels and ship performance, has resulted
in a number of papers, mostly to conferences. Conferences are
numerous, though many of the papers have a strong salesmanship
emphasis. However among the following conferences, papers may be
found which make a useful contribution and/or provide background
for the application of engineering economics.
5.1 First International Coal Fired Ships Conference.
April 1980. Shipping World and Shipbuilder.
5.2 Shipboard Energy Conversion Symposium.
S.N.A.M.E., New York, Sept 1980.
5.3 Symposium on Wind Propulsion of Commercial Ships.
R.I.N.A., London, November, 1980.
5.4 Conference on Priorities for Reducing Fuel Bills.
Marine Media Management, London, February 1982. Trans.I
MarE, 94C Conf.No.12, 1982, 86 pp. (includes SVENSEN,
T.E. Techno-economic reasons for selecting fuel saving
priori ties) .
5.5 Fourth Marine Propulsion Conference. Motor Ship, London,
March 1982. (includes HAKKINEN, P. Evaluating the
economics of main machinery: an integral approach). (See
Ref.3.35) .
A Selected Bibliography - 131
5.6 Theory and Practice of Marine Design. RINA, London, April
1982. First International Marine Systems Design
Conference (includes: MEEK, M. The effect of operational
experience on ship design. LANGENBERG, H. Methodology
and systems approach in early ship design in a shipyard.
KEIL, H. Methods covering the technical and production
costwise optimization of a shipbuilding project and their
effects on the planning work of the shipyard) .
5.7 Ships Cost Symposium. S.N.A.M.E., New York, Sept 1982.
(includes HOWARD, J.L. &KVAMSDAL, R.S. Energy efficient
LNG carriers) .
5.8 Roll-on/Roll-off Conferences: RoRo-76 to RoRo-86.
Conferences every 1-2 years on aspects of
roll-on/roll-off ships and operation. (1984 includes:
HE I RUNG, E. and BRETT. P.O. Aspects of Optimising RoRo
Designs). Business Meetings Ltd., Rickmansworth.
5.9 First International Grain Trade, Transportation and
Handling Conference. Cargo Systems Publications, 1982.
5.10 Fourth International
Handling Conference.
Publications, 1986.
Coal Trade, Transportation and
(CoalTrans 86). Cargo Systems
132 - Engineering Economics and Ship Design
The engineer is often concerned with evaluating al ternati ve
designs. The alternatives will usually differ not only in
performance, but in their first costs and operating costs. It is,
therefore, useful for him to obtain quickly an indication of
relative costs, before setting in train more detailed studies
which may involve work by other organisations.
Cost estimates may be broadly divided into three main categories:
(i) Feasibi li ty study cost estimate (or preliminary or
budget estimate) for general investigations.
(ii) Design study cost estimate, associated with detailed
exploration of a few al ternatives.
(iii) Fully detailed cost estimate, usually for tendering
The expected level of accuracy increases with detail, as does the
amount of data and effort required. This Appendix will be
concerned only with category (i), because cost estimating is more
likely to be applied at this level by ship operators, consultants,
equipment suppliers, regulatory bodies, researchers, etc., rather
than at the more detailed levels, which are largely the preserve of
professional cost estimators, e. g. in shipbui lding companies.
It is not possible in this publication to suggest more than very
simple cost estimating relationships for 'ball-park'-type
estimates; nevertheless, these can still be useful in establishing
the potential feasibility of a project, and in ranking the
principal alternati ves for more detai led study.
In the ship design context, the need to estimate the following
principal costs to carry out an economic evaluation is indicated
on page 83:
( iv)
Ship first cost
Daily running costs
Fuel costs
Port charges
Cargo costs
Capital charges
Freight rates (unless RFR is the criterion)
The following notes will· assist in producing approximate
estimates, but are not a substitute for more detailed methods or
more accurate data where these are available. References 1.21,
2.16, 3.2.1, 3.9, 3.20, 3.28, 3.30 and 3.42 may also usefully be
consul ted for methods and data.
Appendix - 133
Ship First Cost
At the simplest level, the first cost of a ship is influenced
mainly by its type, size, and speed. Where the range of possible
specifications is small, e.g. in straightforward vessels such as
tankers, size alone is often a fair guide to approximate first
cost. Maritime journals such as Fairplay and Lloyds Ship Manager, and
References such as 4.15 include published prices of recent
contracts, and graphs can be plotted to give an indication of
expected prices, at least when market conditions are reasonably
stable. Such graphs may indicate whether a simple cost
relationship of the form:
Cost = k (size)x
may be derived. The slope of such a curve, if plotted on log-log
graph paper is given by x, typically about 0.7; that is, cost
increases less rapidly than size, as would be expected.
Regression analysis can be used where there may be more variables,
e. g. speed.
Care needs to be taken to keep the data as consistent as possible,
e.g. untypical ships must be eliminated and data from the same
time periods should be used, as well as a relatively stable
currency, such as U. S. dollars.
Vossnack of Nedlloyd suggests that cost per tonne lightship may
also be used, with typical prices being $1800-2000 per tonne for
deep-sea container and RoRo vessels in 1985 (when market prices
were low). Bulk carriers would be 80% of this, VLCCs 75%, and
products/chemical tankers 108%.
Where the alternatives differ in other respects, e.g. speed,
machinery type, hull material, etc. a more detailed process is
required, unless the cost of the differences can be easily
identified and simply added to the basic price, e. g. more powerful
deck cranes. The total cost of a ship may be divided into about
eight principal categories, as indicated in Table 14 which gives
an indication of the breakdown of shipbuilding costs into those
categories for three types of ship. The following relationships
give an indication of how the main components may be estimated at
the feasibility study level based on typical U.K. experience. It
is assumed that the ship technical data will already be available
from other design procedures, e.g. steelmass and machinery power.
(0 Steelwork Materials Cost
The floating steelmass is taken from the lightship estimate. The
scrap percentage (typically 10% but 20% or more for small
vessels), is added to give the invoiced steelmass in tonnes. The
corresponding average price per tonne of steel material can
usually be obtained from a steelmaker, e.g. British Steel
Corporation who publish a price list for each main type of steel,
heavy plates, sections, etc. Current prices for mild steel are
around £250 to £350 per tonne. Extra may have to be added for
high-tensile steel, or a preponderance of very thin or very thick
plates, etc.
134 - Engineering Economics and Ship Design
Approximate Percentage Breakdown of Shipbuilding Costs
1 Steelwork materials
2 Steelwork labour
3 Outfit materials and
4 Outfit labour
5 Main propulsion
6 Other machinery
7 Machinery installation
8 Overheads
9 Total building cost
Sub-total materials
Sub-total labour,
including overheads
10 Approximate 1985
selling price, fM
Cargo Li ner Bulk Carrier Tanker
12-20000 25-50000 dwt 20D-300000
dwt (geared) dwt
10 }
22 34
12 13 14
19 }
26 26
7 7 8
12 }
1: 27
21 24 22
100 100 100
57 53 53
43 47 47
8-14 10-17 35-45
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 sub-
contractors such as insulation and ventilation. Electrical equipment
outside machinery space.
4 Shipyard outfit trades only including electrical, excluding overheads.
5 Slow-speed diesel or equivalent, e.g. boilers, turbines, gearing,
6 Auxiliary machinery, generators, shafting, pumps, piping, controls, in
machinery space.
7 Shipyard trades only.
8 Includes variable overheads, e.g. social security and holiday expenses,
supervision and power supplies, and fixed overheads like plant
9 Profits not included, so percentages of selling price should be slightly
Appendix - 135
(ii) Steelwork LabOlU' Cost
S 1 manhours x wage rate
tee work tonnes x tonne steel manhour
At the simplest level,
steelwork labour cost can be estimated
Manhours per tonne depend, not only on the general level of
productivity in a particular shipyard, but also on the size and
type of ship. Large vessels, such as tankers, have greater
steelmass per unit area of structure, i.e. thicker plating, as
well as more repetitive components, than smaller ships, e.g.
ferries. Manhours per tonne for complex regions, e.g. ends and
superstructures can easily amount to two or three times that for
parallel mid-body construction. As a first approximation,
Carreyette in Ref. 3.30 suggest that steelwork manhours may be
estimated from:
Manhours • 227 x
where W = invoiced steelmass, tonnes
L = length b.p., metres
CB = block coefficient
This suggests that manhours per tonne can vary from below 50 for
large ships, to over 200 for small ships. Substantially higher
figures are appropriate for warships and structures offshore.
Wage rates per manhour excluding overheads vary from yard to yard
and country to country. In the U.K. the rate at present is
approximately £5 per manhour; but allowance should be made for
inflation if delivery dates are a long way ahead.
(iii) Outfit Materials and Labour Cost
The outfit cost of a ship can vary markedly with ship type and
specification; for example, variations in cargo handling gear,
accommodation and equipment. At the simplest level, a cost per
tonne of outfit mass could be assumed for material plus labour, say
around £3000 to £4000 for fairly straightforward ships.
At a slightly more detailed level, material and sub-contractors'
costs could be separated into a small number of items where
information can often be obtained from manufacturers, e.g. hatch
covers and cargo handling equipment, plus an aggregation of other
remaining items based on their total mass, say around £2000 to
£3000 per tonne.
Labour costs including machinery installation will depend on the
.manhours, which for any given type of ship may be approximately
related to ship size or outfit mass, e. g. :
Manhours = kLIB
B =breadth mld., metres
k =200 to 300 for straightforward ship types
136 - Engineering Economics and Ship Design
Wage rates for outfit - workers are generally similar to
steelworkers. Carreyette suggests that outfit labour can be
estimated from:
Manhours = 2980 x (outfit mass)2/3
and outfit material from:
Cost = D x (outfit mass)0.95
where D was 2011 in pounds in 1977. This figure can be updated by
the use of a price index such as "Price Index Numbers for Current
Cost Accounting" published by HMSO. This suggests that the 1986
coefficient would be about 4000.
(ivJ Machinery Cost
Economic studies comparing alternative machinery are common. In
general, each different type of machinery has a different first
cost, both of the basic prime mover, and as installed as a complete
system. Broadly speaking, the cost of reciprocating machinery
rises faster with increased power than that of rotating machinery,
i. e. it has a larger exponent in the cost relationship. The
exponents are, however, less than unity, indicating that cost per
uni t power falls wi th increasing power.
Machinery cost = k(Power)n
Type of Machinery n Relative cost
at 15 MW
Slow speed diesel 0.70-0.75 100
Geared medium speed diesel 0.75-0.80 85-95
Geared steam turbine 0.50-0.60 110-115
Industrial type geared gas 0.50-0.60 115-125
The above are total machinery costs, including auxiliaries. The
exponent for slow-speed diesel engines alone is about 0.8, taken
over a wide range of powers, but for a particular model and
cylinder size, about 0.9. Derated versions (e. g. to reduce
specific fuel consumption) are almost the same price as the
maximum rating model, despite the lower output. Currently, k is
about f700 000 to 900 000 with power in MW for a slow-speed diesel
installation, of which the main engine comprises about f200 per kW
in the 15 MW range. Coefficients for the other types may be
derived after selecting an appropriate exponent. .
Appendix - 137
The relative first costs at a maximum continuous rating (MCR) of
about 15 MW are shown; the ratios will be different at other powers
because of the different slopes of the curves.
It should be noted that these costs are per unit at MCR. Because
different machinery types may require different installed powers
to achieve the same ship speed (different transmission or
propulsive efficiencies and service ratings), the ratios of
absolute costs may not be the same as the relative costs. For
twin-screw propulsion, about 15% can be added for diesel or gas
turbine, and about 25% for steam turbine. For electric
transmission, compared wi th gearing/ 15 to 20% can be added.
It is often possible to obtain an estimate for the price of a
slow-speed diesel from a manufacturer. Total machinery cost may
thus be estimated by multiplying this figure by about 2 (high
powers) to 2.5 (low powers). Approximately 80% of total machinery
costs is contributed by the ten most significant items of
Broad corrections may be applied for maj or changes, such as:
ship type
machinery aft or midships
propeller type and r.p.m.
steam conditions and number of boilers
difference in major auxiliaries
alternative fuels, e.g. coal.
Beyond this level, a more detailed specification and quotations
from sub-contractors would be required for a full cost estimate.
(v) Overheads
Overhead costs (sometimes called establishment charges) are costs
which cannot be allocated to any particular contract, such as
supervisory staff, training, power supplies, capital charges on
plant, insurance, local taxes, maintenance, research and
development, and marketing.
Overheads are often expressed as a percentage of total direct
labour costs as calculated previously, typically about 60 to 150%.
(vi) Profit
In a shipyard, it is the j ob of management and not the cost
estimator to decide on an appropriate profit margin to add to the
estimated building cost. The decision will be influenced by the
experience of the yard with the type of work in question (and the
associated uncertainty of the cost estimate), the yard's order
book, the state of the shipbuilding market and competition, and
the standing of the customer. A figure of about 10% of estimated
costs is aimed at, but rarely achieved in the present competitive
world of shipbui lding.
In simple cost estimates, it is possible to aggregate both
overheads and profit together by adding about 30 to 35% to the sum
of steelwork plus outfit plus machinery costs.
138 - Engineering Economics and Ship Design
(vii) Total First Cost and Selling Price
The total price estimated from summing the above i terns can then be
compared with current market prices to assess whether the results
appear to be reasonable. However, over recent years, many
shipyards have quoted prices below cost to obtain work, assisted
in some cases by subsidies.
Small reductions are possible for production of multiple ships.
It is estimated that by doubling the number of ships produced in a
batch in Europe, their average cost can be' reduced by about 2 to
3%, i.e. the slope parameter of the progress curve (or learning
curve) is about 0.975. This means that the average cost of each of
N ships is N - o ~ 0 3 6 5 times the cost of one ship, because 2-0-0365 =
0.975 (see Reference 3.27). The cost of labour on repeat ships
falls faster than material costs.
Operating Costs
(i) Daily Running Costs
Daily running costs include such items as crew costs, upkeep costs
and insurance. Crew costs depend on the number of the crew and
their nationality. Figure 34 gives an indication, where high cost
flags include U.S., Australian, Japanese; medium costs Europe and
South America; and low cost Asia generally excluding Japan. Since
most of the other elements are related to ship size and type, it is
possible to relate daily running costs to a ship parameter. Figure
35 shows how other daily costs vary with size for typical ships.
The band indicates that for any given size and type of ship, there
will be a variation between older and newer ships, between those
wi th different types of machinery and equipment, between different
owners and between those wi th different operating patterns.
Appendix - 139
tom £
/ ."w
J /
/ V /
la. COSl
I ~
10 20 30 40 so
Fig.34 Manning Costs 1985.
(Including Wages, Benefits, Victualling).
~ 2000
4 5 & '10 15 211 10 40 50 ill 10 100 150 700 300 400 &111 100 1000
IILl O· 7 0 OW
lAIHRS 1·0 ·OW
MULil- DEtl fIEIIiKiERS. 1·7 • OW
• OW
• IW
• OW
L.' li. CURIE RS 3
L.ft Ii. CURl ERS . 4
• .1
~ IL.
. ./'l
,....,. "7
.A'f" 1//
~ 1500
::; SOOO
Fig.35 Range of Ship Running Costs - 1985.
140 - Engineering Economics and Ship Design
Table lS shows running costs broken down by maj or category for four
vessel types. Crew costs include not only wages, but victualling,
leave and reliefs, training, benefits, and travel. Upkeep
includes maintenance, repair, stores and lubricating oil, while
miscellaneous includes administration, equipment hire, etc.
Percentage Breakdown of Daily Running Costs
120 000 dwt 2000 TEU 30000 dwt 3000 dwt
bulk 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 34
cost incl. capital,
fuel, port and cargo
Maintenance and repair costs vary with ship size, machinery and
age. Analysis of actual M & ~ c o s t s suggest that they are roughly
proportional to (ship size)O· and that they increase with age in
real terms (i.e. before allowing for inflation) at about 3 to S%
per annum. Insurance depends on a number of factors: ship type,
size and value, plus the shipowner's record. As a proportion of
first cost, annual total premiums covering all categories of
insurance carried vary between about 1 and 3%.
Where data is available from different time periods, the
escalation rates given on page 51 may be used to adjust them to a
common basis. Such rates may also be used to estimate future cash
flows if calculations are being made in money terms.
(ii) Fuel Costs
Daily fuel consumption at sea and in port will already have been
estimated from the technical calculations via service power and
specific fuel consumption (Ref. 1. 21. 2) . Although fuel prices vary
throughout the world, such differences are often small enough to
ignore in feasibility studies. The prices published in journals
Appendix - 141
such as The Motor Ship, Lloyds Ship Manager or Lloyds List (Wednesday
edition) may be taken as a good guide. After several years when
heavy fuel prices were in the range $140 to $190 per tonne (diesel
oil about $220 to $300), they fell dramatically in 1986 to about
half those levels. Until some degree of stability emerges in fuel
prices, it would be wise to investigate a range of prices in
economic evaluations.
(Ui) Port Costs
Port costs comprise a miscellany of expenses, such as port dues,
lighthouse dues, pilotage, tugs, port agents' fees - even bribes!
They vary enormously from port to port around the world. The
lowest costs per gross or net (registered) tor. are usually found
for large ships in ports with few facilities, e.g. tanker loading
jetty ports, while the highest tend to apply to small ships in
ports with an extensive range of facilities. Total costs per net
ton per port call can therefore be as low as 40p or as high as f4.
Many ports now charge on a gross ton basis rather than net.
Usually, however, great accuracy is not necessary at the
feasibili ty study stage as port costs in total amount to less than
10% of total annual costs including capital charges, and the same
rate is likely to apply to all the alternatives being studied.
Canal dues must be added where applicable, calculated per net ton,
al though the rules for measuring NT are different for both the Suez
and Panama Canals. Dues per transi t per NT are approximately $1.83
laden and $1.46 ballast for Panama. For Suez there is a sliding
scale based on Suez net tons and Special Drawing Rights, which
range for laden ships from about $6 for small ships up to 5000
tons, to about $4 at 20000 tons to about $2 for the largest ships;
ballast rates are 80% of laden.
(iv) Cargo Handling Costs
Cargo handling costs also vary widely between ports, especially
for break-bulk general cargo. For the latter, loading or
discharging in a port with low labour costs (e.g. in the Far East)
may cost as little as f4-f5 per tonne cargo ship-to-guay or vice
versa, rising to as much as f30-f40 in high cost areas such as North
America. A realistic average to use for feasibility studies will
depend on the range of ports served, and also the range of cargoes
carried - low stowage factor cargoes such as steel costs less to
handle than high stowage factor cargoes such as wool.
Unit load cargo handling costs are more uniform throughout the
world. A container can vary between about f50 to f120
ship-to-guay, or vice versa, i. e. about f5 to flO per tonne average
cargo (multiplied by two for 'loading and for discharging).
Stuffing and stripping the container itself will cost extra, but
is not included in the sea freight charge.
Bulk cargo handling costs are not usually paid by the shipowner.
However, loading costs are usually small for cargoes such as coal
or grain (which are often sold f.o.b.) say, 30p to f1 per tonne,
while discharging is more expensive, around fl to f2 per tonne for
mineral or granular type cargoes. Liquid cargo handling costs are
142 - Engineering Economics and Ship Design
largely pumping costs which are absorbed by the ship (discharging)
or shore terminal (loading).
(v) Capital Charges
Capi tal charges to cover the investment and a return on capi tal are
a large element in annual ship costs, around 30 to 50% excluding
cargo costs if a good rate of return is to be achieved. At their
simplest, they are calculated as a direct proportion of first cost
via the capital recovery factor. In more complex situations,
where taxation and loans arise, the processes outlined in Part 11
are required to incorporate the acquisition cost into the economic
calculations. In poor markets, shipowners will accept freight
rates making no contribution to capital charges; but this cannot
be sustained indefinitely, especially if there are loans
outstanding on the ship.
(vi) Freight Rates
All of the categories mentioned previously are items of
expendi ture. Income is generated from the product of cargo
carried per annum times average freight rate. The derivation of
annual cargo is discussed on page 83. Freight rates, especially in
the bulk trades, vary widely with supply and demand. Past and
present rates for particular cargoes and trade routes are
published in References 4.1.3, 4.2.1, 4.2.2, 4.8.1, 4.12 and 4.15
and in the shipping press, from the trends of which an assessment
can be made regarding possible future long term levels (unless RFR
is the criterion). Some realistic escalation rate should also be
applied as, in the long run, freight rates increase wi th
inflation. Such references often also give freight rates dating
back for several years, which can help in estimating possible
escalation rates.
Cargo liner freight rates are not usually published, varying
widely between routes and different types of cargo. However,
shipowners and cargo agents are usually willing to provide some
current freight rates for particular cargo liner services
quay-ta-quay. By selecting an 'average' cargo, e.g. machinery,
paint or hardware, and allowing for stowage factor if
weight/measurement rates are quoted (see page 25), a reasonable
estimate can be made. On some routes, especially' short sea,
'freight all kinds' rates are quoted for containers, i.e. a rate
per box irrespective of contents. Liner freight rates on a route
do not fluctuate as widely as bulk rates, but remain constant for
some months before any percentage change (overall or for special
factors like bunker charges) is applied. The German cargo liner
freight index' publi shed in Reference 4.8.1 can be used to give some
guidance on escalation. .
For all freight rates, the shipowner does not receive the full
revenue. For bulk cargoes, brokers' fees will amount to typically
2.5 to 5% of the gross freight, while for liner cargoes within
Conferences, rebates of typically 10% are granted to shippers who
use only Conference ships. Most freight rates are now quoted in
U.S. dollars; the appropriate conversion must be made if
calculations are carried out in other currencies.
Appendix - 143

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