MT3006 - Revision Questions PDF

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Dated : 03 February 2017SCHOOL OF CIVIL AND ENVIRONMENTAL ENGINEERINGDivision of Infrastructure Systems and Maritime Studies Bachelor of Science in Maritime StudiesSHIP CHARTERINGMTRevision NotesPrepared by: Soh Woei Liang Guest Lecturer AY2016-Prepared by: Soh Woei Liang April 2016 Determine the br...

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Dated

SCHOOL OF CIVIL AND ENVIRONMENTAL ENGINEERING Division of Infrastructure Systems and Maritime Studies Bachelor of Science in Maritime Studies

SHIP CHARTERING MT3006

Revision Notes

Prepared by: Soh Woei Liang Guest Lecturer AY2016-17

: 03 February 2017

MT3006 – Ship Chartering

Revision Questions

1. Determine the breakeven bareboat charter equivalent at the end of each period for the following investment. Vessel•s acquisition price Vessel•s lightweight Vessel•s lifespan Required rate of return Projected scrap metal price

 $150million  40,000T  25 years  15%  $450/T

Solution: PV FV N I Solve for PMT

 -150,000,000  40,000 x 450 = 18,000,000  25  15%  23,120,321 per year  63,343

Therefore breakeven bareboat charter equivalent = $63,343 per day

2. Determine the minimum period required for the following investment to breakeven assuming all payments made at the beginning. Vessel•s acquisition price Vessel•s lightweight 10 years historical bareboat rate Required rate of return Projected scrap metal price

 $65million  40,000T  $35,000 per day  15%  $450/T

Solution: PV FV I PMT Solve for N

 -65,000,000  40,000 x 450 = 18,000,000  15%  35,000 x 365 = 12,775,000  6.34

Therefore, 6.34 years are needed to breakeven on this investment

3. Determine the rate of return on the following investment with all payments are made at the end. Vessel•s acquisition price Vessel•s lightweight 10 years historical bareboat rate Projected lifespan Projected scrap price

 $105million  40,000T  $35,000 per day  20 years  $450/T

Solution: PV FV PMT N Solve for I

 -105,000,000  40,000 x 450 = 18,000,000  35,000 x 365 = 12,775,000  20  10.85%

Therefore, the expected rate of return on the above investment is 10.85% Prepared by: Soh Woei Liang

April 2016 Page 2 of 53

MT3006 – Ship Chartering

Revision Questions

4. Determine the breakeven time-charter equivalent on the following investment assuming all payments are made at the beginning. Vessel•s acquisition price Vessel•s lightweight Vessel•s lifespan Required rate of return Projected scrap price Daily running cost

 $150million  40,000T  25 years  15%  $450/T  $5,000/day

Solution: PV FV N I Solve for PMT

 -150,000,000  40,000 x 450 = 18,000,000  25  15%  20,104,627 per year  55,081 per day

Breakeven time-charter equivalent

 55,081 + 5,000  $60,081 per day

5. Determine the minimum period required to breakeven on the following investment assuming all payments are made at the end of each period. Vessel•s acquisition price Vessel•s lightweight Historical 10 years market TCE Required rate of return Projected scrap metal price Daily running cost

 $65million  40,000T  $40,000/day  15%  $450/T  $5,000/day

Solution: PV FV I PMT Solve for N

 -65,000,000  40,000 x 450 = 18,000,000  15%  (40,000 – 5,000) x 365 = 12,775,000  8.61 years

6. Evaluate the following investment assuming all payments at made at the beginning of each period. Vessel•s acquisition price Vessel•s residual value Historical 10 years market bareboat rate Required rate of return Remaining lifespan

 $65million  $10million  $35,000/day  15%  10 years

Solution: FV N I PMT Solve for PV

 10,000,000  10  15%  35,000 x 365 = 12,775,000  -76,203,831

Since PV of future cashflow is higher than acquisition price, the project is a go. Please note that the negative PV figure should be treated as positive. Prepared by: Soh Woei Liang

April 2016 Page 3 of 53

MT3006 – Ship Chartering

Revision Questions

7. Evaluate the following opportunity to dispose one of your vessel to a buyer who offered $45million. Vessel•s net book value Vessel•s lightweight Projected scrap price Operating expense Remaining lifespan Cost of capital Projected market TCE

 $50million  40,000T  $450/T  $5,000/day  5 years  15%  $35,000/day  $30,000/day  $40,000/day  $25,000/day  $20,000/day

Year 1 Year 2 Year 3 Year 4 Year 5

Solution: Year 1 Cashflow Year 2 Cashflow Year 3 Cashflow Year 4 Cashflow Year 5 Cashflow

= (35,000 – 5,000) x 365 = (30,000 – 5,000) x 365 = (40,000 – 5,000) x 365 = (25,000 – 5,000) x 365 = (20,000 – 5,000) x 365

= 10,950,000 = 9,125,000 = 12,775,000 = 7,300,000 = 5,475,000

Assuming vessel sold for scrap at the beginning of year 6. Year 6 Cashflow CF0 CF1 CF2 CF3 CF4 CF5 CF6

= -50,000,000 = 10,950,000 = 9,215,000 = 12,775,000 = 7,300,000 = 5,475,000 = 18,000,000

= 40,000 x 450

PV of CF1 PV of CF2 PV of CF3 PV of CF4 PV of CF5 PV of CF6

= 18,000,000

= 9,521,739 = 6,967,864 = 8,399,770 = 4,173,799 = 2,722,043 = 7,781,897

Net Present Value = CF0 + CF1 + CF2 + CF3 + CF 4 + CF5 + CF6 = -50,000,000 + 9,521,739 + 6,967,864 + 8,399,770 + 4,173,799 + 2,722,043 + 7,781,897 = -10,432,888 Since NPV is negative, the continued trade of the vessel will not be feasible as the future cashflows are unable to provide a positive NPV. In the event a financial calculator is used, then it is possible to derive the internal rate of return also which will work out to 7.11%. Since the IRR of the project is lower than the cost of capital, the continued trading of the vessel will not bring economic benefit to the company.

Prepared by: Soh Woei Liang

April 2016 Page 4 of 53

MT3006 – Ship Chartering

Revision Questions

8. Calculate the market time-charter equivalent for the following fixture. Cargo size Fixture rate Vessel•s particulars Port Costs Voyage distances

 145,000 metric tons  $25/MT  12.5kts on 50MT of bunkers per day  13.0kts on 45MT of bunkers per day  $50,000 per call  $50,000 per call  5,000 miles  5,000 miles  120 hours  $450/MT

Laden Ballast Load Discharge Laden Ballast

Laytime Bunker costs Solution: Voyage duration

= (5,000 ÷ 12.5 ÷ 24) + (5,000 ÷ 13.0 ÷ 24) + (120 ÷ 24) = 16.7 + 16.0 + 5 = 37.7 days

Voyage costs

= (16.7 x 50 x 450) + (16.0 x 45 x 450) + 100,000 = 375,750 + 324,000 + 100,000 = $799,750

Gross freight

= 145,000 x 25 = $3,625,000

Voyage returns

= 3,625,000 – 799,750 = 2,825,250

Market TCE

= 2,825,250 ÷ 37.7 = $74,940 per day

9. Using the same voyage and vessel variables as question 8, calculate the market TCE for the following tanker fixture. Cargo size Fixture rate Flat rate

 80,000 metric tons  150 WS  $10.50 per metric ton

Solution: Voyage duration

= (5,000 ÷ 12.5 ÷ 24) + (5,000 ÷ 13.0 ÷ 24) + (120 ÷ 24) = 16.7 + 16.0 + 5 = 37.7 days

Voyage costs

= (16.7 x 50 x 450) + (16.0 x 45 x 450) + 100,000 = 375,750 + 324,000 + 100,000 = $799,750

Gross freight

= 80,000 x 10.50 x (150 ÷ 100) = $1,260,000

Market TCE

= (1,260,000 – 799,750) ÷ 37.7 = $54,635 per day

Prepared by: Soh Woei Liang

April 2016 Page 5 of 53

MT3006 – Ship Chartering

Revision Questions

10. Assuming a daily running cost (operating expense) of $7,000 per day, what is the daily operating profit using the same conclusion as in question 9. Daily operating profit

= 54,635 – 7,000 = $47,635 per day

11. Assuming a breakeven bareboat rate of $35,000 per day, what is the daily profit before tax using the same conclusion as in questions 9 and 10. Daily profit before tax

= 47,635 – 35,000 = $12,635 per day

12. Calculate the minimum number of vessels that a shipowner must have in order to service a contract of affreightment on the following route. Laden Voyage Ballast Voyage Laden speed Ballast speed Laytime Per voyage parcel size Contract volume

 5,000 miles  5,000 miles  12.5kts  15.0kts  120 hours  80,000 metric tons  2,400,000 per year

Solution: Round voyage duration

= (5,000 ÷ 12.5 ÷ 24) + (5,000 ÷ 15.0 ÷ 24) + (120 ÷ 24) = 16.7 + 13.9 + 5 = 35.6 days

Number of ships

= (2,400,000 ÷ 12) ÷ [(30.42 ÷ 35.6) x 80,000] = 200,000 ÷ 68,359.55 = 2.93 = 3 ships

13. Calculate the breakeven time-charter equivalent on the following newbuilding: Acquisition price  $100million Historical scrap price  $250/T Vessel•s lightweight  40,000T Cost of capital  10% Vessel•s lifespan  25 years Operating & overhead costs  $5,000 per day Assume all payments made at the end of each period. Solution: PV FV N I Solve for PMT Breakeven TCE

 -100,000,000  40,000 x 250  25  10%  10,915,126.50

= 10,000,000

= (10,915,126.50 ÷ 365) + 5,000 = 29,904.46 + 5,000 = $34,904.46

Prepared by: Soh Woei Liang

April 2016 Page 6 of 53

MT3006 – Ship Chartering

Revision Questions

14. Calculate the rate of return on the following vessel acquisition: Acquisition price Projected residual value Vessel•s lifespan Operating & overhead expense Historical market TCE

 $75million  $5million  20 years  $5,000/day  $35,000/day

Assume all payments made at the end of each period. Solution: PV FV PMT N Solve for I

 -75,000,000  5,000,000  (35,000 – 5,000) x 365  20  13.51% per year

= 10,950,000

15. Calculate the market TCE for the following fixture: Freight rate Cargo size Round voyage days Bunker consumption Bunker costs Port costs Broker commission Address commission

 $10/MT  100,000MT  30 days  30MT/day  $250/MT  $100,000  1.5% on gross freight  1.5% on gross freight

Solution: Gross freight Commission Voyage costs Net freight Market TCE

= 10 x 100,000 = $1,000,000 = (1.5% + 1.5%) x 1,000,000 = $30,000 = (30 x 30 x 250) + 100,000 = $325,000 = 1,000,000 – 30,000 – 325,000 = 645,000 = 645,000 ÷ 30 = $21,500/day

16. Using the same voyage variables as in question 15, calculate the market TCE for the following fixture. Freight rate Cargo size Flat rate Solution: Gross freight Commission Net freight Market TCE

 150 WS  150,000MT  $10.50/MT = (150 ÷ 100) x 10.50 x 150,000 = $2,362,500 = (1.5% + 1.5%) x 2,362,500 = $70,875 = 2,362,500 – 70,875 – 325,000 = 1,966,625 = 1,966,625 ÷ 30

Prepared by: Soh Woei Liang

= $65,554/day April 2016

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MT3006 – Ship Chartering

Revision Questions

17. Calculate the net present value and internal rate of return on the following contract of consecutive voyage. Vessel•s net book value Vessel•s projected residual value Vessel•s remaining lifespan Contract duration Operating and overhead expense Cost of capital Projected market TCE Year 1 Year 2 Year 3 Year 4 Year 5

 $50million  $5million  10 years  5 years  $5,000/day  10% per annum  $25,000/day  $35,000/day  $20,000/day  $30,000/day  $40,000/day

Solution: Annual depreciation expense

= (50,000,000 – 5,000,000) ÷ 10 = 4,500,000

Total depreciation expense

= 4,500,000 x 5 = 22,500,000

NBV at end of contract

= 50,000,000 – 22,500,000 = 27,500,000

Assuming NBV at the end of contract is recovered in year 5. CF0 CF1 CF2 CF3 CF4 CF5

= -50,000,000 = (25,000 – 5,000) x 365 = (35,000 – 5,000) x 365 = (20,000 – 5,000) x 365 = (30,000 – 5,000) x 365 = [(40,000 – 5,000) x 365] + 27,500,000

Net present value

= 7,300,000 = 10,950,000 = 5,475,000 = 9,125,000 = 40,275,000

PV of CF1 = 6,636,364 PV of CF2 = 9,049,587 PV of CF3 = 4,113,449 PV of CF4 = 6,232,498 PV of CF5 = 25,007,606

= CF0 + CF1 + CF2 + CF3 + CF4 + CF5 = -50,000,000 + 6,636,364 + 9,049,587 + 4,113,449 + 6,232,498 + 25,007,606 = $1,039,504

Internal rate of return = 10.62% (using financial calculator)

18. Calculate the minimum number of vessels required to service the following contract: Contract size Contract parcel size Voyage days

 4.8million tons in equal monthly shipments  145,000MT per shipment  45 days

Solution: Monthly shipment size

= 4,800,000 ÷ 12 = 400,000MT

Number of ships required

= 400,000 ÷ [(30.42 ÷ 45) x 145,000] = 400,000 ÷ 98,020 = 4.08 = 5 vessels needed

Prepared by: Soh Woei Liang

April 2016 Page 8 of 53

MT3006 – Ship Chartering

Revision Questions

19. Using the same variable as in question 17, calculate the returns on assets with additional information as follow: Vessel was acquired with 50% debt at loan tenure of 10 years with equal capital repayment annually. Cost of debt is at 150 basis points above LIBOR which is projected to average around 3.5% per annum throughout the loan tenure. Solution: Outstanding debt

= 50,000,000 x 50% = 25,000,000

Capital repayment

= 25,000,000 ÷ 10 = 2,500,000

NBV of loan at beginning of Year 1 Year 2 Year 3 Year 4 Year 5 Interest Expense

Year 1 Year 2 Year 3 Year 4 Year 5

= 25,000,000 – = 22,500,000 – = 20,000,000 – = 17,500,000 –

2,500,000 2,500,000 2,500,000 2,500,000

= 25,000,000 x (3.5% + 1.5%) = 22,500,000 x 5% = 20,000,000 x 5% = 17,500,000 x 5% = 15,000,000 x 5%

Annual depreciation from question 17 Vessel NBV at beginning of Year 1 Year 2 Year 3 Year 4 Year 5 Return on asset

= 25,000,000 = 22,500,000 = 20,000,000 = 17,500,000 = 15,000,000 = 1,250,000 = 1,125,000 = 1,000,000 = 875,000 = 750,000 = 4,500,000

= 50,000,000 – = 45,500,000 – = 41,000,000 – = 36,500,000 –

4,500,000 4,500,000 4,500,000 4,500,000

= 50,000,000 = 45,500,000 = 41,000,000 = 36,500,000 = 32,000,000

Year 1 = (7,300,000 – 1,250,000 – 4,500,000) ÷ 50,000,000 = 3.10% Year 2 = (10,950,000 – 1,125,000 – 4,500,000) ÷ 45,500,000 = 11.70% Year 3 = (5,475,000 – 1,000,000 – 4,500,000) ÷ 41,000,000 = -0.06% Year 4 = (9,125,000 – 875,000 – 4,500,000) ÷ 36,500,000 = 10.27% Year 5 = (12,775,000 – 750,000 – 4,500,000) ÷ 32,000,000 = 23.52%

Average Return on asset

= (3.10% + 11.70% - 0.06% + 10.27% + 23.52%) ÷ 5 = 9.71%

Prepared by: Soh Woei Liang

April 2016 Page 9 of 53

MT3006 – Ship Chartering

Revision Questions

20. An opportunity to acquire a vessel presents itself and you are required to determine the financial feasibility of this opportunity. The following information are available: Asset•s fair market value is at $60million Asset•s remaining lifespan is at 5 years Asset•s lightweight is at 32,000T Available financing structure is as follow

Operational information

Market information

Cost of debt Cost of equity Weight of debt Weight of equity Loan tenure Operating Costs SG&A Expenses Drydock cost Drydocking cycle Next drydocking

 8% per annum  10% per annum  80%  20%  3 years

 $5,000/day  $ 500/day  $1,500,000 for 30 days  30 months  Middle of year 3

Projected market TCE Year 1 Year 2 Year 3 Year 4 Year 5

 $45,000/day  $50,000/day  $55,000/day  $35,000/day  $60,000/day

10 years historical average scrap price

 $350/T

Assume full utilisation, no leap year and zero tax rate Calculate the following: a) Returns on asset b) Net present value of this investment Based on the above answers, provide your recommendation. Solution: Cost of capital

= (80% x 8%) + (20% x 10%) = 8.4%

Capital repayment

= (80% x 60,000,000) ÷ 3 = $16,000,000 per year

Interest expense

Year 1 = 48,000,000 x 8.0% Year 2 = (48,000,000 – 16,000,000) x 8.0% Year 3 = (32,000,000 – 16,000,000) x 8.0%

Depreciation expense Amortisation expense

= [60,000,000 – (32,000 x 350)] ÷ 5 Year 3 = (1,500,000 ÷ 30) x 6 Year 4 = (1,500,000 ÷ 30) x 12 Year 5 = (1,500,000 ÷ 30) x 12

Operating & SG&A expense Net revenue

= (5,000 + 500) x 365

Year 1 = 45,000 x 365 Year 2 = 50,000 x 365 Year 3 = 55,000 x (365 – 30)

Prepared by: Soh Woei Liang

= $3,840,000 = $2,560,000 = $1,280,000 = $9,760,000/year = $300,000 = $600,000 = $600,000 = $2,007,500/year = $16,425,000 = $18,250,000 = $18,425,000 April 2016

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MT3006 – Ship Chartering

Revision Questions

Year 4 = 35,000 x 365 Year 5 = 60,000 x 365 NBV of vessel at beg

Year 1 Year 2 Year 3 Year 4 Year 5

= 60,000,000 – = 50,240,000 – = 40,480,000 – = 30,720,000 –

= $12,775,000 = $21,900,000 9,760,000 9,760,000 9,760,000 9,760,000

= $60,000,000 = $50,240,000 = $40,480,000 = $30,720,000 = $20,960,000

Net Income

Year 1 = 16,425,000 – 2,007,500 – 3,840,000 – 9,760,000 = 817,500 Year 2 = 18,250,000 – 2,007,500 – 2,560,000 – 9,760,000 = 3,922,500 Year 3 = 18,425,000 – 2,007,500 – 1,280,000 – 9,760,000 -300,000 = 5,077,500 Year 4 = 12,775,000 – 2,007,500 – 9,760,000 – 600,000 = 407,500 Year 5 = 21,900,000 – 2,007,500 – 9,760,000 – 600,000 = 9,532,500

Returns on Asset

Year 1 Year 2 Year 3 Year 4 Year 5

a) Average Returns on Asset Cashflow

Year 1 Year 2 Year 3 Year 4 Year 5

= 817,500 ÷ 60,000,000 = 3,922,500 ÷ 50,240,000 = 5,077,500 ÷ 40,480,000 = 407,500 ÷ 30,720,000 = 9,532,500 ÷ 20,960,000

= 1.36% = 7.81% = 12.54% = 1.33% = 45.48%

= 1.36% + 7.81% + 12.54% + 1.33% + 45.48% = 13.70% = 16,425,000 – 2,007,500 = 14,417,500 = 18,250,000 – 2,007,500 = 16,242,500 = 18,425,000 – 2,007,500 – 1,500,000 = 14,917,500 = 12,775,000 – 2,007,500 = 10,767,500 = 21,900,000 – 2,007,500 = 19,892,500

Assuming vessel was scrapped at the beginning of year 6 PV Cashflow

b) Net present value

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

= 14,417,500 ÷ (1 + 0.084)1 = 16,242,500 ÷ (1 + 0.084)2 = 14,917,500 ÷ (1 + 0.084)3 = 10,767,500 ÷ (1 + 0.084)4 = 19,892,500 ÷ (1 + 0.084)5 = 11,200,000 ÷ (1 + 0.084)6

= 13,300,277 = 13,822,745 = 11,711,383 = 7,798,261 = 13,290,550 = 6,903,071

= -60,000,000 + 13,300,277 + 13,822,745 + 11,711,383 + 7,798,261 + 13,290,550 + 6,903,071 = 6,826,287

Based on above ROA of 13.70% over a cost of capital of 8.4% and NPV of $6,826,287, the recommendation is to proceed with the acquisition

Prepared by: Soh Woei Liang

April 2016 Page 11 of 53

MT3006 – Ship Chartering

Revision Questions

21. A shipowner has a fleet of 5 x handymax bulkers which are averaging 20 years old. This fleet has been trading on the spot market and their average performance are as follow: 2003 2004 2005 2006 2007

TCE TCE TCE TCE TCE

$14,800/day $28,100/day $21,200/day $20,300/day $42,500/day

Utilisation Utilisation Utilisation Utilisation Utilisation

85% 80% 75% 70% 65%

Due to the age of the vessels, the operating costs had been escalating at 1.5% per annum. As of end 2007, the operating costs per vessel averaged $5,000/day. In addition, due to the acute shortage of seafarers, the availability of experienced shore based staff is also declining resulting in rising wages. By end 2007, the average daily G&A costs have went up to $500/day...