A Mathematical Method for Cost Performance and Efficiency in Ship Economics

Investment projects in the shipping industry span long time periods, and it is therefore necessary to reduce the current or future predicted cash flows to an expression in money units of an appropriate period. The discounted cash flow needs to forecast the amount of free cash flow that the company will produce for this period. The commercial cashflow is described in freight income, fixed and variable operation cost, capital cost and taxes and profits, i.e. the technical and economic performance is determined by the technical performance, economic performance and operation performance. If the shipping market is growing faster than the expansion of the economy, the shipping company will be able to earn returns on new investments that are greater than its cost of capital. In this paper a mathematical method for cost performance and efficiency in ship economics has been formulated for evaluating the economic performance. The relationship between the net present value (NPV) and deadweight is drawn based on displacement and lightship parameters where design variables are used in mathematical formulation as drivers in economic performance. For the case in which cash flows or income streams are expected to extend indefinitely into the future, the sum of an infinite geometric series is calculated, which is then discounted back to the valuation date. Using the sum of terms of an infinite decreasing geometrical progression, we obtain for the net present value of constant cash flows.