How much does your vessel cost over time?

2018-09-28T18:38:24+01:00September 2018|Categories: Article|

Expenses can skyrocket when warranty and fixed interest rate periods are over

Applying Total Cost of Ownership (TCO or ‘what does a vessel cost during ownership’) enables shipowners to make objectively informed decisions about investments. Modelling TCO enables shipowners to objectively determine whether it is cost-effective to dock a ship for maintenance or conversion. For example, in case of the installation of a scrubber or a ballast water treatment system.

Many companies in shipbuilding and ship operations use TCO over the long term as a framework for analyzing investment or divestments decisions. The analysis typically includes the initial purchase price as well as all direct and indirect expenses. While the direct expenses can be easily reported, companies most often also seek to analyze all potential indirect expenses that can be of significant influence in deciding whether to complete a purchase.

TCO is not a fixed number, but varies over time

Although the concept of TCO is fairly simple, forecasting it is far more complex. In contrary to popular belief, TCO is not a fixed number but an uncertain variable in the investment decision equation. Expenses fluctuate over time as a result of changes in the economic and political environment and changes in contractual agreements of the owner. Wars, credit crunches, central bank politics, energy conflicts, warranty periods, fuel hedges, wage inflation and many more indicators impact the TCO of a vessel. All parameters in TCO models can fluctuate over time and these changes may have significant impact on future annual expenses and therefore impact investment decisions now and in the future. Monitoring these changes is crucial for assets owners, buyers and designers and is required for both new investments as well as existing assets.

What happens to the asset value on your balance sheet if the expected residual value of the vessel tuns out to be minimized due to ongoing market downturn, new environmental regulations or as a result of disruptive technology? What happens to your business case if fuel cost rise or drop significantly? The funding structure of assets may need to be changed and always need to be continuously monitored. Now that the time of cheap money is ending and interest rates are on the rise again, it could be time to reduce leverage. Risk profiling and therewith the average cost of capital could change together with the funding structure or operations profile. More working capital may be needed over the years if there is an increasing trend of late payments in the industry. Crewing cost can change dramatically over time depending on the region of the world and labor law changes. Expenses for maintenance and repair will increase over the lifetime of the vessel and are subjected to inflation of wages and prices of material like steel and copper.

Decision-making under uncertainty

Shipowners and ship producers should all monitor the development of the cost of their vessels and the impact is has on the value of these assets on the long run. In this highly capital-intensive industry, it is essential to reassess the total cost of ownership on a frequent basis and with a rolling forecast horizon of 3 to 5 years. TCO is not a static number, but a model under uncertainty. It is subject to change every day of the week and largely depends on developments in interest rates, fuel cost, financing structure, inflation, wages, vessel age and residual market value.

  • Life Cycle Cost Model Tugboats

    1,250 / year and a 3,250 sign-up fee
    Total cost of ownership (TCO) model for tugs is offered. Model provides the total cost of ownership of the vessel over its complete life cycle. The model consists of Financial Statements, Financial Ratio Analysis,  Net Present Value and a Return on Investment analysis.
  • Total Cost of Ownership RoPax Ferry

    990 / year and a 3,350 sign-up fee
    Total cost of ownership (TCO) model for Ro-Pax Ferries. Model provides the total cost of ownership of the vessel over its complete life cycle. The model output consists of Financial Statements, Financial Ratio Analysis,  Net Present Value, Return on Investment and Monte Carlo Simulation.
  • Lyfe Cycle Cost Model Dredging Vessel

    1,150 / year and a 3,700 sign-up fee
    It enables comparison of different size and type of dredgers. Total cost of ownership (TCO) model for Dredging Vessels is given. Model provides the total cost of ownership of the vessel over its complete life cycle. The model output consists of financial statements, financial ratio analysis,  net present value and return on investments.
Other TCO models

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