3. Calculation Question (201=20 points)

Supposing that COSCO is planning to open an inland water shipping line from Shanghai to Wuhan,

they are facing the question that whether they should purchase a new ship (500 TEU containership)

for this new shipping line.

Please (1) introduce what methods could be applied here to answer this question and calculate the

economic viability of this ship and help COSCO make this decision: whether or not purchase this

ship. The details of parameters are given below:

The ship is a 500 TEU inland water containership. The newbuilding price is 60 million CNY at

the beginning of year 1.

Assuming that COSCO plans to borrow all the 60 million CNY from the bank. The lifetime of

this ship is 15 years, that means after 15 years operating, the ship must be demolished.

The depreciation-straight line method is applied in this question. The residual value at the end

of year 15 is 0.

The ship could navigate 40 voyages per year. For each voyage, 100% of the containers could be

fully loaded. The values of annual number of voyages (40) and loading rate (100%) are assumed

to be constant within the 15-year-lifecycle.

The freight rate is set as 1500 CNY/TEU in first 5 years; 2000 CNY/TEU from year 6-10; 2500

CNY/TEU from year 11-15.

The annual total cost excluding capital cost accounts for 80% of the annual revenue of the ship.

The revenue and cost could be deemed as occurred at the end of each year. The value of 80%

is assumed to be constant within the 15-year-lifecycle.

The annual discount rate or interest rate is set as 8% in this question.

Taxes and stakeholder dividends are not considered in this question.

(2) give some suggestions to help improve the economic viability of this ship