- To finance a business, you typically will have a combination of equity and debt.Suppose that you run a small business and can finance a major expansion with either an additional $1 million in equity from you (opportunity cost $100,000/year) or $1 million in debt at an annual interest rate of $60,000.The debt term is 5 years and it is a mortgage-style repayment, fixed amounts every year.If you fail to make a payment, you lose your business to the lender. Which option leaves you the greater flexibility in terms of taking chances over the next 5 years?Explain. Do you think that businesses with highly variable cash flow would favor this kind of debt?Explain.
- Read the article "Ship Fumes Billow Into Quandary" This is a couple of years old; you can answer the questions as of the 2018 facts given in the article, or if you happen to have further knowledge you can update your answer to reflect that, but don't do any outside research. Which of the two options is more "flexible" and which requires a greater "commitment"?In what sense?Explain briefly. What are the advantages of each option?Feel free to bring numbers into your considerations.Explain briefly.
The owners of 60,000 cargo ships are bracing for tighter emissions rules that are forcing them to make a multibillion-dollar choice: Start buying cleaner-burning fuel or invest in a device that treats a ship's exhaust before letting it out." It isn't an easy call. Retrofitting a vessel with a sulfur-trapping exhaust system called a "scrubber" costs as much as $10 million a ship, while cleaner fuels are about 55%% more expensive than the ones shipping operators use now. Whether it makes sense to install scrubbers and absorb a bigger financial hit upfront depends on whether scrubbers will be adequate to meet even stricter pollution caps expected in the future and the availability and cost of cleaner fuels. Both factors are difficult to gauge." Scrubbers involve "a complicated and expensive installation of $5 million to $10 million per ship and the benefit to the environment is still not clear," said Soren Toft, chief operating officer at Maersk Line, the world's biggest container operator. "It's like installing small refineries in approximately 60,000 vessels and it's not a very sensible way of doing things."" The deliberations stem from new caps on sulfur emissions, by global regulator International Maritime Organization, that will go into effect in January 2020." Ships contribute about 13%% of total sulfur-dioxide emissions, according to the IMO, by burning heavy fuel with a 3.5% sulfur content. That is more than 2,000 times the level allowed for cars on U.S. highways. The pollution from burning high-sulfur fuel causes respiratory ailments and can aggravate heart disease, according to the World Health Organization." The new cap on a fuel's sulfur content will be 0.5% and the change will cost the industry about $40 billion, according to maritime executives. Higher fuel costs lead to increased freight rates, which are passed on to consumers." Refineries say they will have enough cleaner fuel blends to meet demand, but many shipowners are opting not to wait and see. Scrubber manufacturers expect orders to total between $6 billion and $18 billion by 2026, from less than $300 million last year and just a few million in 2016." The lion's share will go to big competitors such as Finland's Wartsila Qxj, Sweden's Alfa Laval AB and Norway's Yara Marine Technologies." Yara said it had more than 400 scrubber inquiries last year, up from 100 in 2016; inquiries exceeded 100 in the first two months of 2018. "Shipping is waking up to fundamental change," said Thomas Koniordos Yara's senior vice president for environmental solutions." Mr. Koniondos declined to say how many orders Yara has in place. "A study commissioned by the IMO says about 6.7% of the global commercial fleet, or around 4,000 ships, will be using scrubbers after 2020." Executives at shipyards in China and South Korea, where roughly 1,500 vessels of all types are being built or retrofitted to comply with the new rules, say about 25%% are fitted with scrubbers. A further 65% are built to use cleaner fuel blends and the remainder are built for other options, including liquefied natural gas." A scrubber resembles a mini refinery plant. Exhaust from the engine goes through the unit where it is mixed with water, which dissolves sulfur oxides before the treated fumes exit through the ship's funnels. The used water is then released into the sea or cleaned up and reused, depending on the system." Adopters absorb a big financial hit. Miami-based Carnival Corp., the world's biggest cruise-ship operator, said it has invested $400 million to install scrubbers in 82 of its 102 ships. Sweden's Stena Line, one of Europe's largest ferry operators, serving Northern Europe's low-sulfur zone, said in 2014 that it had to shed about 30%% of its workforce to pay for scrubbers." Scrubber-industry executives say despite the high upfront cost, the devices substantially cut operating expenses. Peter Leifland, Alfa Laval's executive vice president, said a very large crude carrier, or VLCC, would spend $9 million a year using low-sulfur fuel mixes, but a $3.7 million scrubber system would cut the annual fuel cost to $7 million plus an annual service fee of as much as $75,000." "The payback time is around two years, which is quite short, considering the scrubbers will last for the ship's lifetime" he said. " VLCCs have an average lifetime of about 20 years." Shipyard officials in China and South Korea, where the bulk of new VLCCs are built, said 35 of the roughly 50 such vessels ordered last year will have scrubbers. " Maersk Line, a subsidiary of Danish shipping company A.P. Moeller-Maersk AS, says it is keeping its options open, but adds that using cleaner fuels is the preferred choice for much of its fleet, expecting the cost to gradually decline as refiners increase output." Maersk, with a fleet of more than 770 vessels, initially expects the cleaner fuels will add around $2 billion to its average $3.3 billion annual fuel bill." Executives said the onus should be on refineries, not shipowners, to deal with the fuel issue, although scrubbers remain an option."
