EngineeringEconomics Application

to Ship Design

Course Teacher
Dr. N. M. Golam Zakaria
Professor
Dept. of Naval Architecture & Marine Engineering
BUET, Dhaka-1000
 Application to Ship Design

The marine transport or service requirements must be developed

into a series of feasible ship designs, which must then be
evaluated for their technical and economic performance,
covering the following :
• Trading pattern and operating environment
• Range of feasible technical designs
• Estimation of building and operating costs, and income
• Economic evaluation of alternatives
 Application to Ship Design contd..

The ship designer’s concern is the optimal design satisfying the

operator/owner and the shipbuilder based on two
fundamental principles:

Specialist knowledge:

To design the optimal ship, extensive experience of the

influence of different design features on first cost is required.
The designers should quantify accurately the the cost of
alternative hull proportions, materials, machinery,
arrangements, etc.
 Application to Ship Design contd..
Commercial competition:
Through the ship designer, the ship builder must show that
this design is not only the cheapest but also the most
profitable. For industrial or naval vessels, ‘most profitable’
may be replaced with having minimum operating expenses.
 Traditional Approach
The traditional approach survived during the many years in which
developments in ship types were slow, e.g. 1910 to 1960. It has
proved inadequate for the highly competitive years since then, during
which ship types have changed significantly, because:
• Design was usually based on previous ships, yet there was no
existing experience of the new ship types
• Generally only one design for one size and speed was
investigated
• No economic evaluations were made either for the single design
or any alternative
• Traditional cost estimating methods did not reflect the changing
ship types and production methods.
 Modern Approach
• A modern approach aimed at improving the designs of ships
requires good collaboration between the owner, the builder and
the designer, who become partners is making an optimal ship.
• Based on market research and transport demand, concept
evaluation should be done taking into account the owner’s needs
and experiences.
• From a number of feasible designs, an optimal design should be
so chosen that it should be easy to build also. This selection
should be done based on either mathematical optimization or
judgment. Then the design should be firmed up after discussion
with the builder and the owner. Contract and detailed design
should follow from there.
 Integrated Design Process
A comprehensive process includes:-
(i) Investigation of transport demand, corresponding market research and
feedback of operational experience.
(ii) Concept formulation: range of possible technical solutions, ship types,
configurations, sizes and speeds.
(iii) Preliminary technical design of a number of alternatives (often using
specialized computer programs) including dimensions, machinery, etc.
(iv) Estimates of first cost, revenue earning ability of operating costs and
potential each alternative.
(v) Economic evaluation of the alternatives, under a variety of
assumptions.
(vi) Selection of the optimal design, either by judgment, or mathematical
programming techniques .
 Integrated Design Process contd..
(vii) Discussion of the proposed design (and any suitable
alternatives) with clients.
(viii) Contract, detailed design and construction of the final
selection .

The practicing ship designer should be interested in every aspect

of these stages.
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 2. COMPARISON OF ALTERNATIVE SHIP
DESIGNS
• A typical situation faced by the designer is to compare alternative designs
considering both technical and economic factors. The comparison of
alternatives does not need to be based on the entire design.
• This may be done on individual features such as different cargo-handling
systems, different propulsion systems or different materials for the piping
systems.Such features are straightforward to analyse economically when
they do not affect earning capacity. The alternative first costs and
maintenance costs are evaluated in terms of annual cash flows and
converted to present worth to find the system with the highest NPV.
• In practice, most alternative designs differ not only in building and
operating costs, but in performance, so that care must be taken to include
second-order effects. For example, better cargo-handling gear may not only
save on operating costs, but also reduce port time, thereby carrying more
cargo per annum. The secret of success in comparing alternative designs is
to obtain sufficiently realistic data and use an appropriate method of
economic analysis.
A General Approach To The Evaluation Of Economic
Performance of Freight Earning Vessels

In any marine transport system, the principal parameters to be

considered are:-
• Cargo type, quantity and unit value
• Distance and physical characteristics of route
• Operating system, e.g. unitized, bulk, dedicated vessels.
 Principal Parameters
• In more specific terms, especially applicable to the movement in
ships of bulk commodities available in large quantities, these
parameters may be expressed as:-
• Cargo payload
• Load factor
• Round trip distance
• Speed
• Effective cargo handling rate
• Number of ports of call and duration
• Daily fuel consumption at sea and in port
• Service days per annum
• Ship cost
• Crew costs
• Maintenance, insurance and other daily running costs
 Principal Parameters contd..
• Bunkering pattern
• Fuel cost per tonne
• Port charges
• Cargo handling charges
• Freight rate
• Expected rate of return
• Tax rate
• Ship life
• Depreciation (capital) allowances
• Credit facilities
• Subsidies
• Anticipated escalation.
 Example
Approximately 1.25M tonnes of mineral ore per annum require to be
transported between mine and smelter 2,000 miles apart. Compare the
economic performance of a self-unloading bulk carrier of about 60,000 tonnes
d.w. with a conventional ship using existing shore discharging plant. Port
limitations restrict the ship to 225m overall length and 13m draft. Available
machinery fixes ship speed at about 15 knots. Flag- of- convenience ship
owner requires 10 per cent rate of return over 16- year life of ship.
Both Alternatives:
Breadth restricted to 32 . 2 m for possible Panama Canal transits.
Adequate cubic capacity exists for the cargo stowage factor.
Dimensions 210 m b. p. x 32 . 3 m x 17 . 7 m depth x 13. 1m draft ,
Same hull form . Fuel consumption 50 tonnes heavy fuel + 2 tonnes diesel oil per day.
Time at loading port 1.5 days.
Two 8-hour shifts per day worked at discharging port, plus one day manoeuvring and
miscellaneous time per call.
Basic ship price £ 18 M.
 Example contd..
Shore Discharging Gear:
1,000 tonnes per hour, at cost of 90p per tonne.
Self Unloading Gear:
2,000 tonnes per hour.
Weight of gear plus structure 2,300 tonnes
Additional cost £ 9.08M .
Additional maintenance £ 90,000, engineers £ 50,OOO p.a .
Additional diesel oil consumption during discharge 0 . 5 tonnes
per working hour.
Additional three days out of service per annum.
The simplified calculation above shows the two systems evenly matched. It
would thus be desirable to make a more rigorous calculation considering
following:-

• Escalation of items of expenditure

• Credit arrangements

• Accelerated depreciation allowances

• Different building times and installments

• Residual value

• Sensitivity of results to changes in principal assumptions, e.g . fuel

prices.
 Uncertainties in Ship Design
• It can be observed that cash flow calculation is fairly complicated. It
is difficult to express the economic criterion as a mathematical
function of economic and technical variables.
• Further, in such calculations, the economic variables may or may
not be totally independent and their dependence may not be
known exclusively. Some of these may be heuristic in nature.
• A cash flow calculation is a good way to use in such conditions. In
any design activity, it is necessary to optimize the identified
optimizing function expressed as a function of the design variables.
• Since the cash flow calculation is a highly nonlinear subject with
rather difficult constraints, it may be difficult to go for a
mathematical optimization process. In such a case, various
calculation methods can be used to do sensitivity studies as well as
to find one or a number of optimized solutions.
 Uncertainties in Ship Design contd..
• The results of a techno-economic ship design process may be sensitive
to changes in the data, because there may be uncertainty about many of
the technical and economic parameters.
• It is not possible to predict exactly the fuel price over the life of the ship,
nor is it possible to predict other factors like port time, maintenance
cost, load factor, etc. The simplest way of investigating such
uncertainties is to repeat the calculation with different values of key
parameters and assess how sensitive the results are to such changes.
• A typical presentation of such calculations is made with the economic
measure of merit plotted against key parameters for different design
solutions.
• Where the curves of alternate designs do not cross, the ranking is not
changed, but where there is a crossover, the decision to be made is
whether the operating situation is likely to be to the left or right of the
crossover.
 Typical Presentation of Results

Decision-making in ship design based on economic criteria: (a) RFR vs. ship speed,
(b) IRR vs. fuel price, (c) RFR vs. ship first cost, and (d) NPV vs. sea days per annum.
 Uncertainties in Ship Design contd..
• It is also possible to make trade-offs on design decisions based on results of
sensitivity calculations, e.g. how much extra first cost can one afford to pay
to obtain a reduction in fuel consumption. The decrease in NPV from, say, a
10% increase in the first cost can be compared with the percentage
decrease in fuel consumption needed to generate a corresponding increase
in NPV.
• Another way to understand the effects of uncertainty of all the
independent economic variables, such as fuel oil price, port days,
maintenance cost or freight rate, is to model the probability density of
each such variable by collecting large number of data from across the
world.
• Then one can model the probability density of NPV by using the Monte
Carlo simulation technique where one could generate a random number,
get the value of the corresponding variable based on its probability density,
get such values for all variables and calculate the NPV. The probability
density of NPV can give the mean and the standard deviation of NPV, which
can be used to take a decision on the selection of the design solution.
 The Optimal Ship

Optimal ship size for a given speed:

• For a bulk cargo or crude oil trade where there are no
restrictions on ship size or cargo availability, the economies of
scale in building and operating costs indicate that the optimal
ship, in general, is the largest possible, offering the lowest
transport cost.
Optimal Ship Size for constant speed
 Optimal ship speed for a given size:
• Generally, increasing ship speed does not have a great effect on the
hull and equipment part of the first cost apart from the secondary
effects on dimensions due to reduced block coefficient to keep the
payload constant. Likewise, crew cost and other components of
daily running cost are not affected appreciably by change in speed.
• The propulsion power, however, goes up as the cube of speed,
increasing fuel consumption and, therefore, fuel cost goes up
approximately as the cube of speed. Machinery first cost goes up
roughly as the square of speed, increasing the capital cost of the
ship.
• Since the port turnaround time is not zero, the freight earned can
be only less than directly proportional to speed.
Optimal ship speed for a given payload.
 Optimal ship speed for different ship types:

• For ships carrying high-value cargo such as containers, cars,

passengers, etc., freight rate and, hence, income are high and so
are expenses. Therefore, the optimum speed is high. So these
ships have a fine form and high speed.
• On the other hand, ships carrying low-value cargo have a low
freight rate; therefore, bulk carriers are slow-speed full form
ships. In case the designer wishes to consider using an expensive
propulsion plant such as a nuclear-powered ship, the capital cost
goes up and also running cost may increase. It is necessary to
increase income by increasing the number of voyages. Therefore,
optimum speed increases.
Optimal speed for different ship types.
 Optimal ship speed for different ship
types: contd……
• Figure in the previous page indicates the optimum speed in
all these cases. The curves in the figure are quite flat near the
optimum point. The exact optimum point may move to the
right or left during the ship’s lifetime due to fluctuations in
economic or operating conditions. This may also happen at
the design stage due to small variations in engine power
(diesel engines are normally available in steps of power) with
the possibility of being slightly away from the optimum point.
Due to the flatness of the curve, these small variations do not
make appreciable variation in NPV.