Do you ever wonder how a ship’s value is determined? How do the shipowner companies make decisions about purchasing and selling different kinds of ships?
Below are some explanations and methods that are used worldwide. There is one dilemma discussed which is whether the price is equal to the value.
To understand this question we need to look at the following methods:
- Income Approach
- Market Approach
- Cost Approach
The income approach requires a forecast of future cash flow.
The net present value of the future income the vessel will earn is used to calculate the vessel’s value. Naturally, the most important the argument in the modeling income approach is the forecast of freight income. This is based on assumptions about the availability of vessels to compete for the same cargoes, the future market conditions of tonnage supply (depending on to demand and movements and global economic conditions), and the customer’s chartering planning (the spot market, series of short-term charters, or very long-term charters).
Another significant component of the income approach financial modeling will be the price and accessibility of debt financing. Therefore, while the income approach offers a fundamental and well-documented approach to the value of the vessel, there is a problem with the value of money over time. Since $1 million ten years later and $1 million now will not reflect the same value, the return in question must be determined by calculating the cash flow into the future or the present.
The market approach encompasses the idea of supply and demand forms the foundation of this strategy.
This approach is past-oriented. The market price is determined from a recently completed sale of a comparable ship between a willing and knowledgeable buyer and seller in an arm’s length transaction. To ascertain the worth of the vessel in question, it takes into account the prices of comparable vessels on the market and utilizes them as a benchmark. For instance, assume that the value of a five-year-old vessel is around $1 million. If there is the same qualified vessel that needs to be valued, the valuation will be determined for that amount as well. The key is recognition of the ship markets and analyzing \ past prices of the vessels for companies or brokerage service providers.
The cost approach to ship valuations involves determining the vessel’s current replacement cost and then accounting in depreciation in three different ways: economic, functional, and physical obsolescence.
This approach is based on the substitution principle, which states that an informed purchaser would not spend more on a vessel than it would to acquire a brand-new one with comparable functionality. Physical wear, technical advancements, and economic fluctuations are just a few of the variables that make it difficult to quantify depreciation for marine and offshore assets because they all affect the valuation process.
To effectively assess replacement costs, a number of factors must be carefully considered, including regulatory changes, technology improvements, asset condition, and market conditions.
To sum up, the income, market, and cost approaches offer essential frameworks for determining the value of ships in the marine sector.
From estimating future cash flows and evaluating market comparable to calculating replacement costs and depreciation, each approach gives an independent point of view. It should not be forgotten that the most logical approach when valuing a ship is to evaluate and consider these three methods. Research shows that when ship valuation is done using only one or only two of them, the accurate conclusion is not reached and this causes long-term losses.
