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Financial Analysis and Modelling of Ship Investments

Financial modelling of ship investments can quantify downside risk and upside potential before a decision to invest is made, and also be used as a tool to monitor risks and performance during the investment period. A good financial model is also an excellent tool for communicating opportunities or potential problems to management, lenders and investors. This allows for opportunities or potential problems to be identified early and plans for alternative actions to be prepared in advance. Meaningful financial analysis and modelling of ship investments can, therefore, contribute to better management of risks and hence better risk-adjusted returns.

Some of the questions we may want answers to are:

• How much capital is needed for the project?

• What is the debt capacity of the project?

• What is the financing structure that maximises the Net Present Value (NPV) of equity invested?

• What is the forecasted cash impact of financing alternatives, chartering policies and market developments?

• What is required to meet the target return on equity?

• How long will current cash last under various scenarios?

A good financial model has the following characteristics:

1. Key input parameters are clearly identified.

2. The model uses formulas to automatically adjust for changes in input parameters.

3. It has a user-friendly, interactive interface, and clearly separates input and output cells (one common practice is to colour code input cells ).

4. The model is dynamic, robust, cover multi-periods and produces all the important financial output metrics including NPV and Internal Rate of Return (IRR).


Chapter 14 “Financial Analysis and Modeling of Ship Investments”, is written by Lars Patterson