UNIVERSITY OF PIRAEUS

SCHOOL OF INDUSTRY AND HELLENIC NAVAL ACADEMY

SHIPPING DEPARTMENT OF MARITIME
DEPARTMENT OF MARITIME STUDIES SCIENCES

INTERINSTITUTIONAL POSTGRADUATE PROGRAM IN

MARINE SCIENCE AND TECHNOLOGY MANAGEMENT

Thesis

“Comparing among different Vessel Valuation Methods: The case

of a dry bulk carrier.”

Eleni-Maria Donti

MNSND22012

Supervisor:

Dr. Ioannis Lagoudis

Piraeus

April 2024
STATEMENT OF AUTHENTICITY / COPYRIGHT ISSUES

The person preparing the Thesis bears the entire responsibility of determining the fair use
of the material, which is defined based on the following factors: the purpose and character
of the use (commercial, non-profit, or educational), the nature of the material used (part of
the text, tables, figures, images or maps), the rate and importance of its possible
consequences on the market or the general value of the under copyright text.

Author’s Signature:

Eleni-Maria Donti
EXAMINATION COMMITTEE

The present Diploma Thesis was unanimously approved by the Three-Member Examining
Board Committee appointed by the Special Interdepartmental Committee of the Inter-
Institutional Master's Program under the Regulation Operation of the Inter-Institutional
Master's Program 'Management in Maritime Science and Technology’.

THE THREE-MEMBER EXAMINATION COMMITTEE WAS:

MEMBER A΄: Dr. Ioannis Lagoudis.
MEMBER B΄: Professor Ioannis Theotokas
MEMBER C΄: Assistant Professor Dionysios Polemis

The approval of the Diploma Thesis by the Department of Maritime Studies of the
University of Piraeus does not imply acceptance of the author's opinions.
Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Special Thanks-Dedication.

“I dedicate this Dissertation to my family and friends.

Also, I devote this thesis to Advanced Shipping & Trading S.A.,
especially to the CEO Michalis Fountoglou
and to my beloved Professor Dimitrios Cambis for his precious help.
I would also like to express my gratitude to
my Supervisor Dr. Ioannis Lagoudis for his valuable
guidance throughout the conduction of the present thesis.”

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Acknowledgments
Initially, I would like to thank my Professor Dr. Ioannis Lagoudis for his encouraging
support. His guidance helped me throughout these months to complete my dissertation. I
also want to thank the Examination Committee, especially, the President of the
Interinstitutional Master’s Program, Professor Ioannis Theotokas, and Assistant Professor
Dionysios Polemis for their significant involvement.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Abstract
This thesis statement intends to depict and analyze the major valuation methods used in the
shipping market sector. These methods are the Market Method, Income Method, and
Replacement Cost Approach Valuation. Valuation in shipping has a vital role in the industry
as it relates to an asset investment. Every valuer and investor has to take into consideration
that the Vessel is an asset its value changes at a radical pace, depending on market conditions
each time. That’s why, every valuer says that valuations are made based on their commercial
value and not on their construction worth. Depending on trustworthy and reputable
information sources, to display the simulations with accurate and reliable results, three main
completely different outcomes emerge, dependent on various parameters. It is remarkable
to remember that there is no “wrong” estimation result, as the valuer is appraising a vessel
considering different parameters each time and following instructions from the person or
company who wants the vessel valuation.

Key Words

Market Approach, Income Approach, Replacement Cost Method, Valuation, Asset Play.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table of Contents

Acknowledgments ................................................................................................................. v
Abstract ................................................................................................................................ vi
Table of Contents ................................................................................................................vii
List of Tables..................................................................................................................... viii
List of Figures ...................................................................................................................... ix
Abbreviations ........................................................................................................................ x
1. Introduction ....................................................................................................................... 1
1.1. Subject and Goals ................................................................................................... 1
1.2. Research and Purpose ............................................................................................. 1
1.3. Problems and Obstacles .......................................................................................... 2
1.4. Methodology and Techniques ................................................................................ 2
1.5. Thesis Structure ...................................................................................................... 3
2. Literature Review .............................................................................................................. 4
2.1 What Vessel Valuation Is .......................................................................................... 13
2.2. Reasons why Vessel Valuation is significant........................................................... 14
3. Methodology ................................................................................................................... 15
3.1. Methods of Valuation ............................................................................................... 16
3.2. Market Approach ..................................................................................................... 16
3.2.1. Benefits of Market Approach Method .............................................................. 20
3.2.2. Drawbacks of the Market Approach Method .................................................... 20
3.3. Income Approach ..................................................................................................... 21
3.3.1. Advantages of Income Approach ...................................................................... 31
3.3.2. Disadvantages of Income Approach ................................................................. 31
3.4. Replacement Cost Approach .................................................................................... 31
3.4.1. Benefits of Replacement Cost Approach .......................................................... 32
3.4.2. Drawbacks of Replacement Cost Approach ..................................................... 33
3.5. Pros and Cons of all Valuation Methods.................................................................. 33
4. Results ............................................................................................................................. 36
4.1. Fitting the Model with the Market Approach .......................................................... 37
4.2. Fitting the model with the Income Approach .......................................................... 41
4.2.1. Income Approach with b=1 ............................................................................... 43
4.2.2. Income Approach with b<1 ............................................................................... 48
4.2.3. Income Approach with b>1 ............................................................................... 51
4.2.4. Compare between different beta results in Income Approach Valuation ......... 54
4.3. Fitting the Model with the Replacement Cost Approach ......................................... 54
4.4. Comparing between different valuation methods. ................................................... 57
5. Conclusions ..................................................................................................................... 59
References ........................................................................................................................... 62

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

List of Tables

Table 2: Data Analysis. ....................................................................................................... 19

Table 3: Market Approach Valuation Results. .................................................................... 20
Table 5: Historical Data of Random Market Prices. ........................................................... 23
Table 6: Beta Calculation. ................................................................................................... 24
Table 7: WACC calculation. ............................................................................................... 25
Table 8: US 10-Year Treasury by Financial Times. ........................................................... 26
Table 9: Income Approach Data. ........................................................................................ 27
Table 11: Income Approach Method. ................................................................................. 30
Table 12: Cost Approach Calculation. ................................................................................ 32
Table 13: Comparison between each method’s pros and cons. .......................................... 33
Table 16: Vessel data for Market Valuation of PANAMAX OSTRIA. ............................. 38
Table 17: Regression Analysis for PANAMAX OSTRIA. ................................................ 39
Table 18: Valuation results for PANAMAX OSTRIA based on Market Approach. .......... 39
Table 19: Income Approach Equations utilized in calculations. ......................................... 41
Table 20: WACC calculation considering b=1. .................................................................. 43
Table 21: PANAMAX OSTRIA data with b=1. ................................................................. 44
Table 22: PANAMAX OSTRIA Results based on b=1. ..................................................... 45
Table 23: WACC calculation considering b<1. .................................................................. 48
Table 24: PANAMAX OSTRIA data with b<1. ................................................................. 49
Table 25: PANAMAX OSTRIA Results based on b<1. ..................................................... 50
Table 26: WACC calculation considering b>1. .................................................................. 51
Table 27: PANAMAX OSTRIA data with b>1. ................................................................. 52
Table 28: PANAMAX OSTRIA Results based on b>1. ..................................................... 53
Table 29: LTAV Results Comparison................................................................................. 54
Table 32: Replacement Cost Results for Panamax Ostria................................................... 56
Table 33. Valuation Methods’ Results for vessel PANAMAX OSTRIA. .......................... 57

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

List of Figures

Figure 1: Diagram of daily prices of 10-year treasury bonds for 2023. .............................. 26

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Abbreviations

1. ARR Accounting Rate of Return

2. b Beta Factor
3. be Beta
4. BC Bulk Carrier
5. BDI Baltic Dry Index
6. BPI Baltic Panamax Index
7. CAPM Capital Asset Pricing Model
8. Cov Covariance
9. CQSVEM Combined Qualitative Ship Valuation Estimation Model
10. DD Dry Dock
11. D/E Dept/Equity
12. DFC Discounted Cash Flow
13. D/V Dept/Value
14. DWT Dead Weight Tons
15. E/V Equity/Value
16. FCF Free Cash Flows
17. FMV Fair Market Value
18. HSES Hamburg Ship Evaluation Standard
19. IRR Internal Rate of Return
20. KPMG Klynveld Peat Marwick Goerdeler
21. LPG Liquified Petroleum Gas
22. LT Long Tons
23. LTAV Long-Term Asset Value
24. MCDM multi-criteria Decision-Making
25. MRP Market Risk Premium
26. NPV Net Present Value
27. OLS Ordinary Least Squares
28. PV Present Value
29. PwC Price Waterhouse Coopers
30. RCM Replacement Cost Method
31. RD Cost of Dept

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

32. RE Cost of Equity

33. Rf Risk-Free
34. ROA Real Options Analysis
35. S&P Sales & Purchase
36. TP Transaction Price
37. USD US Dollars
38. Var Variance
39. WACC Weighted Average Cost of Capital
40. YOB Year of Built

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

1. Introduction
This Dissertation presents thoroughly the three major valuation methods that prevail in the
shipping market, to make comparisons among them and come to a clear conclusion about their
distinctive characteristics.

Vessel Valuation in shipping has become very substantial in recent days, as the shipping market
has been more volatile than in the past. Considering that until 2008 there was mainly used Market
Approach, since then new methods of asset appraisal have been created to cover shipping needs
and demands. In contrast to periods of economic increase, vessels are relatively easy to value as
the new build and sale & purchase markets are liquid and transactions frequent enough to permit
accurate comparisons, which subsequently facilitate asset valuations.

The most important point that has to be noted is that the valuers have to comprehend what defines
the value of a vessel and how to appraise that value because it is a significant requirement for
making appropriate decisions that enhance the shipping market industry.

1.1. Subject and Goals

The main subject of this thesis statement is to describe Vessel Valuation methods, such as Market,
Income, and Replacement Cost Approach, with their simulations and their pros and cons to make
the final comparisons of their results. Through these results, valuers will be able to determine the
factors that influence the outcome of every method used.

1.2. Research and Purpose

It is noteworthy to mention that the valuation of a vessel is not only for a shipping company but
also for other sectors, such as banking companies and accounting firms. The major reason why a
ship needs valuation is vessel owners. It plays a crucial role for a shipowner to have the
acknowledgment of his ship’s value, as the vessel is appraised commercially, something that can’t
be predicted, due to the highly volatile freight market. Vessel valuation refers always to a willing
buyer and a willing seller, as they need to know the appropriate information before investing in
the asset.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

1.3. Problems and Obstacles

Even though Valuation is a significant measure for every company, regardless of the domain,
shipping valuation is still minimal and “niche”. Therefore, there were restricted sources of
information and very scattered references throughout the web, scientific databases, articles, and
electronic books.

At the same time, the Vessel Valuation thesis is a very difficult task for a valuer, as estimating a
ship’s future value is very complicated to verify. That’s why, combined methods are needed to
define the ship’s value accurately. This may happen due to the lack of unbiased data that can’t be
accessed at any time or anywhere in the world.

1.4. Methodology and Techniques

The theoretical part of this dissertation was based on miscellaneous electronic books and articles
on Google Scholar, Investopedia, Springer, Financial Times, and other sources via the Internet. As
for the practical part of models’ application, various sources of information were used via Marine
Traffic and from the main electronic book for the depiction of every model and more particularly
“The International Handbook of Shipping Finance: Theory and Practice” by Kavussanos and
Visvikis (2016).

The data, which were used in simulations, were based on secondary information and research using
approximate prices and diversified names on Vessels and freight for the order of good sake. The
main techniques, which are utilized in this specific dissertation, are the OLS regression for the
Market Value Method, Capital Asset Pricing Model (CAPM), Present Value (PV), Weighted
Average Cost of Capital (WACC), and Free Cash Flows (FCF) for Income Method and
Depreciation life factor for the Replacement Cost Approach Method. As far as it can be observed,
the Income Approach or else the LTAV method displays a complex of techniques and calculations
that will be explained further in the methodology and result section.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

1.5. Thesis Structure

This Dissertation presents a comprehensive analysis of vessel valuation and its significance in the
shipping market. The study is divided into six parts, with the section being the introduction. This
chapter will describe the main subject and the goals that this thesis aims at, as well, as the research
and its purpose of it. It, also, highlights the research and its purpose, while discussing any
occasional issues that occurred during its conduction.

The second chapter of the thesis is devoted to a literature review that presents different aspects of
the topic through diverse opinions from researchers, authors, organizations, and alumni
dissertations from other universities. More specifically, there are displayed distinct opinions and
explanations for “What vessel valuation?” and “What categories there are in the shipping market?”
major questions and matters of ship appraisals.

In the third part of the thesis, the methodology used in the research is analyzed. The section begins
with a general explanation of what vessel valuation is and why it is significant in the shipping
market. Then follows a thorough analysis of the three main valuation methods - Market Method,
Income Method, and Replacement Cost Approach Valuation. The section provides a
comprehensive overview of each method, including their simulations, benefits, and drawbacks.
This information is crucial for anyone involved in vessel valuation, as it helps them understand the
factors that influence the outcome of each method and make informed decisions accordingly.

The fourth part of the thesis statement focuses on the results of the performance of these
approaches, where a common example is provided to compare the methods and fit a specific model
of a vessel. Drawing on reliable information sources, the impact of beta on the income Method is
analyzed and concluded by comparing the results of all the methods presented in the thesis. referred
to the results of the performance of these approaches.

In the last section of conclusions, a comprehensive analysis of the research’s findings and their
implications for the shipping industry is provided. Objective difficulties encountered during the
prosecution of the thesis will, also, be discussed. Lastly, there will be recommendations for further
research and the author’s conclusions referred to this topic.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

2. Literature Review
The present literature review aims to provide a comprehensive overview of the Vessel Valuation
Approaches, which are a critical aspect of the shipping industry. Through an in-depth analysis of
various sources of information, this review seeks to elucidate the key features and underlying
principles of these approaches from diverse perspectives. By emphasizing their relevance and
applicability to the shipping sector, this study has the major aim of contributing to a more nuanced
understanding of the Vessel Valuation Approaches and their implications for the industry.

Market Investments and asset play in the shipping sector have a vital role in the maritime market
trajectory. That's why, in the last decades many Researchers have drawn their attention to
developing Vessel Valuation Approaches that help them assess every asset. The present thesis has
the intention to show the main Valuation Approaches which are the Market Approach, Income
Approach, and Replacement Cost Method. Furthermore, they will be presented by simulations
with related cases and respective estimations comparing among these methods and choosing which
one is the best way to follow.

Many valuation researchers and thesis statements express their view of evaluating a Vessel. One
of them is the Company McQuilling Services (2009), which are Marine Transport Advisors and
supports that Valuation Methods are the market, income, and cost approach, respectively.
Comparable transactions typically inform the valuation of ships. Consequently, the "Last Done"
methodology has emerged as the most widely used approach to determine the value of vessels.
Both new-build and second-hand ships are valued using this technique, which relies on the most
recent transaction data available.

Every Vessel is categorized by factors such as age, size, and structure, for example, single hull,
double hull, coated, uncoated, and other characteristics based on the type of the ship. This allows
vessels to be compared to similar ones to have an equivalent market rate within a given asset type
at any time.

The prices of second-hand and newbuilding vessels are highly connected and influenced by market
conditions, according to Nam et al. (2022). Age, size, and freight are the most determining factors,
mainly for second-hand ship value. The sale and purchase market enables shipowners to buy

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

secondhand ships immediately, as opposed to waiting for up to two years for a new building.
Freight rates are subject to high volatility throughout the stages of the shipping cycle, with a typical
business cycle lasting around eight years. Thus, ship valuation is considered very important for the
shipping domain.

Based on the Hamburg Ship Evaluation standard (n.d.) (HSES), asset valuation approaches have
been a debate of controversy regarding the accuracy of the comparable sales system.

The intention of the Valuation methods, as the McQuilling Services support, is to aid accounting,
balance sheet, and loan-to-value purposes and not to render the industry's standard for sale and
purchase deals (S&P).

The three main methods for determining the "Fair Market Value" of assets are the Market
Approach, Income Approach, and Cost Approach. The Market Approach involves analyzing
historical data of prices paid in actual sale transactions to estimate the Fair Market Value of the
asset. The Income Approach projects the Fair Market Value based on the net revenue that the
property is predicted to generate over its useful life. Lastly, the Cost Approach considers the
current cost of rebuilding the entire unit to determine the value of the asset based on the basic rule
of substitution.

To value an asset, the valuator must consider that the market at a specific time is the crossing point
of supply and demand from buyers and sellers. In many cases, such as lending, accounting,
maintenance, demolition, insurance, and other fields, justify specific valuation considerations,
that's why, appropriate valuation methods should be further used.

Koray and Çetin (2020) give their explanation for vessel valuation approaches. They consider that
combined mathematical methods are needed to appraise a vessel's value, as the supply and demand
balance is influenced by many factors, such as the economic crisis and the high volatility of the
market. Most of the Brokers utilize the Market Approach method to define a ship's value, even
though this method does not provide a precise estimation, due to the lack of immediate and
unbiased data. Ships, especially those between 6 and 25 years old, because they are more than five
years old, need to be evaluated with more than one approach, that's why there is no standard
mechanism in a ship's valuation projection.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The appraisal of a ship is a complex process that takes into consideration several significant factors.
One of the most crucial elements is the time factor, which plays a pivotal role in determining the
vessel's value. Other equally important factors include the year of the ship's construction and sale,
its tonnage, the sale price of comparable vessels in the market, the shipyard where it was built, the
ship type, and its age. Each of these factors contributes significantly to the overall appraisal process
and aids in determining the fair market value of the ship. A thorough understanding of these factors
is necessary to ensure an accurate and reliable appraisal of the vessel.

The research methodology utilized by the organization entails the usage of three distinct
approaches in the estimation of future outcomes. These approaches include a comprehensive
market report, a reliable forecasting model, and a scenario analysis. In this case, these Regression
Models confirm these coefficients for almost every period.

According to Karatzas (2009), the price of a vessel is what a buyer would pay to acquire the asset
from a well-informed seller, given that markets are efficient and normal. In passive markets, there
are unusual transactions to maintain a clearly defined asset price curve, while several other
variables may continue to fluctuate and in uncertain high levels, such as freight rates, the ability
of debt financing, and other reasons. Valuing a vessel in a less active environment can trigger
numerous arguments, though. Moreover, Vessel Valuations have been mainly used for accounting
and financial intentions, thus professional standards and well-established practices have been
implied to define assets' valuation.

There have been both commercial and academic guidelines that provide an assessment of the fair
Market Value of a Vessel. In active markets, the commercial and academic values often converge
to the purchase price that a well-informed investor-buyer would pay for the acquisition of the
Vessel. On the other hand, high volatility, and uncertainty, which are related to shipping rates,
future estimates of earnings, financial inputs, and reality, dominate in the real world.

It’s worth referring to Karatzas (2009) who summarized the three main valuation methods: Market
Approach, Replacement Cost, and Income Approach. These methods contribute to making
informed decisions regarding purchasing, selling, or investing in Vessels. In the realm of asset

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

valuation, different methods can provide distinct perspectives and insights regarding the worth of
an asset. Each method, however, has its own set of advantages and disadvantages.

The Market Approach, for instance, is a method that involves valuing a vessel by comparing it to
the most recent sale or "last done" of a comparable vessel. Adjustments are made for factors such
as age, cargo-carrying capacity, and miscellaneous vessel specifications. This method can offer a
reliable guide for valuing a similar vessel in efficient and liquid markets. Nonetheless, there are
instances where the Market Approach may be less useful in determining an asset's value.

For example, in the case of Aframaxes, which are vessels that partake in the crude oil trade, there
are often many similar sales that can guide asset pricing and valuation using the Market Approach.
On the contrary, LPG carriers are not transacted as frequently as they are part of a niche market.
This market segment has a relatively small fleet, a small number of buyers and sellers, higher entry
barriers for buyers, and operates based on long-term relationships. As a result, the Market
Approach may not be the most effective method for valuing LPG carriers. Throughout idle
markets, the market Approach tackles further restrictions due to constant uncertainty in the market,
despite the "last done" that this method follows.

The Income approach is the most interesting valuation method according to Karatzas (2009),
because it is the most academically demanding method and widely accepted, as the appropriate
method of determining the value of assets may impact the value of the asset on a high. The income
Approach is the value or more specifically the net present value of all the net earnings the vessel
is supposed to create throughout her remaining commercial life plus her residual value itself or
else "salvage" value.

The Replacement Cost Method (RCM) is mainly useable for Vessels that are specifically destined
for certain trades. Regularly, it refers to vessels that are excessively customized for such trades
and therefore there is a small demand in the event of a sale. The author gives a remarkable instance
of ships that have been valued based on the replacement method, which has to do with quarter-
deck ramps to load vehicles and tanks, helipads, containership capacity, heavy lift and steel-
reinforced, humified cargo holds or Vessels that are on long-term bareboat charter to an operator.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

With the method of Replacement Cost, the Vessel is valued on the assumption of the value of the
Vessel of replacing ship in the present market environment. The evident view of this valuation
method is that the cost to replace the vessel is not necessarily the price that a third-party buyer
would pay, which means that the historical cost is not inevitably a market number.

Generally, it is supported that most of the existing valuation techniques take into consideration the
future cash flows generated by the vessel that investors expect to receive starting from the
valuation date. The results from the widely applied methods, which are the market approach, the
income approach, and the cost approach, are mainly based on the market conditions during
valuation. For instance, when markets have low volatility in the short period and investors'
expectations of future events are resemble, all the methods reach similar results.

On the contrary, when the market environment is depicted by doubt, as investors have different
expectations concerning future events, these methods end up with different results and are mainly
used as supporting approaches to assess the value from different aspects of view, more specifically
to describe a pessimistic or a more optimistic opinion. Under the thesis statement of Xaviaras
(2016), the market approach is a method that considers the value of the vessel to be equal to the
market price of comparable vessels in recently completed transactions among willing and
knowledgeable buyers and sellers.

The market approach, also known as the "Last Done," "Mark to Market," or "Comparative
Valuation" method, is a widely adopted vessel valuation method in the shipping industry. It
involves analyzing historical data of prices paid in actual sale transactions to estimate the fair
market value of the asset.

To predict the value of the vessel with the Market Method, the first step is to search the most recent
completed vessel transactions which are nearly the same as the one examined. The following four
key factors are essential in determining the comparability of vessels: size, type, age, and condition.
These factors play a crucial role in the evaluation of vessels and are often used as the primary
criteria for comparison.

Market Approach Valuation is a complex process that considers several factors to determine the
value of a ship. In addition to the primary factors, such as the ship's age, size, and condition, several

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

other secondary factors can significantly influence the final valuation. These secondary factors
include the type of the main engine, confirmed charter contacts with creditworthy counterparties,
loading equipment (such as derricks and cranes), the shipyard where the ship was originally built,
and its location at the time of sale.

It is noteworthy that while these factors may be considered secondary, they play a crucial role in
the overall valuation of the ship. For instance, the type of main engine can affect the ship's
operating costs, which can, in turn, influence its overall value. Similarly, confirmed charter
contracts with creditworthy counterparties can provide a level of stability and predictability to the
ship's income stream, and therefore, positively impact its valuation.

In conclusion, the Market Approach Valuation of a ship is a complex process that requires careful
consideration of several factors. While the primary factors of age, size, and condition are critical,
the secondary factors, such as the type of main engine, confirmed charter contracts, loading
equipment, shipyard, and location at the time of sale, should not be overlooked, as they can
significantly impact the final valuation.

In his view of the income approach, the vessel is determined by discounting all future cash flows
that the vessel is predicted to generate during its remaining economic useful life containing
residual scrap value on maturity. This method is the most demanding approach and is widely
accepted for estimating the value of asset vessels, as there must be a forecast for future charter
rates. This makes the income approach difficult as future charter rates are usually estimated
depending on historical data.

The income approach is also called the "mark-to-model" method or LTAV (Long Term Asset
Value) and generally requires a financial model with the cash flow forecast. The Long-Term Asset
value Method, first introduced by the German Shipbroker's Association (HSES) and Price
Waterhouse Coopers (PwC), basically utilizes a Discounted Cash Flow (DFC) formula and the
concept of weighted average cost of capital (WACC) to define the vessel's capability to generate
"Financial Surpluses" for the suppliers of capital referring to equity and debt.

The cause for the appearance of this approach was the main depreciation of the secondhand ship
prices. Concerning the Replacement Cost Method, the vessel is valued depending on how much it

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

would cost to build a precise identical vessel in the same condition. The replacement cost requires
adjustments for depreciation caused by physical worsening and functional obsolescence. The
method of replacement cost is principally used to forecast the value of vessels with unique features
that can't be grouped in a wider list and focuses on the fact that it does not account future cash-
generating ability of the vessel. Some of the most common examples are the types of
"maintenance" and "research" vessels.

KPMG (2020), a worldwide consultant company, presents its aspect of the LTAV approach for
valuing ships. There are various reasons to value a ship, therefore companies can choose how to
value a ship among three specific methods. As KPMG states, one of these methods is the Long-
Term Asset Value (LTAV), a ship valuation method based on a discounted cash flow model
(DFC), which has been established since 2009, when economic times were under pressure and
such a method encouraged shipping companies to make amendments to their fleets.

The LTAV approach is a discounted cash flow weighted average cost of capital method based on
the future free cash flows that the valuing ship can generate via use. The future free cash flows are
discounted to the valuation date using a risk-equivalent discount rate. The major intention of the
LTAV method is to provide an accurate estimation that is independent of price fluctuations and
oriented to a ship's long-term earning potential. This specific method is commonly accepted by the
shipping field, as it is a decisive perception that leads to substantial results even in times of crisis.

The WACC is usually used for discounting. The Capital Asset Pricing Model (CAPM) is made up
of the Cost of equity and the cost of debt. The cost of equity is composed of a risk-free basic
interest rate, the risk premium, and the beta factor. It aids investors define the expected return on
investment. Furthermore, the Cost of debt is calculated by adding the risk-free interest rate to the
risk premium rate, which represents the compensation required to offset the risk associated with
the prices of second-hand and new building vessels that are highly connected and influenced by
market conditions. Single-value planning models are not considered as they do not include the
fluctuation margins of the value drivers and distribution curves within these fluctuation margins.
The latter-mentioned method, the multi-value planning model, is a method that should be preferred
more in ship valuation, instead of a single-value model.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The Monte Carlo simulation, a versatile modeling technique, is particularly effective in

mathematically charting the fluctuating margins of value drivers. The primary value drivers that
must be considered for this purpose are transport volumes, charter rates, bunker prices, and
exchange rates. When employing a multi-value planning model, it is imperative to factor in the
uncertainty of valuation and establish a value range for the ship based on this.

It can be challenging to operate in the Shipping Market due to its volatility, high cyclicity, and
seasonality. The future cash flow can also be difficult to forecast accurately due to uncertainties.
Financing an active ship market is also a tough task as there is no ship financing available with
low interest rates because of low cash flows, freight rates, and low return rates. Additionally, there
are some limitations in IRR, NPV, and ARR methods. The DFC method does not consider non-
financial factors, such as managerial or behavioral effects, while the Weighted Average Cost of
Capital (WACC) method requires many assumptions and predictions for a range of inputs.
However, multiple Decision Support Models based on Multi-Criteria Decision-Making (MCDM)
and Real Options Analysis (ROA) can overcome these limitations.

The CQSVEM model (Combined Qualitative Ship Valuation Estimation Model) has the main
intention of defining the variations between nominal and real sale prices. The "combined
quantitative ship valuation estimation model" centers around the idea that price margin is
determined by variations in prices. As a result, the model calculates an adjusted price to aid in
investment or disinvestment decisions. This is accomplished through a series of steps, including
data collection, classification, and benchmarking, as well as determining fair value, age, and
attribute adjustment, and ultimately, making a sale or purchase.

At the same time, Kavussanos and Visvikis (2016) describe the two major valuation approaches,
the market and LTAV method in their way. They consider that the fundamental value of a vessel
is based on the expected future financial advantages that equity and debt investors simultaneously
can predict. The valuation method that offers the most credibility in results is the income approach
or the discounted cash flow (DFC) valuation method. In the latter method (DFC), the principal
value of a ship is the present value of its projected cash flows, discounted at a rate that mirrors its
risk value. Thus, the DFC method is also called as "mark-to-model" method. It must be noted that

11
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

the DFC approach is mainly used for the valuation of companies and long-lasting assets, such as
the real estate sector.

Nonetheless, the market approach is the most prevailing valuation method in the shipping field,
which helps valuators and investors make the right decisions and estimate the ship's value. Vessel
valuations are very significant for the shipping industry as shipbrokers use valuations when they
want to advise their clients on fulfilling a purchase decision and determine borrower's compliance
with existing loan contracts and bank's compliance with capital sufficiency standards and
predictions for potential credit losses.

It is important to note that vessel valuations are not only requested for financial planning purposes
but also demanded in a variety of other scenarios. For instance, it is used as a maintained price in
court sales, in a broad range of legal disputes, and by insurance agents to define coverage levels.
When determining the market price of a vessel, auction pricing is commonly used. The transaction
price is accepted as the "clearing" price between willing and well-informed buyers and sellers. The
market method is also called the "relative valuation approach", "mark-to-market" or "last-done"
method and is dependent on similar vessels' pricing.

On the other hand, DFC valuation relates the value of an asset to the present value of expected
future cash flows on that asset. Correspondingly, under a DFC approach, the value of an asset is a
function of the expected cash flows occurring at some point in the future. The value of a vessel is
obtained by discounting free cash flows at the weighted average cost of capital (WACC).
Integrated into this method are the tax benefits of dept and the expected additional financial risk
associated with dept.

Hence, this section has the intention to present and briefly mention the major ship valuation
methods and why each one is important to the estimation and decision-making in the shipping
industry among different aspects of different authors and organizations.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

2.1 What Vessel Valuation is

Generally, Vessel Valuation is the estimation of an asset based on its “commercial” price and not
on its building value, which can be conducted in several ways and methods. For example, a
Panamax, which was built in China in 2021, has a building price of around $18 million, while it
has a commercial value of around $15 million today, as the shipping market at that moment was
bearish or in a bullish market the same vessel would overcome its initial price of $18 million. This
is why, the shipping market has high volatility and is dependent on many factors at the same time.
It has, also, been mentioned that according to the economic theory, price differs from value.

On the one hand, price is the quantity of payment or reimbursement given by one party to another
in return for goods or services. At the same time, value is a measure of the advantage that an
economic factor can gain from either a good or service. Eventually, it can be observed that the
price constantly fluctuates with the value.

This phenomenon occurs as the price is driven by demand and supply of the market and more
specifically in shipping markets (Wenrui, 2014, p.10). Until the global financial crisis in 2008, the
valuation of the vessels was conducted with the Market Approach, using the price of comparable
vessels in recent purchases. Thereafter the beginning of the crisis, when prices in the secondhand
market fell to very low levels and the general market volatility recorded historically bearish prices,
new valuation methods turned up.

One of the most reputed methods is the LTAV method, or else the Income Approach, which was
first proposed by the Hamburg Shipbrokers Association in conjunction with PwC and is dependent
on Discounted Cash Flow (DFC). Then, replacement cost appeared in the scene, as there was
ambiguity after the financial crisis whether the market prices reflected the real values of the ships
or they were inflated priced, which created a “bubble” consecutively going to “explode”.
(Xaviaras, (2016) p.8)

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

2.2. Reasons why Vessel Valuation is significant

It must be noted that Asset Valuation is initially very important for the shipping sector, for banking
field, and accounting companies, too. Vessel owners require vessel valuations to estimate if it is
the right time for a vessel’s purchase. Other main reasons for valuation appraisals are accounting,
planning, and controlling purposes.

Willing sellers and buyers utilize valuations to have a basic idea before deciding where to invest.
Usually, shipbrokers have adequate experience in ship valuations as they are well-informed about
the market trajectory and they can advise their potential clients, on which investments are the best.
Furthermore, banks are highly influenced by the changes in shipping market values.

Vessel valuations play a crucial role in the banking sector as they enable banks to make informed
lending decisions, determine whether borrowers are complying with existing loan covenants,
provision for potential credit losses, and conform with capital adequacy standards. Without
accurate vessel valuations, banks would not be able to make sound financial decisions and would
be at risk of incurring significant losses. Nonetheless, valuation estimations are considered vital
when market conditions commence to become unstable and unpredictable. (Xaviaras, (2016) p.8)

The following segments that will proceed in this thesis, are to describe thoroughly these
approaches and depict them with respective simulations comparing the results between these
valuation methods.

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

3. Methodology
This section will briefly mention Vessel Valuation in general and how it was developed throughout
the years. Moreover, there will be a description of the three most common valuation methods, with
their simulations and their pros and cons respectively. The three simulations were adjusted on a
Panamax Vessel, as it is widely recognized and used in the S&P (Sales and Purchase) market.

The acquisition of this Research is mainly secondary, and it was based on obtaining adequate
knowledge of the subject, identification of the prevailing aspects regarding the topic, and formation
of the goal and objectives.

The information utilized was provided mainly from various shipping-related articles analyzing the
topic, books, and market analyses either from shipbroking firms or global financial websites with
Market Information, such as Financial Times. Furthermore, some information was attained from
university dissertations of MSc and PhD levels, such as Wenrui (2014), and Xaviaras, (2016), in
which many aspects of the shipping markets and various opinions on Vessel Valuation Methods
were analyzed.

Various Secondary sources of information were used to collect information for creating the Ship
Valuation Methods in Excel and to comprehend the philosophy behind the concept of valuations.
During the procedure, the focus was on gathering topic-related scientific papers, published in
recognized journals.

Thus, papers from researchers, such as Kavussanos and Visvikis (2016), Hitchner (2017), and
Financial Times were mainly used for the conduction of this dissertation. After these major aspects
were accredited, the thesis's main topic was shaped. This research thesis depended on secondary
research, as primary data were unavailable or very limited to be used.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

3.1. Methods of Valuation

Most of the valuation approaches take into consideration the future cash flows produced by the
vessel, which investors forecast to receive as of the valuation date. The most accepted approaches
can be summarized into three:

 The market approach.

 The income approach.

 The replacement cost approach.

The results of these methods mainly depended on the market conditions throughout the valuation.
When the market has low volatility in the short term and investors’ expectations of future events
are similar, all the approaches mentioned above have similar close results.

On the contrary, when the market is uncertain with different investors’ expectations about the
future, these methods deviate from each other. That’s why, supporting techniques are used to
appraise the value from different aspects, such as an optimistic and a pessimistic view (Xaviaras,
(2016) p.9).

3.2. Market Approach

The first valuation method, which is going to be presented, is the Market Approach which is the
most common among the other ones. The market price of a vessel is defined by auction price,
which is the fair value, where the purchase price is accepted between willing buyers and sellers.
According to Hitchner (2017), Fair market value can be determined “as the price at which the
property would change hands between a willing buyer and a willing seller, neither being at force
to purchase or sell and both parts have knowledge of relevant facts”.

The Market Approach, which is one of the most used valuation methods, involves a three-step
process. Firstly, the buyer must identify the factors that determine comparability and value, which
is a crucial element in the valuation process. Secondly, the buyer must search for an appropriate
number of purchases that can act as a reference to find the most recent transaction that matches the
vessel, they are interested in. The last step refers to vessel price adjustment concerning the

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

comparable transactions. This approach has been extensively studied in academic research and has
been proven to be an effective way to determine the fair market value of a vessel.

A stochastic implication of the Market Approach will follow above, to be comprehended in a better
way. A Panamax vessel is to be appraised on 1st December 2023, so a sample of thirty random
Vessels was created, to compare with the main ship. These ships should have similar
characteristics to the estimated one, such as age, size, and freight market. Age has a major role in
vessel valuation, as newer vessels with more developed technology may produce lower costs, such
as maintenance costs. Furthermore, larger vessels can carry more cargo, thus there is a positive
relationship with the price.

As freight rates increase, vessel prices will rise, because a strong positive relationship between the
state of the freight market and the vessel price exists. This occurs as freight rates are the cash flows
a ship can produce. Transaction date has, also, a vital role, because more recent transaction prices
are more relevant and adequate than older ones. For instance, a more recent transaction price might
reflect a new use for a vessel or a new industry environment.

It is crucial to consider various factors that may influence the valuation of a vessel. These factors
include the particulars of the main engine, any confirmed time charter contracts with creditworthy
counterparties, loading equipment such as derricks and cranes, the original shipyard, and the
location of the vessel at the time of sale. A thorough analysis of these factors is necessary to
determine the precise value of a vessel in the market.

BLUE MALUE, which is the vessel to be estimated on 1st December 2023, is a decade Panamax
bulk carrier with a capacity of 71,121 Dwt (Dead Weight Tons) and 2011 YOB (Year of Build).
The below table summarizes a list of Panamax Bulker sales, between July 2023 and December
2023, five-month data transactions. The table provides information on the age, the size of vessels
sold, and the state of the freight market at the time of purchase. BPI (Baltic Panamax Index) is the
measure that represents the freight market for Panamax, reflecting the supply and demand balance
in the dry bulk shipping markets.

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 1: Thirty Vessels Data to Estimate with Market Approach Valuation.

Source: Author based on Kavussanos and Visvikis (2016).

As the estimation of the Vessel is affected by many aspects, such as age, size, and freight, the
Ordinary Least Squares (OLS) regression analysis can be implemented to appraise a purchase
price. Using all the information provided in the table above, the estimation is the following
multivariate regression to examine the relationship between the vessel price and the pricing factors.
𝑇𝑃𝑖 = 𝑎 + 𝑏1 ∙ 𝐴𝑔𝑒𝑖 + 𝑏2 ∙ 𝑆𝑖𝑧𝑒𝑖 + 𝑏3 ∙ 𝐹𝑟𝑒𝑖𝑔ℎ𝑡𝑖 + 𝑒𝑖

Where:

𝑻𝑷𝒊 is the paid purchase price for the vessel i, (i is the running index, refers to each of the
30 transactions to the table above).

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

𝒂 is a (constant) intercept term.

𝒃𝟏 is the sensitivity coefficient for Age.

𝑨𝒈𝒆𝒊 is the age of the vessel BLUE MALUE at the date of the transaction.

𝒃𝟐 is the sensitivity coefficient for Size.

𝑺𝒊𝒛𝒆𝒊 is the vessel size measured in thousand DWT of the appraised BLUE MALU.

𝒃𝟑 is the sensitivity coefficient for Freight.

𝑭𝒓𝒆𝒊𝒈𝒉𝒕𝒊 is the average monthly BPI at the date of the transaction of BLUE MALU.

𝒆𝒊 is an error term.

Applying OLS Regression methodology to appraise the intercept term and the sensitivity
coefficients via Excel, the below results arose.

Table 2: Data Analysis.

The equation that derives from solver in Excel, after applying OLS is: 𝑇𝑃𝑖 = 24,121,155 −
359,529.32 ∙ 𝐴𝑔𝑒𝑖 − 39.98 ∙ 𝑆𝑖𝑧𝑒𝑖 − 224.28 ∙ 𝐹𝑟𝑒𝑖𝑔ℎ𝑡𝑖 . Depending on the adjusted R-squared,
which is the standard measure of data fitting in the regression model, justifies that 88% of the
variability observed is explained by the regression model, and the rest of them, 12%, is appraised
by unexpected variables. After creating the formula to estimate the value of BLUE MALU, is

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

taken into consideration the numbers of age, size, and freight from the first table. Thus, the
following estimation emerges upon rounding results:

𝑇𝑃𝑖 = 24,121,155 − 359,529.32 ∙ 12 − 39.98 ∙ 71,121 − 224.28 ∙ 2,154

= 24,121,155 – 4,314,351.84 – 2,843,417.58 – 483,099.12= 16,480,372.59 $ USD.

The table below is the same estimation through Excel calculations, which were analytically
presented above.

Table 3: Market Approach Valuation Results.

3.2.1. Benefits of Market Approach Method

The major advantage of the Market Valuation Method is that is the most applicable and usual
method in valuing a vessel. Moreover, this approach depends on the shipping price of recent real
transactions because the market shows less volatility in the short term. Therefore, the market
depicts the real market status.

3.2.2. Drawbacks of the Market Approach Method

The Market Approach method is a widely used valuation technique in the maritime industry, which
considers various marketing and technical factors that can affect the ship's price. These factors
include the age of the ship, deadweight tonnage (DWT), the country of origin, the type of main
engine, fuel consumption, and a range of other parameters. However, the process of contemporary
ship valuation has become increasingly complex, and there is a growing need to incorporate
additional parameters to depict a ship’s market value more accurately. As such, maritime industry

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

professionals must stay up to date on the latest developments in the field to ensure that their
valuations are comprehensive and reliable (Wenrui, 2014, p.22).

3.3. Income Approach

The income approach is a more complex valuation method, which combines many valuation
techniques. DFC valuation relates the value of an asset to the present value of expected cash flows
on that asset. More specifically, this approach is a function of the expected cash flows occurring
at some time in the future. To make appraisals with this estimation model, a row of steps and
calculations must be followed.

STEP 1

The first step is to estimate the beta factor. Beta factor (b) is a measure of the volatility or else
systematic risk of a portfolio compared to the market. Depending on how much is the beta factor,
there are different scenarios. The calculation can be estimated with the following formula:

𝐶𝑜𝑣(𝑟𝐵𝑃𝐼 , 𝑟𝐵𝐷𝐼 )
𝑏𝑒 =
𝑉𝑎𝑟(𝑟𝐵𝐷𝐼 )

Where:

𝒓𝑩𝑷𝑰 is the return on the market which the main vessel is subject to, in this case, is data of
BPI (Baltic Panamax Index).

𝒓𝑩𝑫𝑰 is the return on the overall market, which is the BDI (Baltic Dry Index).

𝑪𝒐𝒗𝒂𝒓𝒊𝒂𝒏𝒄𝒆 shows how changes in the main vessel’s returns are related to changes in the
market’s returns.

Variance depicts how far the market’s data spread from their average value.

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The types of Beta Factors that can be estimated are the following:

Table 4: Beta factor types.

BETA VALUES EXPLANATION

Beta=1 This case indicates that its price activity is

strongly correlated with the market. This
means that it has systematic risk.

Beta>1 This indicates that the main vessel’s price is

more volatile than the whole market.

For instance, if the beta is 1.3, it is supposed to

be 30% more volatile than the market, which
means that risk is increased as well as the
expected return.

Beta<1 A beta value that is less than one means that

the main vessel is less volatile than the entire
market. This means that makes a less risky
portfolio and moves more slowly than the
market averages.

Source: Author based on Kenton (2022).

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

In the table below, there are data on BPI Asset Prices, which are related to the Baltic Panamax
Index and BDI market prices, which are referred to as the Baltic Dry Index in the entire market.

Table 5: Historical Data of Random Market Prices.

Source: Author based on Kavussanos and Visvikis (2016).

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

With the aid of Excel formulas, the covariance (COVARIANCE.P(B3:B50, C3:C50)) and variance
(VAR.P(B3:B50, C3:C50)) are calculated. Then, Covariance is divided with Variance to calculate
the beta factor as it can be observed below, be= 0.61. In this case, beta<1, therefore it is a low-risk
investment for valuation.

Table 6: Beta Calculation.

STEP 2

Afterward, the calculation of the WACC (Weighted Average Cost of Capital) will follow up to
calculate the LTAV on DFC.

𝛦 𝐷
𝑊𝐴𝐶𝐶 = 𝑅𝛦 ∗ (𝑉 ) + 𝑅𝐷 ∗ (1 − 𝑡) ∗ (𝑉 )

Where:

E Market Value of the asset’s equity

D Market Value of the asset’s dept

V= E+D (Value=Equity+Dept)

RE cost of equity

RD cost of dept

T is tax rate

In shipping cases are considered that there are no taxes, as it is not necessary to take them into
account, therefore T=0 (General Law, 2015) (Marshall Hargrave,2023). More specifically, RE is

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

the cost of equity which equals the risk-free rate plus the product of the expected market return
deducting the risk-free rate and the beta of the market.

The risk-free interest rate depicts the rate of return of an investment that has no or little risk in the
capital market. Investors often use government bonds as risk-free rates, because of their minimal
risk in the capital market. Cost of debt RD represents the cost of financing a project, such as buying
a new building vessel, using external finance, or from financial institutions. More especially, the
cost of debt in shipping depicts the interest rate that banks charge prospective investors to acquire
external capital.

As for capital structure (D/E), investors use a combination of external and internal financing for a
large investment. It depicts the amount of the weighted average cost of capital, as a higher level of
debt leads on the one hand to a higher beta and at the same time to an increased rate for the cost
of equity accordingly, as, on the other hand, the relative weight of equity capital in WACC formula
is lower (Xaviaras, 2016, p.11).

The WACC approach is dependent on the free cash flows available for distribution between equity
and debt holders. Also, the expected flows must be discounted using a weighted average of the
required rates of return for both equity and debt.

Table 7: WACC calculation.

Source: based on Financial Times.

The annual expected free cash flows must be discounted to present values using the WACC. To
calculate WACC, the US 10-year Treasury at the beginning of 2023 is found via Financial Times,

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

which is 3.80% (Chatham Financial, 2023). US 10-year Treasury rates are used for a fixed rate
payer in USD in return for receiving a three-month LIBOR. Also, the US treasury's 10-year Current
Yield is used for a risk-free rate.

Table 8: US 10-Year Treasury by Financial Times.

BONDS 1 DECEMBER 2023

US 10-YEAR TREASURY

US10YT

YIELD TODAY’S CHANGE 1 YEAR CHANGE

4.21  -0.015 / -0.36%  + 19.86%

Source: based on Financial Times.

Figure 1: Daily prices of 10-year treasury bonds for 2023.

US 10-YEAR TREASURY BONDS
FROM 30 DEC 2022 UNTILL 1 DEC 2023
6.00

5.00

4.00
PRICES USD

3.00

2.00

1.00

0.00
30/12/22

23/01/23
01/02/23
10/02/23
22/02/23
03/03/23
14/03/23
23/03/23
03/04/23
13/04/23
24/04/23
03/05/23
12/05/23
23/05/23
02/06/23
13/06/23

05/07/23
14/07/23
25/07/23
03/08/23
14/08/23
23/08/23
01/09/23
13/09/23
22/09/23
03/10/23

23/10/23
31/10/24
10/11/23
21/11/23
01/12/23
11/01/23

23/06/23

12/10/23

DATES

Source: based on Financial Times.

The high-yield index has an average coupon rate of almost 6% according to a financial source
(Martin, 2023). Thus, credit spread (bond) is calculated if the treasury bond yield (Rf) is deducted

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

from the Corporate Bond Yield 6%, which is equivalent to 1.79%. Credit spread refers to the
disparity of yield or returns between two same-maturity Treasury Bonds by possessing different
credit ratings (5paisa Research Team, 2023). After estimating Credit Spread (bond), RD is
calculated which is the sum of US treasuries at the start of the year at 3.8% and Credit Spread at
1.79%. Therefore, the cost of debt RD is equal to 5.59%. Having calculated beta at the first step
the cost of equity RE is calculated based on the CAPM formula:

Re = Rf + be x MRP,

Where MRP=Market Risk Premium is equal to RD-RF.

Consequently, RE = 4.21%+ 0.61*(5.59%-4.21%) = 5.05%. For this case is assumed, a rational

proportion of Dept and Equity at 60%/40%. The final step is to calculate WACC based on the last
estimations. Using the formula of WACC the following result arose:

𝛦 𝐷
𝑊𝐴𝐶𝐶 = 𝑅𝛦 ∗ (𝑉 ) + 𝑅𝐷 ∗ (𝑉 ) = 5.05%*40% + 5.59%*60% = 5.37%.

Table 9: Income Approach Data.

In the table above, a case of Panamax Dry Bulk Carrier is assumed, which was built in 2011 and
the appraisal is considered on 1st January 2023. The gross charter rate is considered at 17,050 $
USD per day adjusted linearly to the historical average for a year. The following year daily gross

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“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

charter rates are supposed to increase only with the expected inflation rate of 2% per year. The
results of net annual charter revenues are based on:

• the number of available running days adding one more parameter, whether it is a year with
dry docking services or without,

• the vessel’s utilization rate,

• the amount of paid fees and commissions.

Annual Operating expenses include tonnage taxes and are, also, estimated to increase with the
expected inflation rate of 2% per year. At the end of economic life, which is in 2035, the vessel’s
scrap value will be obtained, based on the number of lightweight tons and the steel price per light
ton, depending on net actual charter rates, annual operating expenses, and the scrap value, the free
cash flows can be appraised in each calendar year for the vessel’s remaining lifetime (Kavussanos,
Visvikis, 2016, pp.299-302).

The last step is to calculate the Present Value of the Vessel (PV) which is the current value of a
future total of money of cash flows given a specified rate of return. The formula of Present Value
(PV) is the following:

𝐶𝐹𝑡
PV =
(1+𝑟)𝑡

Where:

PV is the Present Value of Cash Flow at time t,

𝑪𝑭𝒕 is the expected cash flow at time t,

r is the discount rate

t is the time.

This means that future cash flows are discounted at the discount rate of 2%, and the higher discount
rate leads to a lower present value of future cash flows (Fernando, 2023). After estimating the
Present Value for each year, a summary emerges, which depicts the value of the vessel with the

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Income Approach method, or else the LTAV approach. Depending on the table below, the
appropriate calculations are made to reach the result of the LTAV value.

Table 10: Income Approach equations for Calculation.

Income Approach Equations

1. Actual Booking Days=Operating days x %Actual Booking Days

2. Daily Gross Charter Rate = Gross Charter Rate per day x Inflation Rate

3. Charter Rate After Age Discount = Daily Gross Charter rate x (1-Age Discount)

4. Daily Net Charter Revenue = Charter rate After Age Discount x (1 - Fees &
Commissions)

5. Annual Net Charter Revenue = Daily Net Charter Revenue x Actual Booking Days

6. Annual Operating expenses = Total Annual OPEX x Expected increase OPEX per year

7. Scrap Value=Light Displacement in LT x Scrap Price x (1+ Inf Rate)^(Economic Useful

Life-Vessel's Age)

8. FCF (Free Cash Flow) = Annual Net Charter Revenue - Annual Operating Expenses (+
Scrap Value)

9. PV Factor = 1/((1+WACC)^No Years)

10. PV = PV Factor x FCF

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 11: Income Approach Method.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Using the data above, eventually, the result is 40,242,290 $ USD for the valuation date 1st
December 2023, which will be discussed later.

3.3.1. Advantages of Income Approach

The Income valuation method has been widely acknowledged for its ability to provide a
comprehensive assessment of the future earnings potential of a ship. The method enables an in-
depth analysis of the vessel's capacity to generate profits and its overall profitability. This, in turn,
facilitates informed decision-making when considering the purchase or sale of a ship. The Income
valuation method, therefore, represents a valuable tool for investors and stakeholders in the
maritime industry, offering a reliable means of assessing the financial viability of vessel
investments.

3.3.2. Disadvantages of Income Approach

Even Though, the important advantages, there are crucial disadvantages that must be referred to.
It must be mentioned that is a more complex valuation method than the other ones, which is why
it makes it difficult to understand. Additionally, it is complicated to predict future income, as the
market presents high volatility. Thus, the results are not always accurate. Influenced by all these
factors, it is concluded that the number of future earnings can’t be controlled (Wenrui, 2014, p.20).

3.4. Replacement Cost Approach

The Replacement Cost Method (RCM) is an approach to valuing an asset, in this case, a vessel,
which takes under consideration the vessel’s depreciation or loss of value over time and the cost
of replacing the asset if it were damaged or demolished (Equitest, 2023). In the shipping section,
to apply the Replacement Cost Approach, the valuation must be implied between two similar
vessels from the same category and the same year of build.

In this instance, two Panamax Vessels are assumed which were built in 2010, LADY L and
ANTHOUSA, to evaluate LADY L (Main Vessel) with ANTHOUSA (Subject Vessel) on 1st
December 2023. It, also, considered that the sale price of the main vessel is 8.9 million USD $ and
9.1 million USD $ for the subject vessel respectively.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The economic useful life of the vessel must be taken into consideration, which is the time
throughout an asset that remains useful and has not depreciated to the point (Chen, 2020). On this
occasion, economic useful life is assumed at 25 years. With this significant element, the
depreciation life is estimated, which is determined by dividing one by economic useful life. The
result that occurs is equal to 4%.

Thus, the current value of the main vessel LADY L is equivalent to (Sale Price – (Sale Price x
Depreciation Rate x Age)) which leads to USD 4,628,000. Subsequently, with the same method,
the replacement value of the subject vessel ANTHOUSA is calculated, which is equal to USD
4,732,000. Summarizing the two values of the main and subsequent vessel, the result that emerges
is equal to USD 9,360,000, which is the final value for the asset.

Table 12: Cost Approach Calculation.

3.4.1. Benefits of Replacement Cost Approach

The Replacement Cost Approach is a widely accepted valuation method in the shipping industry
due to its numerous benefits. The sale price is used as a benchmark price in this approach, which
is a significant advantage when determining the vessel's value. Moreover, this method also
considers depreciation, which reflects the ship's substantial, functional, and economic losses. This
ensures that the valuation is based on the current condition of the vessel, providing a more accurate
and reliable estimate of its worth. These benefits make the Replacement Cost Approach a crucial
tool for investors and analysts when making informed decisions about vessel investments.

32
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

3.4.2. Drawbacks of Replacement Cost Approach

The valuation method under discussion seems to have certain limitations that could restrict its
application in practical scenarios. Firstly, it does not account for the impact of the shipping market
on ship prices, which is a crucial factor to consider since secondhand prices can sometimes exceed
new building prices. Secondly, assessing the substantive loss, functional loss, and economic loss
of a ship through this method requires extensive calculations, related to the complex composition
of the vessel. Finally, utilizing future prices in the evaluation of current vessels may not be a fitting
approach, as it could lead to inaccurate estimations and judgments (Wenrui, 2014, p.18).

3.5. Pros and Cons of all Valuation Methods

Table 13: Comparison between each method’s pros and cons.

METHODS BENEFITS DRAWBACKS

1. MARKET APPROACH 1. The most applicable 1. The Market Approach

Valuation method. method assesses a
ship's market value by
2. This approach depends
considering marketing
on the shipping price
and technical factors,
of recent price
ex. age, DWT, etc.
transactions.

2. INCOME APPROACH 1. Considers the future 1. More complex

earnings of the ship. valuation method.

2. It depicts the 2. Difficult to

capability of the vessel comprehend.
to make a profit.
3. It is complicated to
predict future income,
due to the market’s
high volatility.

4. Not always accuracy.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

5. Future earnings can’t

be controlled.

3. COST APPROACH 1. The sale price is used 1. Not able to depict the
as a benchmark price. influence on shipping
prices.
2. It reflects depreciation
measuring the ship's 2. Takes only into
substantial, functional, consideration the sale
and economic losses. price and the
depreciation of the
ship.

3. The secondhand price

will sometimes be
higher than the new
building price, which
can’t happen in the
replacement cost
method.

4. The evaluation of
substantive loss,
functional loss, and
economic loss of the
ship needs a lot of
calculations.

5. Using a future price in

the appraisal of a
current vessel is not
appropriate.

As can be observed above, the Valuation method with the least drawbacks is the Market Approach.
This is the major reason that is the most preferable method used by shipping firms. Moreover, it

34
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

appears to vital benefit from the other methods, which renders this method very usable and
comprehensive for valuers. On the other hand, the method with the most disadvantages is the
Replacement Cost Approach method, which is not very reputable in comparison to the other ones,
as it leads to inaccurate and unreliable results.

Upon presenting an overview of the main valuation methods, the subsequent section will provide
a detailed and systematic analysis of a fitted case study involving a dry bulk ship. This examination
will be undertaken with the objective of comparing the results obtained from the various valuation
techniques. The comprehensive evaluation of the dry bulk ship case study will enable a thorough
understanding of the practical application of the theoretical valuation methods mentioned earlier.

35
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

4. Results
In this part, it will be presented a fitted case study of a specific vessel, using the three valuation
methods that were analyzed earlier in the methodology section, to compare the results among them
and observe, which is the most suitable and appropriate approach. The three aforementioned
methods were applied to Panamax Vessels, which are Dry Bulk Carriers, as is the most prevalent
and preferable category of a ship in the maritime industry, particularly for Sales and Purchase
(S&P) transactions. In this case, BC PANAMAX OSTRIA, a Panamax dry bulk vessel, which is
76,444 DWT, built in 2008 is chosen to be presented with each method. According to Marine
Traffic (2023), the following information about this vessel can be drawn.

Table 14: Vessel information for Panamax Ostria.

VESSEL INFORMATION

IMO 9399557

Name PANAMAX OSTRIA

General Vessel Type Cargo

Detailed Vessel Type Bulk Carrier

Navigational Status Active

MMSI 636021875

Call Sign 5LGC8

Flag LIBERIA (LR)

Gross Tonnage 41115

Summer DWT 76444 t

Length Overall X Breadth Extreme 225 x 32.26 m

Year Built 2008

Source: based on Marine Traffic.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 15: Vessel Valuation of Panamax Ostria.

CURRENT VALUATION

Current Valuation Demolition Value

$11.8 Million $5.9 Million

Source: based on Marine Traffic.

The valuation date is 1st December of 2023 is assumed for all the following valuations that will be
conducted in the fitting. Beyond using the same valuation date, the same economic useful life and
sale price will be utilized in every method.

4.1. Fitting the Model with the Market Approach

Firstly, BC PANAMAX OSTRIA 2008 will be evaluated with Market Method appraisal, as it is
the most common method among the others and the most acceptable in the shipping sector. In the
table below, there is a list of thirty numbers of five-month data of purchases of Panamax Bulk
Carriers, providing information about vessel names, sale prices, year of build, age at sale, DWT,
and the state of the freight market at the time of purchase, which can be depicted from Baltic
Panamax Index. As a Panamax vessel is evaluated, the BPI index must be utilized, which reflects
the supply and demand balance for the Panamax shipping market.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 16: Vessel data for Market Valuation of PANAMAX OSTRIA.

Using OLS (Ordinary Least Squares) Regression Analysis with the data above, it can be defined
the following relationship between vessel price and pricing factors.

𝑇𝑃𝑖 = 𝑎 + 𝑏1 ∙ 𝐴𝑔𝑒𝑖 + 𝑏2 ∙ 𝑆𝑖𝑧𝑒𝑖 + 𝑏3 ∙ 𝐹𝑟𝑒𝑖𝑔ℎ𝑡𝑖 + 𝑒𝑖

Where:

𝑻𝑷𝒊 is the paid purchase price for the vessel PANAMAX OSTRIA based on the 30
transactions according to the table above),

𝒂 is a (constant) intercept term,

𝒃𝟏 is the sensitivity coefficient for Age,

𝑨𝒈𝒆𝒊 is the age of the vessel PANAMAX OSTRIA on 1st December 2023,

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

𝒃𝟐 is the sensitivity coefficient for Size,

𝑺𝒊𝒛𝒆𝒊 is the vessel size measured in thousand DWT of the appraised PANAMAX OSTRIA,

𝒃𝟑 is the sensitivity coefficient for Freight,

𝑭𝒓𝒆𝒊𝒈𝒉𝒕𝒊 is the average monthly BPI on 1st December 2023 of PANAMAX OSTRIA.

Table 17: Regression Analysis for PANAMAX OSTRIA.

After applying the OLS Regression model, the intercept term and the sensitivity coefficients are
appraised, which are significant for the calculation with the Market Approach. Thus, the following
results emerge:

Table 18: Valuation results for PANAMAX OSTRIA based on Market Approach.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The equation that derives from solver in Excel, applying regression model is:

𝑇𝑃𝑃𝑂 = 18,108,414 − 791,180.59 ∙ 𝐴𝑔𝑒𝑃𝑂 − 3.55 ∙ 𝑆𝑖𝑧𝑒𝑃𝑂 + 3,559.53 ∙ 𝐹𝑟𝑒𝑖𝑔ℎ𝑡𝑃𝑂

Where PO is the appraised vessel of Panamax Ostria.

The adjusted R-square in Table 17 which is equal to 0.85 justifies that 85% of the variability
observed, is explained by the regression model and the rest 15% is estimated by unexpected
variables. After creating the form to estimate the value of PANAMAX OSTRIA, the results of age,
size, and freight are considered in Table 18.

Therefore, the following estimation arises with rounding results:

𝑇𝑃𝑃𝑂 = 18,108,414 − 791,180.59 ∙ 15 − 3.55 ∙ 76,444 + 3,559.53 ∙ 2,250

= 18,108,414 – 11,867,708.9 – 271,376.2 + 8,008,942.5

≈ 13,978,143.87 USD.

40
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

4.2. Fitting the model with the Income Approach

In this section, the three occasions of beta (b=1, b>1, b<1) are considered, to compare the results
between these cases. Using the equations that were analyzed in the methodology section, the next
appraisals can be made.

Table 19: Income Approach Equations utilized in calculations.

Income Approach Equations

1. Actual Booking Days=Operating days x %Actual Booking Days

2. Daily Gross Charter Rate = Gross Charter Rate per day x Inflation Rate

3. Charter Rate After Age Discount = Daily Gross Charter rate x (1-Age Discount)

4. Daily Net Charter Revenue = Charter rate After Age Discount x (1 - Fees &
Commissions)

5. Annual Net Charter Revenue = Daily Net Charter Revenue x Actual Booking Days

6. Annual Operating expenses = Total Annual OPEX x Expected increase OPEX per year

7. Scrap Value=Light Displacement in LT x Scrap Price x (1+ Inf Rate)^(Economic Useful

Life-Vessel's Age)

8. FCF (Free Cash Flow) = Annual Net Charter Revenue - Annual Operating Expenses (+
Scrap Value)

9. PV Factor = 1/((1+WACC)^No Years)

10. PV = PV Factor x FCF

The table presented above offers a comprehensive understanding of the equations used in LTAV
calculations. Equation 1 defines the Actual booking days, which refers to the number of days that
the vessel is active and is of paramount importance in the estimation of the Income Approach.
Equation 2 represents the Daily Gross Charter Rate, which is the rate of hire inclusive of fees and

41
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

commissions. More specifically, the Gross Charter Rate is determined by multiplying the vessel’s
fixed value with an annual inflation rate.

In Equation 3, the Charter Rate after the age discount is calculated by multiplying the daily gross
charter rate by an annual age depreciation. Equation 4 determines the Daily Net Charter Revenue
by deducting the age discount and all fees and commissions from the daily gross charter rate. The
Annual Net Charter Revenue is calculated by multiplying the Daily Net Charter Revenue by the
actual booking days, as outlined in Equation 5. In Equation 6, the Annual Operating Expenses are
defined as all the costs related to the vessel's operation, such as manning costs, stores, repair &
maintenance, insurance, administration, etc.

Equation 7 outlines the computation of the Scrap value, which is based on the main factors of the
remaining life of the vessel, light displacement, and scrap price. Equation 8 helps to determine the
Free Cash Flow, which is derived by subtracting the Annual Operating Expenses from the Annual
Charter Revenue. That’s why, FCF is equal to Annual Charter Revenue- Annual OPEX. (Chris
B. Murphy, 2023). Finally, Equation 9 represents the present Value Factor, which estimates the
current value of money that will be received in the future, and Equation 10 is the Present Value,
obtained by multiplying the present value factor with Free Cash Flows. The insights offered by
these equations offer a comprehensive and nuanced understanding of the LTAV calculations.

42
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

4.2.1. Income Approach with b=1

The present analysis will commence with a thorough examination of the income approach, with a
beta equal to one. This scenario is indicative of a strong correlation between the price activity and
the market, thereby implying the presence of systematic risk.

Table 20: WACC calculation considering b=1.

Given the US treasuries 10-year data, Rf rate, Coupon Rate, Credit Spread, and debt & Equity
proportions from the Methodology section in Table 7, b=1 is settled. From Table 4, when the beta
value is equal to one, it means that the vessel’s price, in this case, PANAMAX OSTRIA, is highly
correlated with the market. This signifies that it has systematic risk, inherent to the whole shipping
market.

Initially, the RE is estimated through the CAPM model RE=RF +bE x MRP = 5.59%. Then, using
the formula of Weighted Average Cost of Capital (WACC), the following result arises:

𝛦 𝐷
𝑊𝐴𝐶𝐶 = 𝑅𝛦 ∗ (𝑉 ) + 𝑅𝐷 ∗ (1 − 𝑡) ∗ (𝑉 ) => WACC = 5.59%*40% + 5.59%*60% = 5.59%

Therefore, RD=RE=WACC=5.59%, because b=1.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 21: PANAMAX OSTRIA data with b=1.

Upon careful examination of the table above, it is observed that the annual Operational Expenses
(OPEX) for the PANAMAX OSTRIA have been comprehensively calculated, taking into account
several key factors such as Manning costs, Stores, Routine, Repair and Maintenance expenses,
Insurance costs, and Administration costs. Additionally, the table presents crucial information
regarding the Vessel Type, Year of build, Size, Age, and Light Displacement of the vessel, which
is pertinent to understanding the overall expenses incurred by the vessel.

It is important to note that several assumptions were made during the valuation process, which are
fundamental to the outcome of the analysis. These include a specific valuation date of 1st
December 2023, an estimated economic useful life of 18 years, operating days of 355, actual
booking days of 95%, operating days with dry dock of 340, gross charter rate per day of
17,600$/day, age discount of 4%, fees and commissions of 5%, inflation rate per year of 2%,
expected increase in OPEX per year of 2.5%, and a scrap price per long ton on the valuation date
of 01/12/2023 of 250$.

Furthermore, Dry Docks have been appraised since the year of building that is in 2008. Thus, five
more Dry Dock Surveys till 2035 must be expected (2008, 2013, 2018, 2023, 2028, and 2033
respectively). Finally, the appraised WACC is taken from Table 20 equal to 5.59%, to continue
with the calculations.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 22: PANAMAX OSTRIA Results based on b=1.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The first column is the year that starts the valuation 2023 until the year is to be appraised. In this
case, the appraisal is about to last till the year 2035. Thus, in the second column, there is the number
of years, starting from year one for 2023 and ending up to the number 13 for the year 2035.

In the third column, are the operating days that the vessel is working considering the Dry-Docking
Years, which are calculated in Table 21. This means that 340 Operating Days will be placed for
the years of Dry-Dock, which are 2023, 2028, and 2033 accordingly, and for the rest of them, 355
days will be set. Using the form Actual Booking Days=Operating Days x %Actual Booking
Days from equations Table 19, the fourth column is calculated, which arises from Actual Booking
Days in DD= 340 x 95% = 323 and Actual Booking Days= 355 x 95% = 337, respectively.

In the fifth column, the Daily Gross Charter Rate is calculated, which emerges from the equation
Daily Gross Charter rate per day x Inflation Rate. In the first row of the column, the gross
charter rate per day is set from the data in Table 21 17,600 $/day, as the inflation rate starts from
the following year. In the second year, the Daily Gross Charter rate increases at (Gross Charter
Rate= 17,600$/day x 1.02) 17,952 $/day. The same steps are followed to calculate the rest of the
Daily Gross Charter Rates till 2035, reaching 22,321 $/day that year.

The next column is the Age Discount that starts from the second year of valuation and in this case
is 4% given in Table 21. Then, Charter Rate After Age Discount is calculated based on the
equation Charter Rate After Age Discount Daily Gross Charter Rate x (1- Age Discount). In
the first row, the Charter Rate After Age Discount is equal to the Daily Gross Charter Rate of
17,600/day, as it is not discounted yet. In the second row, Charter Rate After Discount 17,952$/day
x (1-4%) = 17,234$/day. The same steps are followed to calculate the rest rows till the year 2035.

In the next column, Fees & Commissions are equal to 5% given in Table 21, which will be used
in the calculation of the Daily Net Charter Revenue. Daily Net Charter Revenue can be estimated
from the equation Charter Rate After Age Discount x (1- Fees & Commissions). The first row
derives from 17,600 x (1-0.05) = 16,720$/day, the same method is applied for the rest rows till the
year 2035.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

The next column, Annual Net Charter Revenue which is equal to Daily Net Charter Revenue x
Actual Booking Days, are the Net Charter Revenues that are calculated in the previous column
multiplied by the actual booking days. For instance, 16,720 x 323 = 5,400,560 $/year.

Annual OPEX is the operational expenses per year. The first-year Operational Expenses are equal
to 1,824,500 $/year, as per data in Table 21. The second year can be calculated by the form Annual
Operating Expenses=Total Annual OPEX x Expected increase in OPEX per year, which is
equivalent to 1,824,500 $/year x (1 + 0.025) = 1,870,113 $/year.

Scrap Value is estimated in the last year of valuation, and it is added up to Free Cash Flows. The
form of Scrap Value is Light Displacement in LT x Scrap Price x (1+ Inflation Rate) (Economic

Useful Life-Vessel’s Age). Thus, the value from data in Table 21 is estimated at 12,250 LT x 250$ x
(1+2%) (18-18) = 3,062,500$.

Free Cash Flows are determined by the equation Annual Net Charter Revenue – Annual
Operating Expenses and Scrap Value only is added for the last row. Therefore, the equation
becomes Net Charter Revenue – Annual Operating Expenses + Scrap Value. For example, the
first row occurs by deducting 5,400,560$ – 1,824,500$ = 3,576,060$.

And for the last row, in which scrap value must be added, is FCF = 6,865,332$ - 2,453,750$ +
3,062,500$ = 7,474,082$ Then, the WACC with the considering b=1, to appraise the PV factor,
𝑪𝑭𝒕
which has the following formula: PV = . The result for the first row by using the above
(𝟏+𝒓)𝒕

formula occurs as follows PV = 1/((1+5.59%)^1 ) = 0.95. The final PV, which is utilized for LTAV
valuation, derives from PV = PV Factor x FCF = 0.95 x 3,576,060$ = 3,386,741$. Following the
same steps to calculate PV till 2035 and finally adding them, a result of $36,860,410$ emerges
with LTAV valuation, given b=1.

47
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

4.2.2. Income Approach with b<1

Table 23: WACC calculation considering b<1.

Similarly, from Table 4, when the beta value is less than one, means that the vessel, in this case,
PANAMAX OSTRIA, is less volatile than the entire freight market. This leads to a less risky
portfolio and moves gradually in comparison to the shipping market averages. Thus, a very low
beta of 0.4 is assumed. Initially, the RE is estimated through the CAPM model RE=RF +bE x MRP
= 4.76%. Also, RD remains the same and is equal to 5.59%. Then, using the formula of Weighted
Average Cost of Capital, the following result arises:

𝛦 𝐷
𝑊𝐴𝐶𝐶 = 𝑅𝛦 ∗ (𝑉 ) + 𝑅𝐷 ∗ (1 − 𝑡) ∗ (𝑉 ) => WACC = 4.76%*40% + 5.59%*60% = 5.26%

Therefore, RE<WACC<RD, supposing that beta is less than one.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 24: PANAMAX OSTRIA data with b<1.

It is worth noting that to make comparisons between the three cases of beta, the same instance is
utilized, with the only modification being the adjustment of the WACC factor. This approach
ensures consistency and facilitates a more rigorous and systematic analysis of the data.

49
 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 25: PANAMAX OSTRIA Results based on b<1.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

According to the analysis, it has been observed that the columns that are subject to change due to
b<1 are the Weighted Average Cost of Capital (WACC), Present Value (PV) Factor, and the PV
itself. Observing that the PV Factor increases throughout the years, due to the smaller denominator,
a higher LTAV value of $ 37,651,280 is estimated than the previous result.

4.2.3. Income Approach with b>1

Table 26: WACC calculation considering b>1.

Similarly, Table 4, when the beta value is more than one, signifies that the vessel, in this case,
PANAMAX OSTRIA, is more volatile than the entire freight market. This leads to a riskier
portfolio and moves radically in comparison to the shipping market averages. Thus, a very high
beta of 1.3 is assumed. Initially, RE is estimated through the CAPM model RE=RF +bE x MRP =
6.00%. Also, RD remains the same and is equal to 5.59%. Then, using the formula of Weighted
Average Cost of Capital, the following result occurs:

𝛦 𝐷
𝑊𝐴𝐶𝐶 = 𝑅𝛦 ∗ (𝑉 ) + 𝑅𝐷 ∗ (1 − 𝑡) ∗ (𝑉 ) => WACC = 6.00%*40% + 5.59%*60% = 5.76%

Therefore, RD<WACC<RE, supposing that beta is more than one.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 27: PANAMAX OSTRIA data with b>1.

After adjusting the Weighted Average Cost of Capital (WACC) following the methodology, the
subsequent step entails proceeding with the determination of the Long-Term Average Value
(LTAV). This requires the determination of the discount rate, which provides the basis for
determining the present value of the projected cash flows. Subsequently, dividing the present value
by the number of outstanding shares yields the LTAV.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 28: PANAMAX OSTRIA Results based on b>1.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Based on our analysis, it appears that when b>1, the only columns that exhibit a change are
WACC, PV Factor, and PV. Observing that the PV Factor diminishes throughout the years,
due to the bigger denominator, a lower LTAV value of $ 36,474,153 occurs than the
previous results.

4.2.4. Compare between different beta results in Income Approach Valuation

Table 29: LTAV Results Comparison.

Beta WACC LTAV Results

B=1 5.59% 36,860,410 $

B<1 5.26% 37,651,280 $

B>1 5.76% 36,474,153 $

In brief conclusion, Beta is analogous to WACC and vice versa with LTAV Results. Beta
shows how risky is an investment, and so does the WACC. WACC represents the return of
the asset to the investors. That’s why, the higher the WACC, the higher volatility it has, as
investors anticipate greater returns for compensation. LTAV has adverse results, as it is the
value of the asset that the investor must pay. Thus, he prefers a riskier investment with low
LTAV Results.

4.3. Fitting the model with the Replacement Cost Approach

This valuation method requires a comparable vessel with similar characteristics and
demands the same type as the valuated one, as it is based on substitution cost. In this
instance, information on Marine Traffic is found, one of the most useful and accurate
websites providing vessel information for every ship. In this case, Vessel TORO is the
subject ship that will be utilized, to appraise PANAMAX OSTRIA’s value on 1st December
2023. Based on the information below TORO is an active Panamax Bulk Carrier of 76,636
DWT built in 2008, the same as the main vessel.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 30: Subject’s vessel information.

VESSEL INFORMATION

IMO 9443009

Name TORO

General Vessel Type Cargo

Detailed Vessel Type Bulk Carrier

Navigational Status Active

MMSI 538007174

Call Sign V7NL4

Flag MARSHALL IS (MH)

Gross Tonnage 39737

Summer DWT 76636 t

Length Overall x Breadth Extreme 224.94 x 32.26 m

Year Built 2008

Source: based on Marine Traffic.

Herein it can be observed the valuation estimation in the present market depends on data
from Marine Traffic. The price of $14,6 million is used to make the appropriate calculation
with the Replacement Cost Approach. Accordingly, the value of 11.8 million USD is used
for PANAMAX OSTRIA, as in Table 15.

Table 31: Subject’s Vessel Valuation for the use of RCM.

CURRENT VALUATION

Current Valuation Demolition Value

$14.6 Million $6.0 Million

Source: based on Marine Traffic.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Table 32: Replacement Cost Results for Panamax Ostria.

Given the valuation date of 1st December 2023, Vessels of PANAMAX OSTRIA 76,444
DWT/2008 YOB, which is the main ship, and TORO 76,636 DWT/2008 YOB, as the
subject vessel, are considered. The economic useful life has been determined in 18 years, as
in the previous valuation methods, to make adequate comparisons later.

Depreciation life can be estimated based on the economic useful life. It can be calculated by
𝟏
the form 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑳𝒊𝒇𝒆 = 𝑬𝒄𝒐𝒏𝒐𝒎𝒊𝒄 𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆 , which is equal to 6%. The current

value of the main ship and the replacement value of the subject vessel can be appraised from
the following equation: Sale Price - (Sale Price x Depreciation Rate x Age). For Vessel
PANAMAX OSTRIA this value is equivalent to $11,800,000-($11,800,000 x 6% x 15) =
$1,966,667 (a). Respectively for the subject vessel TORO, its value is equal to $14,600,000-
($14,600,000 x 6% x 15) = $2,433,333 (b). Finally, by adding the relations (a) and (b) the
Depreciated Replacement Cost Value reaches $4,400,000.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

4.4. Comparing between different valuation methods.

Table 33. Valuation Methods’ Results for vessel PANAMAX OSTRIA.

METHOD RESULT

1. Market Method 13,978,143.87 $

2.1. Income Method with beta=1 36,860,410 $

2.2. Income Method with beta<1 37,651,280 $

2.3. Income Method with beta<1 36,474,153 $

3. Replacement Cost Method 4,400,000 $

As can be observed from the results, there is a large deviation among them. The major reason
why this might become is that different criteria are taken for granted in each method. There
is no mistaken valuation result, as every approach can be utilized for different uses and
purposes.

For a Panamax vessel like PANAMAX OSTRIA, which is 76,444 Dead Weight Tons and
was built in 2008, the most rational outcome for 1st December of 2023 would be with a
Market Approach of 13,978,143.87 $, because it is based on the current shipping market
conditions and is comparable to a sample of similar data of vessels.

Nonetheless, the Income approach takes into consideration more aspects, financial
terminology, and more complicated calculations, to appraise an accurate result. As can be
noticed, in the LTAV method, three scenarios of beta contribution are assumed, which is
why there are three different results only in one method.

The Income Method, a widely used approach in finance, is influenced by several key
measures that are critical to understanding the financial performance of a company. These
measures include the Weighted Average Cost of Capital (WACC), Present Value (PV), and
Free Cash Flows (FCF). Additionally, FCF is derived from various factors such as Charter
Rate, Age Discount, Fees and Commissions, Charter Revenue, OPEX (Operational
Expenses), and Scrap Value. A thorough understanding of these measures is essential for
making informed financial decisions.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

Finally, the result of the Replacement Cost Method is the lowest result of all with a value of
4.4 million USD. This occurs because this method takes under consideration only one
vessel, which is not so indicative for the appraisal and it is based on the replacement value,
which derives from a depreciation rate.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

5. Conclusions
This dissertation has provided a thorough presentation of applied valuation methods that are
used extensively in shipping investment and financial decision-making. Since appraising
vessels plays a key role in finance, there is no surprise in developing new valuation
approaches fitted to the demands of the shipping market.

Herein, the main three valuation approaches have been examined and have displayed how
they can be utilized for asset play investment. First and foremost, the most common and
widely accepted method in the shipping industry is the market approach, which estimates a
ship’s value compared to recent sales of similar vessels. This approach is also known as the
“mark-to-market” method in shipping valuation. Secondly, the Income Approach, which is
a more complex valuation appraisal, determines the principal value of a vessel by its future
expected cash flows, discounted by using the cost of capital (WACC), also known with the
name of “mark-to-model”. Finally, the Replacement Cost Method takes place between two
similar vessels and has as a key point the depreciation value of a subject ship.

The choice among the three approaches is not always easy and is mainly based on one’s
view about market efficiency. Market prices and value results will have “close” results in
“normalized” markets. In contrary to “abnormal” market conditions, market prices can
diverge from value results under an inevitable state. Thus, a valuation model is required to
recognize and explain this deviation, as well as to compare the models’ outcomes among
them. The most preferable valuation model is the Market Approach as it is the most
comprehensive and least complex method concerning the others.

Even though the Income Method uses more composite financial techniques and, therefore,
has more accurate results, is still less understood. Moreover, the Income Approach has to
take into consideration market risk, which is expressed by the beta factor. As for the
Replacement Cost Approach, it is only dependent on a vessel, which is the indicative one
for the shipping market. Thus, this method does not provide such an accurate outcome.

During the conduction of this thesis statement, many obstacles and difficulties must be
mentioned and taken into consideration for further research. Although ship valuation models
end up with satisfied outcomes, there is little experience and knowledge on this subject, so
there might be deficiencies or divergences in the results. Moreover, Vessel Valuation is a

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

modern and developing topic in shipping market investment. That’s why, there are limited
sources of information concerning this vital issue.

The present dissertation is premised on an analysis of the major valuation methods that
pertain to the shipping industry. The underlying research is based on the views and opinions
that have been expressed and explicated in the Literature Review section. Through a
comparative analysis of these methods, the dissertation seeks to offer a clear and incisive
appraisal of their distinctive characteristics, while also shedding light on the broader
implications of valuation in the shipping industry.

What makes vessel valuation a modern trend nowadays is the competitive shipping
environment and the unpredictable market conditions that have led valuers to develop
renewable methods of appraising an asset. The restricted information about vessel valuation,
data finding, and the challenge of an intuitive depiction of the valuation fitting models, were
the most crucial parts of this thesis statement. Another important issue is that it is hard to
quantify all the technical factors, which influence vessel price.

The depiction of the model, particularly in the Market Approach method, was based on the
age of the ship, dead weight tonnage, and freight market conditions. Other crucial factors
such as the type of engine, flag, speed, and other elements are difficult to determine. For the
main reasons above, there must be mentioned the below recommendations for vessel asset
play investments.

First, vessel valuation appraisals must become widely known to the immediately interested
parties, such as willing buyers, willing sellers, valuers, etc. At the same time, ship valuation
companies should provide adequate information and updates to all parties concerned.
Adoption of vessel valuation should be an integral part of the maritime industry and for
shipping finance, too. Thus, there would be appropriate training for potential valuers to
make precise estimations in appraising a vessel. Many organizations such as Lloyds offer
seminars and certifications that acknowledge someone as an official valuer.

Is noteworthy to mention that Ship Valuation is a vital part of contemporary shipping to

support the sales and purchase department and the shipping finance sector. That is why
accurate results have significant meaning. Generally, shipping valuation is an upcoming
trend for the shipping finance sector, as the shipping market volatility and the uncertain

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

conditions that dominate the sector make it appropriate for any interested party. Further
research in developing the appraisal methods and finding more ways to make them more
comprehensive, should be examined from shipping companies, which are interested in
adopting such techniques in their valuing system.

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 Eleni-Maria Donti,
“Comparing among different Vessel Valuation Methods:
The case of a dry bulk carrier.”

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