Question

1.      Because of wars, some Dutch ports have been temporarily closed for repairs, and the shipping company has more ships than it can use. It is thus considering whether to lease some of the excess ships to smuggler-entrepreneurs. It is anticipated that the port closing will last 3 years. A ship now has a market value of 1.5 million guilders, but will depreciate in value of 200,000 guilders over a three-year period. The monthly discount rate is 2%.

a.       As the financial advisor to the company, what minimum monthly lease payment would you recommend the ship overs charge?

b.      How much of the lease payment goes to depreciation, and how much for rate-of-return opportunity cost, in absolute and percentage terms? Percentages should be expressed using the ships initial capital value as the base.

Answer 1

Current Market Value, PV = 1,500,000
Monthly Discount Rate, r = 2% or 0.02
Number of Lease Payment, n = 3 years or 36 Months

a)
Monthly Lease Payment, PMT = iPV / [1- (1+r)^-n]
Monthly Lease Payment, PMT = (0.02*1500000) / [1- (1+0.02)^-36]
Monthly Lease Payment, PMT = 30000 / [1- (1.02)^-36]
Monthly Lease Payment, PMT = 30000 / [1- 0.4902]
Monthly Lease Payment, PMT = 30000 / 0.5098
Monthly Lease Payment, PMT = $ 58,849 per month

b)
Total Annual Lease Earning = 58849*12 = 706,188
Depreciation = 200,000
Return = 706188 - 200000 = 506188

Total Return = 706188 / 1500000 = 47.08%
%age to Dep = 200000 / 1500000 = 13.33%
%age Rate for opportunity cost = 506188 / 1500000 = 33.75%