The S.S.

Kuniang

Alexander Challinor/Jorge Puell

EBGN 560-Decision Analysis
9/17/2010
Case Introduction:

The main focus of the S.S. Kuniang case study is how the New England Electric
Services Company will supply their four power plants located on the eastern
seaboard with coal. The N.E.E.S. requires four million tons of coal to be delivered to
its four power plants by shipping freight every year.

In order to meet current coal demand N.E.E.S. has chartered the vessel, “Marine
Electric” from the Universal American Barge Association. In addition N.E.E.S. has a
shared contract with Pennsylvania Shipping Company for General Dynamics to
construct a coal transport ship, the GD-1, which will be capable of transporting 2.25
million tons of coal per year. N.E.E.S. shares the contract with Pennsylvania
shipping company because P.S.C. has great knowledge with the shipping industry,
thus minimizing N.E.E.S.’s risk.

Future Demand:

N.E.E.S. will need an extra ship to carry the extra coal not shipped on the GD-1.
There are several options N.E.E.S. can take in regard to future prospects for their
shipping dilemma. The main focus of this report is to try and choose which option
will give the best outcome for the company.

Null Option: this option would require N.E.E.S. to continue the outsourcing of the
shipping to U.A.B.C. or the lowest cost provider and pay them to ship any excess
coal not carried by the GD-1. Since this is the base solution, the NPV is equal to
zero.

GD-II: another option is to contract a second ship from General Dynamics, at the
same cost and capacity as the GD-1; $70 million and 36,250 tons of coal
respectively. This second ship, while not always at full capacity by N.E.E.S., would
be able to fill its excess space with coal for other companies or grain shipments
sponsored by the U.S. government. This option yields a NPV of 2.1 million more than
the first option.

S.S. Kuniang: the final option explored by N.E.E.S. would be to acquire the S.S.
Kuniang, which the previous owners have declared a total loss after running
aground. N.E.E.S. can bid on the ship and if won, repair it and use it to haul the
remaining coal. One caveat to this bidding strategy is that it is a sealed bid auction.
N.E.E.S. can make only one bid and they are not allowed to see what other
companies may bid. Bidding probabilities are shown in the table below.

N.E.E.S. Bid Chance of Winning Bid

$3,000,000 5%
$4,000,000 15%
$5,000,000 25%
$6,000,000 40%
 $7,000,000 55%
$8,000,000 70%
$9,000,000 85%
$10,000,000 100%
Valuation:

The minimum cost of repairs to the S.S. Kuniang is estimated to be $15 million.
According to U.S. Code Title 46, Section 14, the cost of repairs must be three times
the cost of the salvage value for the ship to operate between US ports once it is
restored. The valuation of the ship is determined by the U.S. Coast Guard. It is
believed there is only a 30% chance that the ship will be valued at salvage ($3
million) and a 70% chance it will be valued at the auction price ($4-10 million). The
prospect of the S.S. Kuniang passing US code is heavily dependent on the value the
coast guard places on it and the auction amount.

Self Unloader?

N.E.E.S. has the option to install self unloading equipment onto the vessel; the cost
of this equipment is $21 million. The NPV of the S.S. Kuniang with and without the
self loading equipment are $46 million and 41.75 million respectively not including
the cost of bid or repairs. This option (to install/not install) may factor heavily into
N.E.E.S.’s decision once the coast guard gives its valuation of the S.S. Kuniang. In
addition, the self unloading option may count towards the repair cost of the vessel.

Final Outcome:

The expected monetary value is $10,157,050 when not installing the self loader and
bidding an amount of seven million dollars. There is a 55% chance we will win the
auction and an expected value of 23.75 if we do not install the loader and the coast
guard values the vessel as salvage. Alternatively, if the Coast Guard values the
vessel at auction price, we will gain an expected value of 13.75. It is a bad idea to
install the self loader in any bid amount from 3 million to 10 million because your
repair cost is still 3 times the salvage value without the self loader; we still pass the
standards set by the Jones Act to operate commercially in the U.S. If we would not
win the auction at $7 million, then our best option would be the GDII with a NPV of
$2.1 million.

Influence Diagram:
 Bid Amount
Win Bid?

Payoff
Self Unloader?

Coast Guard EvaluationAmount

OptionsUnder Consideration

Decision Tree:
 F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
5.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 2
7.9
5
F
ALS
E 0
.0%
B
ran
ch#
1
1
3 1
3
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 2
9.7
5
T
RUE 0
.0%
B
ran
ch#
2
29
.75 2
9.7
5
F
ALS
E C
han
ceo
fwin
nin
gbid?
$3
0 3
.39
25
9
5.0
% 0
.0%
N
o
2
.1 2
.1
T
RUE B
idA
m ou
n t
B
id
0 1
0.1
575
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
1
5.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 2
5.1
5
F
ALS
E 0
.0%
B
ran
ch#
1
9 9
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 2
5.7
5
T
RUE 0
.0%
B
ran
ch#
2
25
.75 2
5.7
5
F
ALS
E C
han
ceo
fwin
nin
gbid?
$4
0 5
.55
75
8
5.0
% 0
.0%
N
o
2
.1 2
.1
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
2
5.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 2
2.3
5
F
ALS
E 0
.0%
B
ran
ch#
1
5 5
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 2
1.7
5
T
RUE 0
.0%
B
ran
ch#
2
21
.75 2
1.7
5
F
ALS
E C
han
ceo
fwin
nin
gbid?
$5
0 7
.16
25
7
5.0
% 0
.0%
N
o
2
.1 2
.1
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
4
0.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 1
9.5
5
F
ALS
E 0
.0%
B
ran
ch#
1
1 1
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 1
7.7
5
T
RUE 0
.0%
B
ran
ch#
2
17
.75 1
7.7
5
F
ALS
E C
han
ceo
fwin
nin
gbid?
$6
0 9
.08
6
0.0
% 0
.0%
N
o
2
.1 2
.1
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 1
6.5
%
N
o
23
.75 2
3.7
5
5
5.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 1
6.7
5
F
ALS
E 0
.0%
B
ran
ch#
1
-3 -3
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 1
3.7
5
T
RUE 3
8.5
%
B
ran
ch#
2
13
.75 1
3.7
5
T
RUE C
han
ceo
fwin
nin
gbid?
$7
0 1
0.1
575
4
5.0
% 4
5.0
%
N
o
2
.1 2
.1
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
7
0.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 1
3.9
5
F
ALS
E 0
.0%
B
ran
ch#
1
-7 -7
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 9
.75
T
RUE 0
.0%
B
ran
ch#
2
9
.75 9
.75
F
ALS
E C
han
ceo
fwin
nin
gbid?
$8
0 9
.76
5
3
0.0
% 0
.0%
N
o
0 0
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
8
5.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 1
1.1
5
F
ALS
E 0
.0%
B
ran
ch#
1
-1
1 -1
1
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 5
.75
T
RUE 0
.0%
B
ran
ch#
2
5
.75 5
.75
F
ALS
E C
han
ceo
fwin
nin
gbid?
$9
0 9
.79
25
1
5.0
% 0
.0%
N
o
2
.1 2
.1
F
ALS
E 0
.0%
Y
es
7 7
3
0.0% In
sta
llS
elfL
o ad
er
S
alv
age
0 2
3.7
5
T
RUE 0
.0%
N
o
23
.75 2
3.7
5
10
0.0
% U.S
.Co
astG
uardV
alu
ation
Y
es
0 8
.35
F
ALS
E 0
.0%
B
ran
ch#
1
-1
5 -1
5
7
0.0% In
sta
llS
elfL
o ad
er
A
uctionPric
e
0 1
.75
T
RUE 0
.0%
B
ran
ch#
2
1
.75 1
.75
F
ALS
E C
han
ceo
fwin
nin
gbid?
$
10
0 8
.35
0.0
% 0
.0%
N
o
2
.1 2
.1
D
ecision
S
SKunia
ng
1
0.1
575
F
ALS
E 0
.0%
G
D -2
2.1 2
.1
F
ALS
E 0
.0%
N
ull
0 0
Sensitivity Analysis:

An interesting analysis can be performed with respect to the ratio of the Jones Act.
In the original act the cost of repairs must be three times the cost of the salvage
value for the ship to operate between US ports once it is restored. We can vary this
ratio by making the repairs range from 0 to 6 times the cost of salvage value,
increasing then decreasing the expected value correspondingly.

In the figure above, we vary the salvage value percentage chance the coast guard
places on the vessel. As the chance of the salvage title increases the expected
value increases.

Below we show the change in the cost of the self unloader. As mentioned in the
analysis above, the cost of the unloader doesn’t come into play at all in the regular
analysis; It only starts to come into effect when the value goes below 41.75 (the net
present value without the self unloader).