Transportation Research Part D 40 (2015) 87–96

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Transportation Research Part D

journal homepage: www.elsevier.com/locate/trd

The evaluation of investments efficiency of SOx scrubber

installation
Irina Panasiuk ⇑, Liudmila Turkina
Klaipeda University, Marine Engineering Department, Bijunu Str. 17, Klaipeda LT-91225, Lithuania

a r t i c l e i n f o a b s t r a c t

Article history: The article analyses the investments efficiency of sulphur oxide (SOx) scrubber installation
Available online 25 August 2015 to comply with the requirements of MARPOL 73/78 Annex VI, which sets 0.1% SOx limits in
2015 in Emission Control Area (ECA) and 0.5% in 2020 globally. There are two most realistic
Keywords: technologies to reduce SOx emission suitable for existing fleet: low sulphur fuel; scrubber.
MARPOL 73/78 Mentioned technologies are compared and economic issues of each are analyzed in the
Low sulphur marine gas oil article. The comparison of the technologies shows that no matter which technology will
Scrubber
be selected each will require the additional costs: capital and operating costs, loss of profits
Investment efficiency
NPV
due to the reduce of cargo capacity. That is why the technology introduction will be con-
Payback period sidered as investments in the article. Each of mentioned technology has certain specific of
the investments. Therefore, the evaluation of the investments efficiency should be carried
out by comparing the different technologies (in our case scrubber and low sulphur fuel)
that meet the requirements of MARPOL 73/78. Investments efficiency in technology will
be evaluated by cash flow modeling during the billing period covering the time interval
from the technology introduction to the completion of use. The concept of cash flow allows
forming a systematic view of funding and determining the dynamics of the financial effects
at the each stage of technology introduction. In turn, a comparative analysis of technolo-
gies will identify the best option of investment applying to a particular ship.
Ó 2015 Elsevier Ltd. All rights reserved.

Introduction

Annex VI of MARPOL 73/78 which will entered into force in a short time sets limits on sulphur oxides (SOx) from ship
exhausts: to 0.1% by 2015 in ECA and globally to 0.5% by 2020. Annex VI contains provisions allowing for special SOx ECA
to be established with more stringent controls on sulphur emissions. The existing ECA include the Baltic Sea, the North
Sea, the North American, including most of US and Canadian coast and the US Caribbean, including Puerto Rico and the
US Virgin Islands (IMO, 2008). ECA regulations are now enforced across many countries and there are further designated
zones under discussion. In the medium and long term it can be expected that most of global trading centers will be pass
through ECA (Asariotis and Benamara, 2012). Therefore, an increasing number of scientists are exploring mentioned issues
in their researches. Most attention is paid to assessments of abatement technologies and alternatives for complying with
MARPOL 73/78 Annex VI regulations. Several researchers emphasize and illustrate the great environmental improvement
potential of the different technologies and alternative fuels. Several authors also highlight the complicated issue of selecting

⇑ Corresponding author. Tel.: +370 60423666.

E-mail address: irina.panasiuk@gmail.com (I. Panasiuk).

http://dx.doi.org/10.1016/j.trd.2015.08.004
1361-9209/Ó 2015 Elsevier Ltd. All rights reserved.
88 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96

optimal measures to comply with new requirements (Cullinane and Bergqvist, 2015). Most of researches contain analysis of
environmental impact of ship exhaust and ways to reduce harmful emission (Caiazzo et al., 2012; Fridell et al., 2008; Kennan,
2014; Lack et al., 2012). According to Annex VI of Marpol 73/78 the regulations will be applicable not only to new building
but also to existing ships. According to most researchers (Brynolf et al., 2014; Fridell et al., 2008; Kjølholt et al., 2012; Kruse,
2012; Schinas and Stefanokos, 2014; Tai and Dung-Ying Lin, 2013) SOx restrictions will bring considerable financial and tech-
nological challenges especially for modernization of existing ships. That is why there is a need to analyze SOx emission
reduction technology installation economic and technological impact on existing fleet.
Some aspects of problematic of technology installation are analyzed in articles. However the method of the evaluation of
investments efficiency described insufficient.
To ensure compliance with mentioned requirements shipowners may choose one of the most appropriate technologies:
fit an exhaust gas cleaning system or use any other technological method to reduce SOx emissions (IMO, 2008). Presently, the
most realistic technology to reduce SOx of ship exhausts is:

Low sulphur fuel: according to marine fuel standards (ISO 8217) intermediate fuel oil IFO contains <3.5% SOx; marine die-
sel oil MDO <1.0% SOx; low sulphur marine gas oil LSMGO <0.1%. In our case, the restriction in ECA is equal 0.1%. Thus,
only LSMGO will be analyzed in the article (ISO 8217: 2012).

Liquefied natural gas (LNG).

Scrubber.

Each of mentioned technology has advantages and disadvantages which are listed in Table 1 (Kjølholt et al., 2012; Kruse,
2012; McGill et al., 2013; Germanisher Lloyd, 2013; Brynolf et al., 2014):
SOx reduction technologies are a common and proven technology on land. That is why the cost of SOx reduction at sea
generally being lower because the easiest and least expensive measures have already been taken on land in most EU coun-
tries (Kageson, 1999). On the average the costs of typical measures of ships SOx emission reduction is from 0.52 to 4.52 $/kg
(Wang and Corbett, 2007). Speaking about capital costs of scrubber installation for the particular ship, the costs of technol-
ogy introduction is from 1 to 5 million $. It is noteworthy that the costs of each technology can vary greatly depending on the
specific of ship operating (being in ECA, amount of fuel consumption). Despite the fact that mentioned technologies are well
known, there is not enough practical knowledge of its economic efficiency. The cost-effectiveness of different technologies
(LNG, LSMGO, scrubbers) was studied by many scientists and equipment manufacturers (Schinas and Stefanokos, 2014; Tai
and Dung-Ying Lin, 2013; Walter and Wagner, 2012; Wang and Corbett, 2007; Wärtsilä, 2010, 2013; Yang et al., 2012). There
are several ways to achieve the compliance with SOx requirements and many articles contain a comparison of advantages
and disadvantages of technologies of SOx reduction (Brynolf et al., 2014; Glosten, 2011; Kruse, 2012). Mainly, the offered
cost-benefit analysis of SOx reduction technologies is based on some key assumptions, related to ship and route character-
istics (Cullinane and Bergqvist, 2015) Also, others authors investigate economic issues SOx scrubber installation but there are
still not enough recommendations of assessment of technology installation efficiency (SOCP, 2011; Yang et al., 2012). How-
ever, there is still a lack of information about the investments aspects of life cycle of technology introduction (cost elements,
specific of return of investments, billing period and etc.). Issues of technology efficiency are investigated only by calculating
payback period without specifying the method of calculation. For this reason, the article analyzes the method of assessment
of scrubber installation efficiency in comparison with using of LSMGO (see Table 2).
According to Table 1, no matter which technology will be selected by the shipowner the additional expenses (capital and
operating costs, loss of profits due to the reduce of cargo capacity) cannot be excluded. However, it should be noted that each
of mentioned technology has certain specific of the investments. Thus, in accordance with the data presented in Table 1, the
use of LSMGO requires comparatively low capital costs. However, the operating costs are considerably higher because of

Table 1
The comparison of SOx reduction technologies.

Criteria LSMGO LNG Scrubber

Advantages
Simple to use (if modification is not
required)

Less engine maintenance

Suitable for new building and retrofit
Disadvantages
Availability is already limited

More expensive than IFO

Reduce engine life if conversion is not
performed

Changeover time can add several
hours to the trip

Higher fuel consumption rate

Reduce 90–100% SOx, 60% NOx, 70%
PM and 25% CO2

No additional abatement measures
are needed

Requires a modification of ship (engi-
nes replacing, specially designed sys-
tems, larger fuel tanks, gas sensors
and etc.)

Retrofit is difficult and expensive

Lack of infrastructure and LNG is cur-
rently limited

Reduce 90–99% SOx and 60–85% PM

Allows using IFO

Comparatively quick payback

Suitable for new building and retrofit

Not a really proven and well used
technology yet

Significant investment cost

Additional energy during operation,
discharge of water and etc.

Reduced income due to less cargo
capacity

Insignificant reduction of NOx
 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96 89

Table 2
The basic principles of the evaluation of the investments efficiency.

Principles Description
Possible option In our case, LSMGO or scrubber
Project life cycle Consideration of the expected period until the end of ship operation
The most important factors The organizational and economic mechanism of each technology implementation. In our case, the additional
capital and operating costs, the savings in fuel costs
Cash flow modeling The planning of incomes and outflows by modeling of billing period cash flows of technology introduction
Maximum effect In our case, the possible lowest cost of technology introduction
Time factor Accounting the outflows at the different time by using a discount rate of the costs of capital
Future costs and benefits Accounting the operating costs and loss of profits (cargo capacity reduction, out of operation during installation,
time wasting to switch fuel from LSMGO to IFO) associated with the LSMGO or scrubber introduction
Comparability of the comparison Using a unified system of prices, taxes, and other parameters of the economic environment
conditions
The need of turnover Self-financing of the project or lending by the Bank
The effects of inflation Accounting of changes in prices of products or resources of the project billing period
Risks The influence of uncertainties in the project. In our case, the probability of a total loss of investments in the case of
changed Marpol 73/78 requirements

LSMGO price. Thereby, despite the fact that capital investments are insignificant, LSMGO technology is expensive in the
medium and long term. In turn, LNG includes both the initial cost of the conversion, and the additional costs to cover the
differential costs of IFO and LNG. The scrubber installation involves significant capital costs, but under certain conditions
it may be more cost-effective solution in the medium and long term (DNV, 2012).
It should be noted, that the received effect of the technology introduction should be comparable to evaluate the efficiency
of investments. In other words, the result (reduction of SOx emissions) from the introduction of one of mentioned technolo-
gies should match the result obtained by introducing of another. The possibility of applying the mentioned technologies on
existing ships is analyzed in the article. Therefore, we proceed from the assumption that compared technologies should be
applicable for existing ship retrofit. However, the technology of LNG due to significant modifications of ship (engines replac-
ing, specially designed systems, larger fuel tanks, gas sensors and etc.) in most cases does not apply to the ship which is
already in operating. Moreover, this technology ensures compliance with the requirements of MARPOL 73/78 not only in
case of SOx, but also NOx, PM, CO2. In turn, technologies of LSMGO or scrubber largely focused on SOx reduction with insignif-
icant effect on NOx emission, and therefore cannot be comparable with LNG. The possibility to comply with the requirements
of MARPOL 73/78 on SOx limits will be taking into account to ensure the comparability of technology. Therefore, the tech-
nology of LNG will not be analyzed in the article. The evaluation of the investment efficiency will be done through the com-
parison of two technologies: LSMGO and scrubber.
There are two types of scrubbers: wet and dry. Wet scrubbers are more acceptable for ships because of the lower price
and smaller dimensions of units. That is why only wet scrubbers will be analyzed in the article. Currently, the wet SOx scrub-
bers reached an industrial scale and there are a number of manufacturers offering their equipment including such companies
as Alfa Laval Aalborg, Clean Marine, Couple Systems, DuPont BELCO Clean Air Technologies, Green Tech Marine, MAN Diesel
and Turbo, Marine Exhaust Solutions, Wärtsilä Hamworthy Krystallon. There are three main types of wet scrubbers which
are offered by manufacturers: the open loop which uses only sea water; the close loop which uses fresh water mixed with
caustic soda; the hybrid which has both benefits of open and closed loop (ABS, 2013; DNV, 2012). The open loop scrubber
system is rather simple and cheaper than close loop. However, it cannot be operating in area with restricted water outlet
criteria like Baltic Sea. In turn of hybrid system, there are no significant weight and dimensional characteristics differences
between close loop and hybrid system. Mentioned types of wet scrubber are comparable with some difference in price (open
loop scrubbers are 20% cheaper than close loop) which is taken into account when calculating capital cost of scrubber
installation. As an example, the estimation of close loop scrubber installation efficiency is presented in the article.

Basic principles of investments efficiency evaluation

The basis of evaluation is a classic development of investments project. Preparation and analysis of investments in real
assets significantly depends on the type of investments. In turn, the investments type is determined by the required effect
which will be solved. As it is known the investments in SOx reduction technology is a capital costs in order to ensure
compliance with the MARPOL 73/78 requirements and, as a consequence, to be able to operate the ship in the forthcoming
period. Therefore, the mentioned investments can be attributed to the necessary costs, which cannot be avoided if ship will
be operated after 2015 in ECA or after 2020 globally. As any investments, the selection of a particular SOx reduction
technology implies the spending of money, with the aim of making a profit or achieves other positive effects. Despite the
fact that such investments do not bring the profit, one of the incentives to invest is still an efficiency of the technology
introduction. The mentioned efficiency is expressed by the compliance with MARPOL 73/78 requirements for the possible
lowest cost of technology introduction. In accordance with the specifics of the mentioned investments the following types
of its efficiency can be specified:
90 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96

Environmental efficiency of investments in technology which is expressed by the less negative impact on the environment.
Respectively, if the technology allows complying with the MARPOL 73/78 requirements, the investments can be consid-
ered as environmental effective.

Financial efficiency of investment in technology which is expressed by the lowest capital and operating costs in compar-
ison with other technologies. Respectively, if the introduction of technology allows to achieve the best results, this invest-
ments can be considered as financial effective.
As a rule, the evaluation of the investments efficiency is carried out by comparing the situation ‘‘with” or ‘‘without it”. In
the case of the technology introduction, the investments must be implemented in any case. Otherwise, the owner will lose its
ability to operate ships in ECA. Therefore, the evaluation of the investments efficiency should be carried out by comparing
the different technologies that meet the requirements of MARPOL 73/78. Regardless of the technical, technological, financial,
and other features of the selected technology, the basis of the evaluation of the investments efficiency is based on the fol-
lowing principles (Mbybcnepcndo 'royovbrb et al., 2013).
On condition, if the evaluation of the investments efficiency was carried out by taking into account all mentioned prin-
ciples, such evaluation can be considered as sufficient and adequate.

Criteria of investments efficiency in technology of SOx reduction

Investments in technology, like any other investments activities should be directed to ensure the implementation of the
most effective forms of capital investments. The positive effect of investments of scrubber installation appears much later
after technology introduction. Therefore, such investments tend to have significant level of risk, due to the high probability
of a total loss of investment in the case of changed Marpol 73/78 requirements. The required rate of return to compensate the
risk of investments can be calculated by using the capital assets pricing model CAPM (Ross et al., 2013):

RR ¼ RFR þ b  ðER  RFRÞ ð1Þ

where RR = required rate of return; RFR – risk-free rate; ER = expected rate return; b = risk measurement factor.
According to the CAPM, the expected return of investments equals the rate on a risk-free investments plus a risk pre-
mium. If this expected return does not meet required return, the investment should not be undertaken. Investments are sub-
ject to many risks that may come from the economy, the nature of the market, the industry in which a company operates or
the company itself. However just one of these risk is universal (inflation which will be described in Section ‘The cash flow
modeling of investments in technology’). It is very difficult to predict others risks in practice. But risk premium may be set by
the shipowner in accordance with actual experiences of ship modernization. The level of investments risk, which implies the
risk of unexpected losses, requires providing ‘‘risk premium”. In our case, the investment risk of technologies (scrubber,
LSMGO) to a greater extent will be expressed in terms of tightening requirements of SOx reduction and as a consequence
will result in unsuitability of the mentioned technologies. However, the risk level of scrubber and LSMGO is equivalent that
allows ignoring this risk when comparing the investments in mentioned technologies. The main conditions of profitability
are to ensure higher than the average annual inflation rate, higher than profit of alternative solution (based on time) and
higher than the interest rate of the deposit. In this case, the maximum profitability is ensured by the choice of technology
with the highest positive effect.
Thus, investments in technology have a special mechanism of assessment of profitability by taking into account the pay-
back period, the level of risk, the expected inflation rate, the prospects of tax and etc. The main criteria of a particular invest-
ments choosing are the following rules (Stopford, 2009; Hubner, 2008): compliance of funding terms; risk balance;
maximum profitability; conditions of profitability: return on investment; compliance with strategy of company. In case of
investments in technology it is necessary to take into account the specifics of its implementation. Due to the funding differ-
ence of the technology implementation, the terms of incomes (savings in fuel costs) and outflows (capital CAPEX and oper-
ating OPEX expenditures) should be identified to ensure a comparable assessment of technologies. The determining factor
will be the maximum payback period, during which will be assessed the profitability of technologies.

Billing period of investments efficiency evaluation

Investments efficiency in technology will be evaluated during the billing period t, covering the time interval from the
technology introduction to the completion of use. In our case, the beginning of the billing period is determined by the date
of introduction of technology (scrubber or LSMGO). The completion of use the technology is established in accordance with
the posible operational period of ship. Billing period is divided into stages (t0, t1, t2. . . tn) and main economic indicators are
defined. In accordance with investments specific of each technology, the stages are defined as follows:

1. Stage of introduction of technology.

2. Stage of operating.
3. Stage of return on investment.
4. Stage of completion.
 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96 91

The first stage is period of technology introduction t0. In the first stage the main are capital costs. In the case of LSMGO,
the capital costs are insignificant and not taken into account in calculations:
CAPEXfuel ffi 0; $: ð2Þ
In case of scrubber, CAPEX consist costs of equipment, design, installation and documentation:
CAPEXscrub ¼ C equipment þ C design þ C installation þ C documentation ; $ ð3Þ
where C equipment – cost of scrubber equipment, $; C design – costs of scrubber design, $; C installation – cost of scrubber installation
including costs of crew and the lost profits since the vessel will be out of operation during installation (2–4 weeks), $;
C documentation – documentation costs, $.
In case of LSMGO OPEX, significant costs of fuel will be present during the operating stage and will increased the oper-
ating costs of ship. Difference of fuel costs are directly dependent on the time of ship operating in ECA. Further, the time in
ECA will be taken into account by factor T ECA ½0 . . . 1:0. For example, if ship is operated 50% in ECA the factor T ECA ¼ 0:5.
Either, if the ship is not operated 100% time in ECA, there will be additional costs C switching of switching from IFO to LSMGO
(loss of time to switch the fuel supply system). These costs are also calculated by taking into account factors T ECA ½0 . . . 1:0.
Thus, operating costs can be calculated as follows:
OPEXfuel ¼ Gfuel ðC LSMGO  C IFO Þ  T ECA þ ðC switching  ð1  T ECA ÞÞ; $=year: ð4Þ
where: Gfuel – annual fuel consumption, t/year; C LSHFO – the price of LSMGO, $/t; C HFO – the price of IFO, $/t; C switching – cost of
fuel switching from LSMGO to IFO depending on time in ECA T ECA , $/year.
The main parameter of Eq. (4) is difference between the price of LSMGO and IFO which mainly depends on current crude
oil. As it is known, the price of crude oil is usually very volatile (see Fig. 1).
However, the price can be forecasted by using adjusted moving average of crude oil price for the last period X (Einloth,
2009). In this case, the assessment of future price should be done by using statistical data of fuel price (the rate of price).
Thus, the future fuel price FC fuel can be calculated as following.
FC fuel ¼ C fuel  RP X ð5Þ
where C fuel – current fuel price, $/t; RP X – the rate of price for the last period X.
In the case of scrubber, OPEX will consist costs of maintenance, reagents, water cleaning, additional energy and losses due
to the loss of ship cargo capacity:
OPEXscrub ¼ C scrub maint: þ C scrub NaOH þ C scrub FW þ C scrub En þ ðmscrub  ccargo  nmÞ; $=year ð6Þ
where C scrub maint: – costs of scrubber maintenance, $/year; C scrub NaOH – cost of NaOH, $/year; C scrub FW – cost of FW, $/year;
C scrub En – cost of energy, $/year; mscrub – scrubber system weight, kg; ccargo – cost of cargo shipment, $/kg * nm; nm – truck
nautical mile per year, nm/year.
The third stage is the period when CAPEXscrub þ OPEXscrub become equal to OPEXfuel and further due to the differences
between LSMGO and IFO price the operating of scrubber will generate the return on investments EBITDA (Earnings Before
Interest, Taxes, Depreciation and Amortization):
EBITDAscrub ¼ Gfuel ðC LSMGO  C IFO Þ  T ECA  ðC switching  ð1  T ECA ÞÞ  CAPEXscrub  i; $=year ð7Þ

Fig. 1. Crude oil price from 2003 to 2015. Source: www.opec.org.

92 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96

Payback period PBP is directly depended on the differences of LSMGO and scrubber CAPEX and OPEX:
CAPEXscrub þ OPEXscrub
PBP ¼ ; year ð8Þ
OPEXfuel
The fourth stage is the period of completion which are determined by the maximum posible period of ship operating. This
period are limiting the possible income of investments. Thus, the maximum payback period should not exceed ship operat-
ing period:
PBP 6 T ship exp: ; year ð9Þ
where T ship exp: – maximum possible ship operating period, year.
However, to ensure the profitability of investments in scrubber, the payback period should be shorter than T ship exp: what
allows getting profit. The period after PBP and before T ship exp: will characterize the investments efficiency. The recommended
maximum PBP is 5 years. Then:


Max PBP 6 5; year ðaÞ
ð10Þ
T ship exp: P Max PBP; year ðbÞ
The different stages of investments are characterized by multi-directional flows of incomes and outflows. Thus, on the
stage of introduction there are only outflows (CAPEX). Subsequently, during the operating of scrubber incomes of fuel price
saving will exceed OPEX. Moreover, the mentioned incomes will gradually compensate CAPEX of scrubber and at this stage
will be established T payback . Further, the mentioned comparison will be represented as cash flow modeling.

The cash flow modeling of investments in technology

As it is known, financial operations generate the cash flow (payments or receipts) distributed during the period. The con-
cept of cash flow allows forming a systematic view of funding at all stages of technology introduction. The cash flow mod-
eling allows determining the dynamics of the financial effects at the each period of technology introduction. In turn, a
comparative analysis of the two technologies (LSMGO, scrubber) will identify the best option of investments applying. Fur-
ther, the value of cash flow related to the time t will be denoted by f ðtÞ. At each stage cash flows will be characterized by
(Mbybcnepcndo 'royovbrb et al., 2013; Bopo,meda, 2008; Ross et al., 2013; Australian Government, 2006):

Income (f in ðtÞ).

Outflows (f out ðtÞ).

Net inflow (f net ðtÞ).

Discounted Cash Flow (f DCF ðtÞ).

Net Present Value (NPV).

Payback period (PBP) and b discounted payback period (DPBP).

Return on Investments (ROI).

The above parameters will be used to assess investments efficiency. In our case, the income is equal to the total volume of
receipts at this stage:
f in ðtÞ ¼ EBITDAscrub ; $ ð11Þ
Outflow will be equal to the total volume of payments at this stage:
f out ðtÞ ¼ CAPEXscrub þ OPEXscrub ; $ ð12Þ
Net inflow will be equal to the difference between incomes and outflows, which in the case of comparison LSMGO and
scrubber is determined by:
f net ðtÞ ¼ f in ðtÞ þ f out ðtÞ; $ ð13Þ
The basis for discounting is the discount rate E, expressed in unit or percent per year. As is known, the inflow, outflow or
net inflows discounting at time t is carried out by multiplying its value f DCF ðtÞ by a discount factor a (t):
1
aðtÞ ¼ 0
ð14Þ
ð1  EÞtt
f DCF ðtÞ ¼ aðtÞ  f ðtÞ; $ ð15Þ
The net present value is equal to the difference between all cash incomes and outflows at the present. NPV shows the
amount of cash that the investor expects to receive from the investments. In turn, investments in technology will be consid-
ered as effective if NPV is greater than other technology. NPV can be calculated as following:
X
T
f net ðtÞ
NPV ¼ 0
;$ ð16Þ
t¼1 ð1  EÞtt
 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96 93

Simple and discounted payback periods are the duration of time until the moment of return on investments. The calcu-
lation of PBP is based on the net cash flows (simple or discounted) and shows the period necessary to return the investments:
f out ðtÞ
PBP ¼ ; year ð17Þ
f in ðtÞ

f out ðtÞ
DPBP ¼  aðtÞ; year ð18Þ
f in ðtÞ
Return on investments is equal to the ratio of incomes and outflows of the technology introduction:
f in ðtÞ  aðtÞ
ROI ¼  100; % ð19Þ
f out ðtÞ
Considering, the specificity of technology investments the mentioned parameters allows:

Determine the net profit during the billing period.

Set the earliest time in the billing period, after which the current net cash flows becomes and stay positive.

Calculate return on investments during the billing period.

It should be noted that the time factor influence has a determining impact on the evaluation of the investments efficiency.
In turn, the decision to invest directly depends on results of the mentioned evaluation.

Example of the evaluation of the investments efficiency

The evaluation of the investments efficiency is made on the basis of data of scrubber installation project of particular ship
received from the shipowner (DFDS, 2014). The main objective of cash flows modeling is to create an optimization model of
the efficiency factors calculation and identification of the most cost-effective technology, taking into account the specifics of
a particular ship. In our case, the optimization model of investments cash flow has follows conditions:
8
>
> NPV ! max; RIO ! max the maximum possible profit of the technology introduction;
>
>
>
> Xn
>
>
> f net ðtÞ ¼
>
ðf in jt þ f out jt Þ; f net jt P 0 net cash flows are always positive;
>
>
>
>
j¼1
>
> X
>
>
m
< f in ðtÞ ¼ f in jt ; f in jt > 0 incomes are always positive;
j¼1
>
>
>
> Xm
>
>
>
> f out ðtÞ ¼ f out jt ; f out jt 6 0 outflows are always negative;
>
>
>
> j¼1
>
>
>
> DPBP ! minthe minimum discounted payback period;
>
>
:
DPBP 6 T ship exp: the discounted payback period does not exceed the maximum period of ship operation:
Solution of the optimization is a vector ðf DCF net1 ; f DCF net2 ; . . . ; f DCF netT Þ, where NPV and RIO takes the maximum and DPBP
minimum value. Income data of particular ship (DFDS, 2014):

Cargo ferry type of ship.

Annual fuel consumption 15000t.

Operating in SECA 100%.

Amount of Fresh water 9720 m3/year.

Amount of NaOH 9720 m3/year.

Cost of scrubber equipment 4020568 $.

Cost of scrubber installation 2010284 $.

Annual maintenance cost 27166 $/year.

Price of IFO 322 $/mt; Price of LSMGO 557 $/mt DC fuel ¼ 235 (Bunkerworld, 2015-02-23), 340% fuel price difference sce-
nario DC fuel ¼ 800 $=mt and 170% scenario DC fuel ¼ 400 $=mt.

The difficulty to predict trends in fuel prices has been emphasized as the most critical in the majority of studies. Over
time, the price difference between high-sulphur IFO and MGO fluctuated between 30% and 250% with a long term average
of 93% (Bergqvist et al., 2015). It is expected that after 2015 the price of MGO will rise because of lack of fuel on market. That
is why offered methodology consist scenario of 340% and 170% difference of IFO and MGO price. The value of forecast price of
fuel is indicative, in order to show how the efficiency of investments in technology will be affected by changed price of fuel.
The results are presented in the graphs (see Figs. 2 and 3). Scrubber operating costs much less than price differential of
LSMGO and IFO and largely contains costs of maintenance, reagents NaOH, freshwater FW and additional energy (see Fig. 2).
94 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96

Fuel
LSMGO NaOH
Energy
Fresh Water
Maintenance
Scrubber Decrease of cargo
Fuel Swiching
Bank deposit
0$ 25,00,000 $ 50,00,000 $ 75,00,000 $ 1,00,00,000 $

Fig. 2. Comparison of annual operating costs of scrubber and LSMGO.

5,00,00,000 $
Billing period
4,50,00,000 $

4,00,00,000 $

3,50,00,000 $
Incomes

3,00,00,000 $

2,50,00,000 $

2,00,00,000 $

1,50,00,000 $ Investment
1,00,00,000 $ period

50,00,000 $

0$ x x xx
0 1 2 3 4 5
Outflows

-50,00,000 $
Payback period
-1,00,00,000 $
Cash flow Discounted cash flow
Discounted cash flow pesimistic scenario Discounted cash flow optimistic scenario

Fig. 3. The modeling of cash flows.

However, it should be noted that the scrubber system has significant size and weight, which reduces cargo capacity and
brings additional costs in the form of loss profits. In the calculations it is assumed that the introduction of the scrubber
reduces the cargo capacity of ship equal to the total weight of the scrubber, and loss of profit will be equal to the cost of
transportation of cargo weight equal to the scrubber system, taking into account the possible distance (ton per nautical miles
per year). All mentioned condition should be taking into account when modeling cash flows (see Fig. 3).
Cash flows modeling allow estimating the efficiency of investments in scrubber and distributing all the incomes and out-
flows during the entire billing period (5 years). Fig. 3 shows that the largest outflows of scrubber introduction occurred at the
beginning of the billing period (buying the equipment and installation). However, CAPEX will be already recouped in the sec-
ond year by the possibility of using cheaper fuel. Next 3 years (from 2nd to 5th year) of scrubber operation will present the
profit in the form of fuel price differential. Thus, even without fuel price rise, investments in scrubber will allow to generate
profit from the scrubber introduction at least 3 years. The amount of profits directly depends on the difference in fuel prices.
For example, the profit is about 130% when calculating the current fuel prices. Using different scenario of fuel prices, men-
tioned profit may rise from 216% to 522%. Thus, taking into account the fuel price rise, investments in scrubber can be
recouped in the first year of its operating (see Fig. 4).
The rise in fuel price is expected in the future because of lack of LSMGO on the market. Thus, for more realistic forecasts,
at least two scenarios of rise in fuel prices must be used in calculations that allow forecasting the volatility of fuel price. Tak-
ing into account the effect of time on the value of cash, the key efficiency indicators of investments (NPV, DPBP, ROI) will be
calculated on the discount methods by taking into account different fuel price scenario (see Table 3).
The PBP in scrubber economical study for DFDS cargo ferry is equal to 1.50 years (DFDS, 2014). The calculation was per-
formed at the pre-design phase and based on mentioned result was signed the contract of scrubber installation. In turn, PBP
obtained in the article is 1.57 years and DPBP 1.75 years. There is 17% difference between analyzed DFDS study results and
obtained in the article. This is due to the fact that the proposed method of evaluation contains more accurate data of CAPEX
and OPEX of scrubber installation. Mentioned data is cargo capacity reduction, out of operation during installation, time
wasting to switch fuel from LSMGO to IFO which are which are not included in most calculations.
 I. Panasiuk, L. Turkina / Transportation Research Part D 40 (2015) 87–96 95

Year
6
DPBP
5

0
100 200 300 400 500 600 700 800 900 1000 ΔCfuel,$/t

Fig. 4. The payback period of the scrubber taking into account the rise in price of fuel.

Table 3
Efficiency indicators of investments in scrubber reference to a particular ship.

Conditions 5 years NPV PBD DPBP 5 years ROI

$ year year %
Current price 11.712.988,51 1.57 1.75 130.06
170% scenario 19.494.579,42 0.57 0.63 216.46
340% scenario 47.040.033,96 1.13 1.26 522.32

Conclusions

The evaluation of the investments efficiency is carried out by comparison of two most realistic technologies (scrubber and
LSMGO). In this case, the maximum profitability of investments is ensured by the choice of technology with the highest pos-
itive effect. Investments effect is determined by factors of profitability: NPV, DPBP and ROI. It should be noted that the time
factor influence has a determining effect on the evaluation of the investments efficiency. Considering, the specificity of tech-
nology investments the mentioned factors allows: determining the net profit during the billing period; setting the earliest
time in the billing period, after which the current net cash flows becomes and stay positive; calculating how much in percent
the return on investments exceeds the costs of the technology introduction.
The example of use the proposed method of cash flows modeling is based on data of the particular ship (DFDS cargo ferry).
Unlike other studies (including analyzed scrubber project), the evaluation contains not only costs of scrubbers unit, its oper-
ation and installation. Costs of profit loss also are included in the calculation. Taking into account the effect of time on the
value of cash, NPV, DPBP, ROI was calculated on the discount methods. Thereby the result of presented method is 17% higher
than analyzed scrubber project data. This is due to the fact that the proposed method of evaluation contains more accurate
data of CAPEX and OPEX of scrubber installation. Mentioned data are cargo capacity reduction, out of operation during instal-
lation, time wasting to switch fuel from LSMGO to IFO which is not included in most calculations. Also the cash flows mod-
eling clearly show that, the decision to invest on the basis of undiscounted cash flows increases the risk of ineffective
investments. Difference between PBP and DPBP is 11%. Furthermore, current price, 170% and 340% scenario of fuel prices
is used in the calculation. The mentioned modeling allows estimating the efficiency of investments in scrubber and distribut-
ing all the incomes and outflows during the selected 5 years billing period. The largest outflows of scrubber introduction
occurred at the beginning of the billing period. However, initial costs will be already recouped in the second year of the bill-
ing period by the differences of fuel price and next years from 2nd to 5th will present the profit in the form of fuel price
differential. The current price scenario profit is about 130%. Taking into account the 170% and 340% scenario of fuel prices,
the amount of profits may rise from 216% to 522%. According to obtained results, it can be argued that investments in scrub-
ber installation are effective under any scenario in fuel prices. Thus, the proposed method of evaluation allows forecasting
cash flows by taking into account all significant cost elements including the volatility of the fuel price.

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