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Compute excel template and calculate findings illustrated in a case study essay

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7BSP1076 Managing Financial Value Drivers
Coursework, Semester B 2019-20
Assessment weighting 100%
BIG Rederij NV
B.I.G. Rederij NV
B.I.G. Rederij NV have a problem.
They are in process of deciding whether to invest in an ultra large container vessel (ULCV)
similar to the Maersk Line ship Emma shown in the picture below.
B.I.G. Rederij NV is a Dutch shipping company which operates a number of bulk carriers and
container ships between destinations around the world. Even larger ships than the Maersk
Emma which have a gross tonnage of around 200,000 tons and capacity of 24,000TEU1 are
now beginning to enter service.
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Note 1 TEU refers to ‘twenty-foot equivalent units’. These ships carry all their freight in steel containers of which there are two
sizes – 20 feet long and 40 feet long. Thus a ship with a capacity of 24,000TEU can carry 24k 20ft containers or 12k 40 ft
containers (or the equivalent mix of both sizes).
——————————————————————————————————-
This Case Study is a fictional representation of real events and has been prepared for discussion,
analysis and comment. It is not intended to describe either good or bad practice. This Case Study may
not be reproduced without the prior written permission of the author.
© Borlace Management Ltd – 2019
Fig1:The Emma Maersk: Gross Tonnage – 170,794 tons
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The logic is simple – larger ships have a cost advantage over smaller ships and are thus
more competitive.
Accordingly, the directors of B.I.G. Rederij NV believe they need to invest in a larger vessel
in order to remain profitable. The new vessel will operate solely between the Port of
Shanghai and the London Gateway port, a distance of 11,866nm, via the Suez Canal. The
vessel will carry containers bound for the UK and for destinations in mainland Europe. The
containers bound for mainland Europe will be loaded onto high-speed freight trains at the
Gateway Logistics Hub and continue their onward journey via the channel tunnel.
Similarly, for the return journey to Shanghai, the vessel will carry UK exports along with
exports from mainland Europe which will arrive at the Gateway Logistics Hub by high-speed
freight trains.
The operational aspects of the problem appear to be quite straight forward. However, there
are a number of business environment issues which give rise to uncertainty and risks.
There is, for example, the long running trade issues between the USA and China which are
having an impact on world trade and economic growth. Furthermore, world trade and
economic growth have been seriously impacted by the Covid-19 virus pandemic.
Global trade growth is shown in Fig 2 above. Growth averaged approximately 3.6% per
annum between 2000 and 2018. However, it is not clear what the growth rate will be in the
immediate future due to the issues identified above. AP Moller-Maersk are quoted in the
press2 as expecting global container demand to contract in 2020 with a fall in volume of up
Fig 2: World Tade Volume Index
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to 25% in the second quarter. Their pre-Covid-19 forecast was for growth of between 1%
and 3% for 2020.
In addition, the situation is further complicated by the UK exiting the EU with future trading
arrangements not yet agreed.
The latest Income Statement and Balance Sheet for BIG Rederij are shown in Appendix 1
and 2 respectively and their recent share price history is shown in Fig 3 below.
BIG Rederij shares are currently trading at €56.50 and the firms loan stock is currently
trading at €105.51 per €100.00 nominal giving an enterprise value of €12,416m. Their equity
Beta is estimated at 1.52 and the effective risk-free rate on Euro denominated financial
assets is 0.05%. The € is currently trading at $1.093 and the applicable Dutch corporate tax
rate is 12.50%4
.
The ULCV Project
The ship
The ULVC under consideration is a standard design of 198,000 gross tonnes from a major
South Korean ship builder. It will be named the BIG Bright Star and have a capacity of
20,000TEU. It will take two years to construct the vessel and complete sea trials and the
quoted price is $180m. A further $15.00m will be needed for crew recruitment and training.
—————————————
Note 2: Daily Telegraph, 14th May 2020
Note 3: All $ values given in this document relate to US$
Note 4: Assume that corporation tax is paid at the end of the year in which the liability arises.
Fig 3: BIG Rederij NV Share Price History
cents (€)
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The terms of business require BIG Rederij to make a stage payment of $90.00m at the end
of 2021 and the final payment of $90.00m at the end of 2022.
The annual depreciation charge will be based on the company’s normal practice of
depreciating ships over their estimated operational life using straight line method. The
anticipated operational life of the BIG Bright Star is 24 years with an end of life scrap value
of $10.00m.
Operating Revenues
BIG Bright Star will commence revenue operations in 2023. Although the BIG Bright Star has
a capacity of 20,000TEU, the company corporate planning department assume a load factor
of only 80% for the purpose of forecasting project revenues. Also note that the Bright Star
will only carry 40ft containers. Fig 4 shows the market rate for shipping a 40ft container
between the Port of Shanghai and the London Gateway and it can be seen that rates are
somewhat volatile. The planning department estimated rate for 2023 is $1,769 and, given
the level of uncertainty in global trade, this is expected to increase by only 1% per annum in
the years 2024-26 inclusive and 3% per annum thereafter.
Crew Costs
The standard crew for normal operations is 50 personnel although the company will recruit
53 personnel for each crew to allow for sickness etc. Two complete crews are required as
each crew will complete one return cycle between London and Shanghai followed by one
cycle ashore to allow for rest days in lieu of 24/7 duty whilst at sea plus annual leave with the
Fig: 4 Cost for shipping a 40ft container from Shanghai to London Gateway.
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balance of shore time used for training etc. Crews will be able to sign-on in either London or
Shanghai and that will be their ‘home’ base for the cycle. Average cost per crew member will
be $50,000 and is expected to increase by 2% per annum.
Fuel Costs
Fuel costs are by far the largest operating cost for these large vessels. After two difficult
years which have seen revenues decline on the back of poor world trade growth BIG Rederij
NV is focussing on reducing costs as are many other shipping firms. Many shipping firms are
running their ships at half speed to achieve significant reductions in bunker costs.
Although capable of sustaining 28 knots, Bright Star will cruise at a constant 17.65 knots
which the marine architects have calculated to be the speed for optimum fuel efficiency. At
this speed the fuel consumption will be 377.51 tons of heavy fuel oil per day which is
expected to be priced at $476.81 per ton in first year of operations, 2023 (though this is
expected to increase at 3% per annum over the life of the vessel).
Maintenance Costs
Ocean going ships operate in a hostile environment and need regular maintenance to keep
them in good condition. This ranges from wear and tear on machinery which is running 24
hours per day whilst at sea to the corrosive effect of seawater on the hull and superstructure.
Annual routine maintenance and repair costs for the Bright Star are expected to be $12.07m
in the first year of operation and increase at 3% per annum over the life of the vessel. Such
routine maintenance and repairs will be undertaken by the ships engineering team whilst at
sea or in port during loading and unloading.
In addition to the above, the vessel will need 1 or 2 days in dry-dock every five years to
complete maintenance below the waterline. This includes cleaning the hull to reduce drag. A
clean hull is vital for achieving optimum fuel efficiency. The first dry-dock is scheduled for
2027 and is expected to cost $25.00m. This price is expected to increase by $5.00m for
each subsequent dry-dock.
The main diesel engine requires a major overhaul after 10 years of operation which will take
two days in dry-dock to complete. This is scheduled to coincide with the second dry-dock
operation in 2032 and will cost $35.00m.
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None of the dry-dock maintenance will interrupt the scheduled operation of the vessel and
will be fitted around the 12 journeys per annum between China and the UK.
Other Operating Costs
Other estimated operating costs for the first year of operation include insurance at $5.98m,
harbour and pilotage charges of $6.45m, and, consumables and incidental costs of $4.26m.
These costs are expected to increase at a rate of 5%, 2% and 2% per annum respectively
throughout the life of the vessel.
Uncertainty!
The project data given above comes from the BIG Rederij corporate planning department
and relates to their best estimate or base case scenario. However, there are a number of
issues which might impact on the operational life of the vessel.
First is the climate change lobby which is pressing for lower emissions from marine traffic
and then there is the rate of technological progress in producing ever more efficient hull
designs and propulsion systems. These may render the vessel obsolete and needing
replacement before its operational life is expired.
Accordingly, corporate planning department conclude that the life of the Bright Star may be
only 20 years (probability of 30%) or even 15 years (probability of 20%).
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Required: Part A, Weighting 70%.
Evaluate the BIG Bright Star investment project on behalf of BIG Rederij NV. Advise the firm
whether they should undertake the project on a financial basis.
Your answer must be presented in the form of a report of 2500 words total. You must also
submit an Excel spreadsheet containing your calculations and an appropriate formula linked
evaluation model.
Required: Part B, Weighting 30%
Topic 1: Identify the strategies adopted by your organisation to enable the creation and
maintenance of value and show how such strategies are linked to the performance
evaluation system. Suggest how improvements could be made.
Topic 2: Evaluate the financial and operating risks faced by your organisation and the
strategies adopted for mitigating these risks. Show how such strategies are linked to the
performance evaluation system. Suggest how improvements could be made
Select ONE of the above topics and give a critical appraisal of how they are implemented in
your own organisation or a similar organisation. Emphasis should be placed on whether
adopted procedures are conceptually sound and the extent to which they could be
improved. You should confine your research to content which is in the public domain and
avoid any activity which may require university ethics approval.
Your answer must be presented in the form of a 1500 word appendix to the above report.
Submission requirements:
You should use Arial font size 12 and 1.5 line spacing. Deviations from the formatting
instructions will attract a penalty of up to 5%.
The word count relates to the body of the report and does not include, for example, the title
page, contents list, executive summary, reference list. Content in excess of the word count
will not be marked.
The hand-in deadline for submission is 23.30 on 17th January 2021.
Late submissions will attract a penalty of 10% per day subject to a minimum mark of 50%.
Reports submitted more than 5 days late will attract a mark of zero. For referred coursework,
reports submitted late will attract a mark of zero.
Submit one electronic copy of your report via Studynet as a Word file. In addition, submit a
working Excel spreadsheet containing your calculations and a formula linked investment
model. Non submission of a working Excel spreadsheet will incur a penalty of 10%.
This is an individual assignment so the report and the Excel spreadsheet submitted must be
entirely your own work.
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This assessment is subject to anonymous marking so do not put your name on any document
you submit. However, you must put your SRN on each document you submit.
Appendix 1
BIG Rederij Income Statement
Year ended
31st August
2020
Year ended
31st August
2019
€M €M
Operating Revenues
Scheduled shipping operations 3690 3820
Logistics services 947 1064
Total operating revenues – continuing operations 4637 4884
Operating expenses
Seafaring crew costs 189 214
Shore based staff costs 237 236
Depreciation 351 330
Bunker Fuel & oil 1480 1681
Insurance 117 121
Maintenance and repairs 401 398
Harbour and pilotage charges 522 486
Consumables and other costs 317 311
Registration and compliance 15 14
Marketing & administration costs 193 198
Total expenses 3822 3989
Operating profit – continuing operations 815 895
Other income/(expense)
Finance income 15 27
Finance expense 128 141
Foreign exchange gain/(loss) (13) (138)
Total other expenses 126 252
Profit before tax 689 643
Tax on profit on ordinary activities 86 80
Profit for year attributable to equity holders 603 563
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Appendix 2
BIG Rederij Balance Sheet
At 31st
August
2020
At 31st
August
2019
€M €M
Non-current assets
Property plant and equipment 5127 5004
Intangible assets 386 175
Total fixed assets 5513 5179
Current assets
Inventories 319 266
Trade receivables 639 641
Financial assets 1068 1719
Cash 1530 1136
Total current assets 3556 3762
Total assets 9069 8941
Current Liabilities
Trade payables 652 661
Accrued expenses 1652 1194
Taxation 66 57
Total current liabilities 2370 1912
Non-current liabilities
Pensions and provisions 174 216
4% Loan stock 2027 3200 3542
Total non-current liabilities 3374 3758
Shareholders equity
Ordinary shares of €0.05c each 8 8
Share premium 572 572
Retained earnings 2644 2535
Reserves 101 156
Shareholders funds 3325 3271
Total liabilities and shareholders equity 9069 8941
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Guidance for the preparation of your report.
The purpose of this assignment is simply to give you the opportunity to demonstrate that you
have acquired the knowledge and skills identified in the Module Learning Outcomes and that
you can apply them in a typical business situation.
You should approach the task as a business manager dealing with a ‘real’ business and should:
a) Adopt a coherent approach to dealing with the set task with a clearly stated
business purpose.
b) Identify an appropriate theoretical dimension and consider the implications for
practice.
c) Adopt appropriate analytical methods and a critical perspective.
d) Refer to empirical work where appropriate.
Do refer to the assessment criteria which show how marks will be awarded. Further specific
advice about how marks will be awarded for the Coursework is given below.
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Guidance for the preparation of your report cont’d.
Task Specific Assessment Criteria: Coursework
Communication Skills (Written) – 20 Marks:
Marks will be awarded for a) for the physical presentation and layout of your report, b)
adopting logical well supported (ie using appropriate citations) arguments, c) the extent to
which the report is accurate, brief, concise and clear, d) the standard of English, and, e)
compliance with standard Harvard referencing. Equal account will be taken of each element.
Knowledge & Understanding – 20 Marks:
You should establish a clear business focussed conceptual basis for your report – ie you
need to show what you are seeking to achieve and why it is important for managing the BIG
Rederij NV business (supported using appropriate citations).
Synthesis – 20 Marks:
From the case data given you should identify the nature of the decision(s) facing BIG Rederij
NV and identify appropriate theory to support the approach you adopt and give your
reasoning. Ie which analytical tools are consistent with ‘business focussed conceptual basis’
referred to above? (supported using appropriate citations).
Analysis – 20 Marks:
Using the case data given, you should apply the analytical methods identified in the previous
section and evaluate the impact on the business in relation to the ‘business focussed
conceptual basis’ referred to above.
Evaluation – 20 Marks:
Conclusions should be arrived at on the basis of your analysis of BIG Rederij NV issues; ie
what do the results of your analysis tell you? In your conclusions section you should
summarise the results of your analysis. Your recommendations will be assessed on the
extent to which they are linked to the analysis of BIG Rederij NV issues and on the extent to
which they are theoretically coherent – ie the extent to which they are consistent with the
theoretical/conceptual base you establish.

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