# Economic Feasibility of Retrofitting an Ageing Ship to Improve the Environmental Footprint
## 4 Economic Analysis
### Feasibility Assessment  
The fuel used by ships is priced based on long-term contracts, which are somehow different from the stock market and because of that, four different scenarios will be analysed here. The cash flow financial approach will be employed to analyse the economic feasibility of retrofitting an ageing multi-purpose ship. Two measures of merit are employed to verify the attractiveness of the LNG fuel compared to the VLSFO, such as NPV and Internal Return Rate (IRR). The NPV represents the difference between the present value of cash inflows and cash outflows over a period, which was initially formulated by [PERSON] [66] and used in many studies [67]:  
\[NPV=\sum_{t=0}^{n}\frac{R_{t}}{(1+r)^{o}} \tag{3}\]  
where \(R_{t}\) is the net cash inflow-outflow, \(r\) is the discount rate and \(o\) is the number of periods. It is used to analyse the feasibility of the investment related to the retrofitting here. It also represents the current value of future payments, using the contracted discounted rate and when NPV is positive, the investment is worth undertaking. If it is negative, it is not. The IRR defines the rate of discount, which makes the present value of the sum of annual nominal cash inflows equal to the initial net cash outflow for the investment. In the present study, IRR is compared to evaluate the profitability of retrofitting an ageing multi-purpose ship from VLSFO to LNG for different scenarios of the fuel market. If the IRR of retrofitting is lower than the cost of capital, then the best course of action may be to reject it [68]. The risk associated with the IRR is acceptable as a function of the cost of capital and the opportunity cost. The VLSFO and LNG propulsion systems could add value to the ship's financial performance and one will likely be the more logical decision as IRR prescribes. It was also considered that the implementation of the LNG as a fuel needs to cover the investment related to the retrofitting, which will be the difference between the expenses associated with taxes of CO2 and the current price of the VLSFO and LNG fuels. The feasibility of retrofitting is made through the standard discounted cash flow approach, based on the net present value, estimated as the sum of expected future cash flows minus the initial investment. The future cash flow is the difference between the expenditure associated with the VLSFO and LNG fuels. The capital expenditure (CAPEX) only related to retrofitting is 3,500,000 USD, an own capital of 500,000 USD is invested, the required net profitability rate is \(r=2\%\) and the resting years of ship operation are \(o=15\) years, the depreciation time is eight years and the time of retrofitting is four months. The average annual inflation rate is assumed as \(i_{infl}=3\%\), income tax rate \(t_{x}=15\%\) resulting in a capital recovery factor, \(C_{rf}=7.78\%\)[55] calculated as:  
\[C_{rf}=\frac{r}{1-(1+r)^{o}} \tag{4}\]  
and the capital cost, \(C_{rf}\), is defined as:  
\[C_{rf}=\frac{r+i_{infl}+r\,i_{infl}}{1-\left(r+i_{infl}+r\,i_{infl}\right)^{-o }(1-t_{x})} \tag{5}\]  
Table 10 summarises the input data for the feasibility analysis, where the assumed parameters are necessary for the case of the particular study but not essential for the methods employed. The original service life for the newly built ship was 25 years, but the retrofitting was performed in the 10 th year due to the pressure to reduce the GHG. The discounted annual average cost of the investment, \(C^{anci}\), is defined as:  
\[C^{anci}=CAPEX\ C_{rft} \tag{6}\]  
A systematic variation of the cost associated with VLSFO, LNG fuels and CO\({}_{2}\) taxes are employed to analyse the feasibility of the retrofitting project. Four scenarios have been analysed A-Denying, B-Disinterested, C-Good and D-Acceptable, where the first one after ending the service life the NPV is -1,000,000 USD, the second one is with NPV = 0 USD, the third is with 30,000,000 USD and the last one with NPV = 6,000,000 USD. Table 11 shows NPV, IRR and Cash-outflow.