Maximizing the rate of return on the capital employed in shipping capacity renewal
Journal article, Peer reviewed
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OriginalversjonOmega : The International Journal of Management Science. 2017, 67, 42-53. 10.1016/j.omega.2016.03.007
Decisions regarding investments in capacity expansion/renewal require taking into account both the operating fitness and the financial performance of the investment. While several operating requirements have been considered in the operations research literature, the corresponding financial aspects have not received as much attention. We introduce a model for the renewal of shipping capacity which maximizes the Average Internal Rate of Return (AIRR). Maximizing the AIRR sets stricter return requirements on money expenditures than classic profit maximization models and may describe more closely shipping investors׳ preferences. The resulting nonlinear model is linearized to ease computation. Based on data from a shipping company we compare a profit maximization model with an AIRR maximization model. Results show that while maximizing profits results in aggressive expansions of the fleet, maximizing the return provides more balanced renewal strategies which may be preferable to most shipping investors.