IN RESPONSE: RESIDUAL VALUE REVISITED

By Sydney P. Levine, of Shipping Intelligence, Inc.

In “Are Tankers A Compelling Investment, Even In This Market?” (Marine Money, March 2001) Urs M. Dur put his finger squarely on a weakness in this kind of IRR analysis. He wrote “Residual [value] is the biggest gamble and predicting the market perfectly is folly”. That’s right; it is impossible to predict residual values precisely, but values must still be estimated and they may have enormous impact on calculated IRRs. In the three scenarios of the article the proposed residual values represent about 36% of the gross cash receipts. And because the project is only 3 years long that 36% has a sizable effect on IRR that is only minimally lessened by the discounting value of time. More than one cynical deal-maker has allegedly been heard to say “let me choose the residual value and I’ll give you whatever IRR you need”.

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