Compass Maritime Services, LLC: Ship Valuation

Executive Summary
Compass Maritime Services, based out of New Jersey are experts in valuations of Sea Vessels.
Their potential clients seek assistance for buying a capesize mass transporter. The vessel found
to be suitable had the following specifications:

Feature Specification

Age 11 years

Deadweight ton Limit 172,000

Motor Burmeister and Wain 6S70MC Motor

Price Hoping to offer $70 million

The clients wanted to know the price to be paid for the vessel and the evaluation techniques
used as follows:

Market Approach: This approach was based on market analysis and price matching.
Income Approach: This approach considered the Net Present Value
Cost Approach: This approach looked at cost of replacing the ship with its current
functionalities.

Q1. Develop a multiple linear regression model to predict the most appropriate price for “Bet
Performer”. Derive new independent variables if necessary.
In the above analysis, we have performed a step-wise regression on the variables with Sale Price
to be the dependent variable.
The first regression considers the Age at Sale and the model explains 62% of the dependence of
Price on Age of the Sale.
In the second regression, we have considered Age at Sale and Trailing 1-Year Average Monthly
Baltic Dry. We see a phenomenal increase in the explanation of the model as the R-square value
increases by 28.8% to account for 90.8% of the dependence of Price.
In the final analysis, we have considered all the three variables i.e. the Age at Sale, Dead-Weight
Tons and Trailing 1-Year Average Monthly Baltic Dry. The R square value increases by 1.2% to
explain 92% of the model. However, the significance of the third model is 1.1% which indicates
that we might have to carry-out transformations in order to increase the significance.

Y=β0 + β1X1+ β2X2 + β3X3

Based on the above equation, our model will be as given

Where Y= Price, X1= Age at Sale, X2= Trailing 1-Year Average Monthly Baltic Dry, X3=Dead-
Weight Tons

Based on the above equation,

Y= 123.215 m

While running the regression, we have assumed that residual errors that there is
homoscedasticity implying that the variance around the regression is same for X which is the
predicted variable. As can be seen from the above scatterplot that there is homoscedasticity in
the plot.
The second assumption we make is that the error is normally distributed. As can be seen from
the above plot, the residuals are approximately normally distributed.