Maritime Finance - Assignment Example

Maritime Finance Paper By Maritime Finance Paper Question One Investment appraisal In capital budgeting process of a company, a number of aspects feature that help develop better grounds for making financial decisions. These range from the use of different appraisal means to identify the project that the business can involve their investment. The process of identifying of the right project for the company to invest in what is referred to as investment appraisal (Campbell & Brown, 2003, p.18). Investment appraisal ensures that the project decisions result from a thorough analysis that considers the viability of the project, the payback period, the Net present Value of the projects and from these results better decisions with regard to capital investments result (Gotze, Northcott & Schuster, 2007, p.24). Payback period and accounting rate of return are among the many investment appraisal measures that aid in investment decisions (Baddeley, 2012, p.241). The payback period method provides many advantages that range from its simplicity to using and the ease with which employees will understand the method. It is also advantageous in guiding decisions for investment decisions with small investment needs. The disadvantages with this method regards to the fact that it ignores the time value for money concept, which is vital in investment appraisal (Woodruff, 2014). The two methods all ignore the time value for money making them less appropriate means of comparing the projects to establish which one will have better yields. The two concepts all apply evaluation based on the assumption of easing the decision for investors in relation to capital budgeting that has proven a need I capital investment needs. On the other hand, Accounting Rate of Return is advantageous in that it provides a simple approach that applies all accounting information and it is easy to calculate. It is also based on the profit that the company generates that helps in measuring the general profitability of the investment (Akalu, 2003, p.17). The disadvantage of this method is that it ignores the time value for money and ignores the terminal values that the project yields (Accounting management, 2009). Time value for money is an aspect that considers the value of money and the effect that time has on it (Lieuallen, 2008, p.335). It aims at determining the value of money today that will be in the future basing on these to make investment decisions and guide capital investment procedures of a company. Time value for money explains how time affects the value of money. Considering a sum of $2000 at present, the value of this figure in the future says after 5 years will be totally different considering an interest rate though which the figure is valued (Mclean, 2002, p.99). These affect investment decisions. Net Present Value and Internal Rate of Return are among the many Discounting Techniques of investment appraisal applicable to management of the investment appraisal process to yield better decisions in the business field (Needles, Powers & Crosson, 2010, p.1238). Net Present value refers to the actual sum of the present values of the different cash flows that an entity carries also covering the salvage value (Coker, 2011). They consider the cash inflows and cash outflows. They consider time series aspects of the different cash flows attached to a business. Among the many tools for applying in time series of investment decisions, NPV is a vital tool in this quest and provides a better picture of long-term investment projects. On the other hand, Internal Rate of Return is a discount rate that relates the Net Present Value of the investment as zero. The measure normally provides better investment efficiency measures. It considers non-mutually exclusive investment projects and provides results that guide to the same result as the NPV (Moyer, McGuigan, & Rao, 2011, p.360). Through the application of the above investment appraisal means, shareholders gain more confidence in the investment decisions of the company due to a better means of appraising to identify possible projects that would provide more returns to the company. The above also provides the shareholders with an understanding of the level of patience to exercise when investing especially through the determination of the payback period. Question Two The following procedure applies in calculating the payback period. Scheme one Calculating the cumulative cash flows for the years from year one to the last year with a negative cash flow, we obtain the PBP. These as, 2550000 + 2470000 + 3210000= 8230000 for year three. 8230000 + 1770000 Solution: Years new equipment Labor running costs total expenses revenue available cash cumulative cash flows 1 1100000 250000 300000 1,650,000 4200000 2550000 2550000 2 1150000 270000 310000 1,730,000 4200000 2470000 5020000 3 1180000 290000 320000 1,790,000 5000000 3210000 8230000 4 1210000 300000 325000 1,835,000 5200000 3365000 11595000 5 1230000 310000 330000 1,870,000 5400000 3530000 15125000         8,875,000       According to the table attached, payback period is obtainable using the formula It therefore: available cash for the first years that cumulative frequency is a negative. These are 2550000+2470000+3210000= 8230000 (total cash in the 3 years). Initial outlay – cumulative cash flow for the 3 years =10000000-8230000 = 1770000 Therefore the PBP for scheme one = 3+1770000/3365000= 3+0.52= 3.52 years. Scheme Two: The PBP is 3.352 years which is obtained as below: these follow the years incomes creating cumulative cash flows as follows. 1050000+1180000+1280000+490000+1390000 for the fourth year giving us a cumulative cash flow necessary for obtaining the PBP. Solution: Years new equipment Labor running costs total expenses revenue available cash cumulative cash flows 1 700000 450000 400000 1,550,000 2600000 1050000 1050000 2 720000 480000 420000 1,620,000 2800000 1180000 2230000 3 750000 520000 450000 1,720,000 3000000 1280000 3510000 4 770000 570000 470000 1,810,000 3200000 1390000 4900000 5 800000 630000 500000 1,930,000 3500000 1570000 6470000 6 830000 700000 530000 2,060,000 4000000 1940000 8410000         10,690,000       Available cash following the years results as 1050000+1180000+1280000=3510000 for the first three years following an initial outlay of 4000000. 4000000-3510000 = 490000 Therefore PBP=3+490000/1390000= 3+0.352=3.352 years. Net present value of the project: Scheme one: With regard to the cost of capital as 12%, the net present value for this scheme is 672910. These are obtained as solved below: In calculating the net present value NPV, the annual revenues less total expenses multiplied with the PV factor that relates to the cost of capital 12%. The sum of all present values and the initial investment gives the NPV. years new equipment Labor running costs total expenses revenue available cash PV factor Present Values 1 1100000 250000 300000 1,650,000 4200000 2550000 0.893 2277150 2 1150000 270000 310000 1,730,000 4200000 2470000 0.797 1968590 3 1180000 290000 320000 1,790,000 5000000 3210000 0.712 2285520 4 1210000 300000 325000 1,835,000 5200000 3365000 0.636 2140140 5 1230000 310000 330000 1,870,000 5400000 3530000 0.567 2001510             Present Value   10672910             less initial outlay   10000000             Net Present Value   672910 Net present value of the second scheme: Based on the same cost of capital that is 12%, the NPV for this scheme is 1547280. This is obtained as follows: NPV results from adding the different values of the present values obtained using the PV factor based on cost of capital value 12%. The total of the present values less the initial outlay gives the NPV. Years new equipment labor running costs total expenses revenue available cash PV Factor Present Values 1 700000 450000 400000 1,550,000 2600000 1050000 0.893 937650 2 720000 480000 420000 1,620,000 2800000 1180000 0.797 940460 3 750000 520000 450000 1,720,000 3000000 1280000 0.712 911360 4 770000 570000 470000 1,810,000 3200000 1390000 0.636 884040 5 800000 630000 500000 1,930,000 3500000 1570000 0.567 890190 6 830000 700000 530000 2,060,000 4000000 1940000 0.507 983580             net present value   5547280             less initial outlay   4000000             NPV   1547280 Profitability Index (PI): Scheme one: PI for this scheme is 1.0673. This is obtained as below: PI= PV of the future net cash flows/initial outlay PI=10672910/10000000=1.0673 Scheme two: The PI for this scheme is 1.387 PI= PV of future net cash flows/initial outlay PI= 5547280/4000000 =1.387 Internal rate of return (IRR): Scheme one: For an effective IRR for the project, the cost of capital 12% is applied and the NPV of the scheme for this case 672910. Finding an IRR that has an NPV equivalent to zero leads to 14.5% as the IRR. years cash inflows initial outlay net cash flows 0   10000000 -10000000 1 2550000 0 2550000 2 2470000 0 2470000 3 3210000 0 3210000 4 3365000 0 3365000 5 3530000 0 3530000   15125000 10000000 5125000 IRR 14.50%             Scheme Two: As in scheme one, 12% as the cost of capital, NPV 1547280 is used. Considering a rate that equates NPV to zero, IRR is obtained as 23.5% Years cash inflows initial outlay net cash flows 0   4000000 -4000000 1 1050000 0 1050000 2 1180000 0 1180000 3 1280000 0 1280000 4 1390000 0 1390000 5 1570000 0 1570000 6 1940000 0 1940000   8410000 4000000 4410000 IRR 23.50%             Decision on Project to Take Based on the results above, accepting the project with the highest NPV will take project scheme two due to the more positive nature of its NPV. Scheme one has a positive NPV but that of scheme two is more positive (Accounting explained, 2013). In many project evaluation aspects, the time value for money aspects is vital. These provide better results for evaluation based on concepts that use this tool such as Net Present Value for money. On the other hand, considering the payback period, the two projects may relate closely with the second scheme with a better payback period compared to the first. This further proves the viability of the second project compared to the first hence bettering the decision to take scheme two. The project scheme two will require less capital, with a higher returns level compared to the scheme one that relates to more profitability through the profitability index determined for scheme two and less for scheme one. These aspects all prove the need to consider scheme two for the company. Question Three There have developed many sources of funding for different businesses including the maritime and logistics companies. The reliance on the bank as the only source of funding is no longer applicable based on the competitive nature of the sector including other financiers such as Private Equity. The private fund symbolizes all these funding arms (Stowell, 2012). Private equity refers to a different class of funding that involves asset classes with different equity securities including debts that aid operations in companies that do not trade on stock exchange levels (British Private Equity & Venture Capital association, n.d). Venture capital companies make these kinds of investments with each investor having different goals that they set for the investment. The investors also base on their own preferences to invest in a company and have different investment strategies. Their main effort is to provide the needed working capital for a company for their expansion building, restructuring management or even for the development of new products (Kocis, Bachman & Long, 2009). This form of funding has proven vital in the sense of its contribution to survival ability of businesses and provision of a fairer source of funding that base on the performance of the company for repayment. The support that these funding channels provide to the maritime sector makes the channel very important to the business especially with the challenges that the industry faces in obtaining funds from the banking sector due to the many risks that it carries. Report Introduction The challenges that the Maritime Logistics companies face have crippled the sector and affected its development. The different forms of funding have remained stringent with their provision of funds to these companies due to the high level of risks that the companies face dealing with transportation of items on water as the medium. The needs to maintain the business and customer satisfaction have occasioned a need for working capital that has proven difficult to obtain from the financial organizations such as banks. The companies have aimed for private equity aspects for funding that have helped sustain the pressure of the economic times. Among the many private equity companies that have provided funds to the maritime industry include the New Maritime Private equity Fund. Body Many Private Equity funds have aided in provision of funding for the maritime and logistics companies but one company of them all stands out. The different private equity companies that have existed have offered limited funding and provided the maritime companies with difficulties in operating these finances with regard to the risks involved in the maritime field. Through the fear of these challenges, the need to develop a maritime private investment company that directly deals with the field provide mandatory. These saw to the formation of the New Maritime Private Equity Fund (Marine money offshore, n.d). The company aims at providing the economical sustainability of the companies that handle maritime services that have all had fears of shortage of working capital. Companies that have had a long route down the road that suffers huge financial difficulties have had to part with assets for the sustainability of the financial pressure developed. Form of investment The company has established a number of management means through which the maritime business has grown and sustained the growth. The investment engages the ship owners, the workers and the customers in a number of ways and gets involved directly in the working of the maritime business. Through this, the company is in position to control the industry and minimize operational risks. The private equity firms offer the necessary financial requirements for the company with much emphasis in the aiding of the working capital needs of the company. The company has slowly continued growing in a sense that covers the necessary investment risks. Having to provide working capital for maritime sector has aided the company also support the sector and retain jobs of thousands of people. Benefits of the investment fund This form of maritime investment arm has provided liquidity for the maritime industry and ensured that the business continues to successful operate despite the difficult economic times. The private equity company has also aided the maritime industry to remain functional for a longer period and though its support systems have made its operations easy and successful. The recent difficulties experienced in the maritime industry occasioned fear in many investors financing the sector (Schinas, Grau & Johns, p.88). The developments of these investment funds have helped provide working capital for the maritime industry making it proceed with business overtime. Conclusion In conclusion, the different needs those companies have in relation to financial needs. These needs have pushed them into groups that have the different working capital needs addressed and hence developing a relationship that takes care of people that work in the marine companies. Through some needs the companies have developed a link through which good reputations are settled and financial difficulties developed are handled through the Private Equity Fund. These have helped employees to develop their confidence in a company and hence more productivity. Recommendations The investment fund provides continuous support to the maritime and logistics field and a continued facilitation will aid the further growth of the industry. The company needs to engage more clients and ensure that insurance aspects are stringent especially those providing for routes that engage fears of piracy. References Accounting explained, 2013. Net Present Value (NPV). Retrieved from http://accountingexplained.com/managerial/capital-budgeting/npv Accounting Management, 2009. Advantages and Disadvantages of Accounting Rate of Return. Retrieved from http://accountlearning.blogspot.com/2011/07/advantages-and-disadvantages-of.html Akalu, M. M. 2003. Projects for Shareholder Value. 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Financail Management in Health Care Organizations. Cengage Learning. Moyer, C. R., McGuigan, J. & Rao, R. 2011. Contemporary Financial Management. Cengage Learning. Needles, B., Powers, M. & Crosson, S. 2010. Principles of accounting. Cengage Leraning. Schinas, O., Grau, C. & Johns, M. n.d. HDBA Handbook on Ship Finance. Springer. Stowell, D. 2012. Investment Banks, Hedge Funds, and Private Equity. Academic press. Woodruff, J. 2014. Advantages and Disadvantages of Payback Capital Budgeting Method. Retrieved from http://smallbusiness.chron.com/advantages-disadvantages-payback-capital-budgeting-method-14206.html Read More