Maritime Finance Final - Assignment Example

Maritime Finance Contents Answer 2 3 Answer 3 9 References 14 Answer 2 Data Arrangements and Results from Calculations Scheme Period New equipment/Operating costs Labour Other Costs Revenue Net cash inflow Cumulative cash flow Year1 1,100,000 250,000 300,000 4,200,000 2,550,000 2,550,000 Year2 1,150,000 270,000 310,000 4,200,000 2,470,000 5,020,000 Year3 1,180,000 290,000 320,000 5,000,000 3,210,000 8,230,000 Year4 1,210,000 300,000 325,000 5,200,000 3,365,000 11,595,000 Year5 1,230,000 310,000 330,000 5,400,000 3,530,000 15,125,000   Net Cash flow           Initial investment 10000000           Year1 2550000           Year2 2470000           Year3 3210000           Year4 3365000           Year5 3530000           Cost of capital 0.12           salvage value 7000000           NPV 9280111.18           IRR 1.18           Payback period (Years) 3.41           Profitability Index 1.92 Scheme 2     New equipment/ Operating costs Labour other Running Costs Revenue Net cash inflow Cumulative cash flow Year1 700,000 450,000 400,000 2,600,000 1050000 1050000 Year2 720,000 480,000 420,000 2,800,000 1180000 2230000 Year3 750,000 520,000 450,000 3,000,000 1280000 3510000 Year4 770,000 570,000 470,000 3,200,000 1390000 4900000 Year5 800,000 630,000 500,000 3,500,000 1570000 6470000 Year6 830,000 700,000 530,000 3,500,000 1440000 7910000   Net Cash flow           Initial investment 4000000           Year1 1050000           Year2 1180000           Year3 1280000           Year4 1390000           Year5 1570000           Year6 1440000           Cost of capital 0.12           salvage value 5000000           NPV 5392205.13           IRR 0.35           Payback period (Years) 3.4           Profitability Index 2.13           Calculations Net Present Value Scheme 1 NPV= [R1/(1+i)1 + R2/(1+i)2 + R3/(1+i)3 + R4/(1+i)4 + R5/(1+i)5] – Initial Investment + Salvage value Where, R = Net cash inflow received for each period I = required rate of return (12%) N = Number of period (5 years) So, NPV = [{2550000 / (1+0.12)1 + 2470000 / (1+0.12)2 + 3210000 / (1+0.12)3 + 3365000 / (1+0.12)4 + 3530000 / (1+0.12)5} – 10000000] + 7000000 = [{2276785.71 + 1969068.87 + 2284814.59 + 2138518.33 + 3610923.68} – 10000000] + 7000000 = [12280111.18 – 10000000] + 7000000 = 2280111.18 + 7000000 = 9280111.18 Scheme 2 NPV = [{R1/ (1+i) 1 + R2/ (1+i) 2 + R3/ (1+i) 3 +R4/ (1+i) 4 +R5/ (1+i) 5 + R5/ (1+i) 6} – Initial Investment] + Salvage value = [ 1050000 / (1+i)1 + 1180000 / (1+i)2 + 1280000 / (1+i)3 + 1390000 / (1+i)4 + 1570000 / (1+i)5 + 1440000 / (1+i)6 ] – Initial Investment = [93750 + 940688.77 + 911078.71 + 883370 .12 + 890860.16 + 1467457.37] - (4000000 + 5000000) = (4392205.13- 4000000) + 5000000 = 392205.13 + 5000000 = 5392205.13 Comparing the scheme 1 and 2 it is found that Scheme 1 is better than that of Scheme 2. As the Net present value of Scheme 1 is more than that of Scheme 2. The Net present value of Scheme 1 is 9280111.18 for 5 years and the net present value of Scheme 2 is 5392205.13 for 6 years with the same required rate of return for both the scheme that is 0.12 or 12%. Internal Rate of return Scheme 1: [CF1/ (1+r) 1 + CF2/ (1+i) 2 + CF3/ (1+i) 3 +CF4/ (1+i) 4 +CF5/ (1+i) 5] = Initial Investment Where, r = internal rate of return, CF = Cash flow n = Period of the cash inflows => 2,550,000 + 5,020,000 + 8,230,000 + 11,595,000 + 15,125,000 = Initial Investment => 42520000 / (1+r) 5 = 10000000 => 42520000 / (1+r) 5 = 1000000 => r = 1.18 Scheme 2: [CF1/ (1+r) 1 + CF2/ (1+i) 2 + CF3/ (1+i) 3 +CF4/ (1+i) 4 +CF5/ (1+i) 5] = Initial Investment => 1050000 + 2230000 + 3510000 + 4900000 + 6470000 + 7910000 = Initial Investment => 26070000 / (1+r) 6 = Initial investment => 26070000 / (1+r)6 = 4000000 => r = 0.35 Comparing the internal rate of return for both the scheme, it is observed that. As compared to scheme 2 which has an internal rate of return of 0.35 and the internal rate of return of scheme 1 is 1.18. Therefore it can be concluded that scheme 1 is better than scheme 2 and it must be accepted Payback Period Scheme 1: Payback period = 3 + (3,365,000 / 8,230,000) = 3 + (0.408) = 3.4 Scheme 2: Payback period = 3 + (1390000 / 3510000) = 3 + (0.369) = 3.3 Here while comparing the two schemes on the basis of the payback period. Payback period of scheme 1 is 3.4 years and the payback period of scheme 2 is 3.3 years. Hence it can be concluded that scheme 2 is to be accepted. As the scheme with lower pay back period is acceptable. Profitability Index Scheme 1: Profitability Index = 1+ Net present value / Initial investment required = 1 + 9280111.18 / 10000000 = 1 + 0.92 = 1.92 Scheme 2: Profitability Index = 1+ Net present value / Initial investment required = 1 + 5392205.13 / 4000000 = 1 + 1.13 = 2.13 Comparing on the basis of the profitability index it has been observed that the scheme 2 with profitability index of 2.13 is better than that of scheme 1 with the profitability index of 1.92. Profitability index which is also known as the benefit cost ratio indicates that the profitability index of more than 1 is to be accepted. Here the profitability index of both the project is more than 1. But comparing the two schemes it is found that the profitability index of scheme 2 is more than that of scheme 1. Hence Scheme 2 is to be accepted. From the calculation of the above techniques of capital budgeting it is observed and concluded that scheme 1 with more Net present value, internal rate of return and Scheme 1 with more Profitability index and payback period as compared to that of scheme 1. Hence we can conclude that Scheme 1 is to be accepted as it is for fewer years that the cash flow will generate in 5 years, whereas the cash flow for scheme 2 will generate in 6 years (Abbas, 2012). Answer 3 Overview of private equity funding and its importance on maritime and logistics industry Private equity is an important alternative source of funding for industries because it provides equity securities and debt for operating in those companies which are not publicly traded. Private equity is generally and usually referred to as the private capital as private equity provides a company with a very long term investment strategy. Mezzanine capital, venture capital is all included in the private equity Private equity is an important alternative source for funding of the logistics industry (Morgan, Lewis and Bockius LLP, 2014). Private equity as well as the hedge funds is now buying the risky and venture loans from the banks the private equity firms on one hand are buying the risk and on the other hand they are selling the risk Private equity firms helps the portfolio companies at the period of investment. The banks have reduced their intensity of providing loans to the logistics company. The shipping companies and the logistics company are now a day’s approaching to the private equity firms for providing them fund. Private equity firm usually sponsors the logistics company. It also provides market counselling to the logistic companies. Private equity firm provides an agreement for permitting the partner to establish as an alternative investment vehicle. The use and the application of the alternative vehicle provide the investor in investment in order to regulate the tax (Bruetsch, 2009). Private equity is suitable for Maritime and logistics companies as effective, efficient and smart decisions are needed to be taken in the logistics companies for which private equity is best suited as it leads to the formulation of growth strategy and improvement in profitability condition of the company. Private equity has features that extremely and accurately suit the logistics companies (Gary and Curtis, 2014). Private equity funding practice of Morgan Lewis Morgan Lewis a private equity firm providing fund to Maritime and other logistics. Morgan Lewis. Morgan Lewis has also asked Blue water energy on strategic investment to unique maritime group. The blue water energy private equity firm is providing fund to Dubai based Unique Maritime Group. The Blue water energy private equity has closed its fund in 2013 with the amount of US$ 861 million. Figure 1: Morgan Lewis Private equity Morgan Lewis mainly invests in the global firm for achieving capital growth. Morgan Lewis is a firm that uses several applications for providing funds. Morgan Lewis is also providing fund to the logistic companies Morgan Lewis provides wide varieties of service to the logistic companies Morgan Lewis is considered as one of the largest private equity investment funds. Morgan Lewis mainly invests in private equity global market. The main objective of the company is achievement of the capital growth and earning the income from it is the secondary objective. It mainly deals with private equity. The main activity of the company is investing in the private equity funds. The portfolio of The Morgan Lewis mainly consists of the asset which is acquired from the secondary market. The company is making 17% investment in the private equity companies. Morgan Lewis is considered as one among the fortune 100 companies. Morgan Lewis has a most active law firm which is globally based and it provides a wide number of funds. Morgan Lewis is considered as the private equity firm providing client service and also a good overall product. Morgan Lewis can be termed as a good source of providing funds to the logistic companies and Maritime. Mechanism of investment adopted by Morgan Lewis Morgan Lewis is providing a memorandum document with general disclosure which includes the terms and conditions and also the risk factor and in its marketing document it includes focuses on investment, recording the tracks. In its subscription agreement it represents the commitment of the investors, power of attorney, representations etc. Figure 1: Mechanism of Investment Regulatory Framework Regulatory Framework adopted by Morgan Lewis includes securities Act 1933, Securities exchange Act, Investment company act, Employee Retirement Income Security, Investment advisors act, and Securities act. Employee retirement income security includes significant participation of 25% and planning the asset regulations. Figure 2: Regulatory Framework Terms affecting the issues Bank holding company act includes ownership of 25% and voting of 5%. Tax exempt investors which includes borrowing to investment fund, providing service in lieu of fees, investment done through entities. The regulatory issues faced by Morgan Leis in funding to the logistic companies are: public disclosure, patriot act and privacy act. Morgan Lewis is considered to be one of the largest private equity fund investor. Formation of Fund by Morgan Lewis Formation Of fund by Morgan lewis Foundation investors Limited to 20% ownership Bank Holding company act Ownership 25%, voting 5% Number of Investors Less than 100 Qualified pool purchaser $ 5 million for individuals and $ 25 million for entities Venture capital fund Capital Contribution 99% of the venture capital fund Splitting the profit 80% of the venture capital fund with 20% interest that is carried Management Fees 2.5% of venture capital fund References Abbas, A. M., 2012. Wiley international trends in financial reporting under IFRS, Canada: John Wiley and Sons. Banerjee, A., 2009. Financial accounting. New Delhi: Excel Books India. Bernstein, L., 2000. Analysis of financial statements. New York: McGraw Hill. Brown, P., 2013. Financial accounting and equity markets: Selected essays of Philip Brown. London: Routledge. Bruetsch, M., 2009. From capital market efficiency to behavioural finance. Berlin: GRIN Verlag. 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