Marine Finance and Insurance - Coursework 3 Essay

Marine Finance and Insurance - Coursework 3 - Essay Example In this particular case, no tax rate is given. 7Capital investment appraisal or capital budgeting is primarily concerned with incremental cash flows therefore depreciation should be added back to arrive at the projected cash flow from operations, because there is no actual cash outflow for depreciation (Brigham, et al, 1999). 3The discounted cash flows are the resulting cash flows after applying the cost of capital which is 14% or , projected cash flow during the year/ (1.14)t, where t represents the time or nth year, 1 is constant, and .14 or 14% is Tower’s cost of capital. To illustrate: Discounted Cash Flow for the first year is computed as: 2,890,000.00/ (1.14)1. For the second year, it is, 6,370,000.00/ (1.14)2, and so on until the sixth year. We will use the discounted cash flows in calculating the discounted payback period and the profitability index or PI (Gapenski, et al, 1999). Regular Payback Method. This method of appraising investment tells the number of operating years needed to recover the initial investment or cash outlay. It is the number of years required until the accumulated cash inflows will equal to the amount of the initial investment. The exact payback period is computed using the formula: Payback = Year before full recovery + (Unrecovered Cost at the start of Year/Cash Flow during the Year). If the capital is recovered within the shortest possible time, then this is good for the company (Brigham et al 1999). If the payback period is less than the companys required payback period for the investment, the proposal is accepted, otherwise it is rejected. However, this method does not consider significant cash flows or profit after the payback period. Therefore, this could not be a sound basis for deciding on the profitability of the investment (Bucklery 1996). For Towers, it will take 3 years before full recovery of proposed investment, total accumulated inflows