Investment Appraisal Techniques for Zylla Limited

This assignment involves analyzing the investment appraisal techniques used by Zylla Limited to evaluate the profitability of a project. The payback period is calculated to be 2 years and 3 months, indicating that the initial investment will be recovered in a short duration. The average rate of return is also calculated to be 53%, which is beneficial for the organization. The assignment recommends acceptance of the project based on these calculations.

BUSINESS SCENARIO FOR
INDIVIDUAL REPORT

Table of Contents
INTRODUCTION..................................................................................................................3
TASK 4................................................................................................................................. 3
1. Short term and long term sources of funding .........................................................3
2. Evaluation of investment appraisal techniques .......................................................4
CONCLUSION..................................................................................................................... 6
REFERENCES.....................................................................................................................7

INTRODUCTION
Zylla limited is the company which is operating number of ferries for providing
crossing services to the passengers and for the crossing of goods across river. The
management of the company has decided to buy a new ferry due to increasing demand of
the crossing services. This assignment will provide understanding of different sources of
funding for purchasing the new ferry. Furthermore, this study will provide with investment
appraisal techniques for identifying the viability of acquiring a new ferry.
TASK 4
1. Short term and long term sources of funding
Short term sources of funding : These are the funds which are acquired by the
organisation for the period of not more than one year. It consists of trade credit, loans from
commercial banks, etc.
 Commercial banks : There are the most important short – term funding available
with the company. The working capital loans are mostly provided by these banks
(Alkaraan, 2017). It helps the organisation by providing them loans for performing
its various operations. These loans are short – term as it are repayable within one
year.
 Advances : organisation can use this source of funding by getting the advances
from the customers and agents for the goods and services. It is a cheap source of
finance. This source of funding is easily available to the firm and the advances can
be provided if the firm is has build strong connection with the customers and
agents.
 Instalment credit : It is the another way through the Zylla limited can acquire a new
ferry on the instalment basis and the possession of the assets in taken and the
payment is made in instalment (Campos, Goldstein and McKenzie, 2015). In this
source of funding the interest is payable by the organisation on the unpaid price.
 Trade credit : This is the credit provided by the suppliers of the company. This act
as a source of funding for the organisation (Alkaraan, 2017). Trade credit is helps
the organisation as it is provided extension of the payment for the goods to
suppliers. The amount due is payable after the completion of the credit period and
the amount is paid to the suppliers.

Long- term source of funding : It is the source of funding available with the
organisation for the period of more than 5 years. It includes sources such as shares,
debentures, long term -borrowing and loans from financial institutions.
 Issue of shares : It is the long term source of funding available with the
organisation. It includes issue of equity shares and preference shares. The shares
are offered to public and investors in exchange of the money. This source of funding
is available for the long term. Equity shares involves minimum risk (Bruton and
et.al., 2015). Preference shares are raised by issue of shares to public and it does
not require any security nor ownership of firm is affected.
 Issue of debentures : This long term source of finance through which organisation
raise funds by issuing the debentures. It is raised by using common seal of the
company. Debenture involves payment of interest on the fixed rate. Debentures
includes debenture stock, bond and any other securities. The debenture amount is
payable after completion of the maturity period.
 Loans from financial institutions : The firm can obtain loan through borrowings
from the financial institutions (Gotze, Northcott and Schuster, 2016). The financial
institutions provide long term loan to the firms by identifying their technical,
economical, commercial, financial and managerial viability of the project for which
the loans is offered. This loans are repayable in less than 10 years.
2. Evaluation of investment appraisal techniques
There are different investment appraisal techniques which consist of net present
value, internal rate of return and Accounting rate of return.
Net present Value : It is a capital investment appraisal technique which undertake
the cash flows for measuring the project viability. The high discount rate will reduce the net
present value to capital. The NPV is the present value of the cash flows which will be
generated by future investment. It is calculated by subtracting the cash flow from
investment by cost of investment.
Advantages
 It gives importance ton time value of money.
 Profitability and risk regarding the project are given high priority.
Disadvantages
 This method is difficult to use.

 It does not provide correct result when the project is of unequal life.
Particular Discounting factor = 3% Cash flows
Pv
factor
1 0.9709 55230 53621
2 0.9426 70045 66024
3 0.9151 88375 80876
4 0.8885 79870 70963
5 0.8626 102555 88465
Sum of present value 359949
Initial cash outlay 150000
Net present value 209949
It is interpreted from The calculation provided with the NPV equals to 209949 which
is beneficial for the firm if it invests its capital in the buying a new ferry.
Payback period : It is the period at which the firm is able to recover its initial cost of
capital. With the help of payback period firm can identify the time period in which it will
recover the amount of investment made.
Advantages
 This method is very simple to calculate .
 It helps in measuring the risk involved in the project.
Disadvantages
 It does not take into account the time value of money.
 It does not consider the cash flow occur after the payback period.
Particular cash flow
Cumulative cash
flows
1 55230 55230
2 70045 125275
3 88375 158420
4 79870 168245
5 102555 182425
Total 689595
Cost of capital 150000
Months 0.3
year of recovery of Initial
investment 2
Payback period
2.3 or 2 years and
3 months

From the above it can be interpreted that the Payback period of the initial
investment is recovered in 2 year and 3 moths which is beneficial for the organisation as it
will increase its profitability. It is recommanded to the Zylla limited to accept the project as
per the payback period as it will recover the cost of capital in a short duration.
Average rate of return : It measures the annual income which will be generated
from the capital investment (Fraser, Bhaumik and Wright, 2015). It identifies the average
profit which will be earned by undertaking the project. It is calculated by dividing the net
returns by capital outlay.
Advantages
 It measures the profitability (Accounting Rate of Return (ARR), 2018).
 It is easy method to understand.
Disadvantages
 It ignores the pattern of cash flow
 It also does not consider the time value of money.
Particular Cash flow
1 55230
2 70045
3 88375
4 79870
5 102555
Total 396075
Average profit 79215
Initial investment 150000
ARR 53%
It is interpreted that the Average rate of return is 53% which is beneficial for the
Zylla limited so , it recommended to the firm to accept the project.
CONCLUSION
From the above study it has concluded about short term and long term sources of
funding available with Zylla limited which has provided with sources such as loans, issue
of shares, debentures etc. Also, It has provided with Investment appraisal techniques on
the basis of which It is recommended to Zylla limited that the project will be beneficial for
the organisation if it invests the capital in this project.

REFERENCES
Books and Journals
Minsky, H., 2016. Can" it" happen again?: essays on instability and finance. Routledge.
Campos, F., Goldstein, M. and McKenzie, D., 2015. Short-term impacts of formalization
assistance and a bank information session on business registration and access to
finance in Malawi. The World Bank.
Bruton, G. and et.al., 2015. New financial alternatives in seeding entrepreneurship:
Microfinance, crowdfunding, and peer‐to‐peer innovations. Entrepreneurship
Theory and Practice. 39(1). pp.9-26.
Fraser, S., Bhaumik, S. K. and Wright, M., 2015. What do we know about entrepreneurial
finance and its relationship with growth?. International Small Business Journal.
33(1). pp.70-88.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-
VERLAG BERLIN AN.
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives.
In Advances in Mergers and Acquisitions. (pp. 67-82). Emerald Publishing Limited.
Online
Accounting Rate of Return (ARR). 2018. [Online]. Available through
:<https://www.investopedia.com/terms/a/arr.asp>