Short and Long Term Sources of Finance for Working Capital Needs

This report discusses the short and long term sources of finance that can be used to fulfill working capital needs. It also explores investment appraisal techniques. The case study focuses on Zylla Limited, a company that needs to purchase a new ferry to increase competition and improve productivity.

Business Scenario for
Individual Report

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Explain short term or long term sources of finance which required to fulfil working capital
needs............................................................................................................................................1
2. Use investment appraisal techniques.......................................................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial evaluation is the important mechanism that allows managers to determine which
practices gives benefit or optimize their earnings (He And et.al., 2018). This analysis is based on
the Zylla Limited, which needs to purchase new ferry in order to increase competition of their
service and also helps to improve productivity. This report deals with many subjects, such as
strategies for investment valuation and short-term or long-term financing.
MAIN BODY
1. Explain short term or long term sources of finance which required to fulfil working capital
needs
There are various short or long term sources of finance which can be used by the managers
of Zylla Limited to fulfil their working capital needs. All are discussed below:
Short term shore of funding:
 Export credit: This is the most critical and simplest form of short-term financing
that available to firms (Hsiao and Kelly, 2018). Trade credit covers several items but the
main principle is an arrangement to purchase on account goods or services without
requiring immediate cash or cheque purchases.
 Bank Overdraft: The borrower will allow the client to repay up to the amount without
further discussion, by entering into an overdraft deal with the Loan. They may apply for
security insurance and could charge standard interest on the loan value.
Long term source of funding:
 Bank Loan: this is a amount of money borrowed for a fixed period within the negotiated
payment plan. Bank loans are seen as an important part of the purchase system for
companies. In fact, bank loans tend to become more well-established available and it also
lets companies extend their operations.
 Retain profits: the profits of the corporation used to pay the shareholders' dividend or
maintain the income and spend in the business and expand its activities (Warren and Seal,
2018). It is deemed within long-term funding that managers may use to meet their need
for working capital.
From the overall analysis, it has been observed that managers of Zylla Limited should
use bank overdraft as short term source of finance to meet the needs working
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capital requirement. Within Zylla Limited, executives use bank loan to purchase new ferry to
increase the demand. Managers wanted working capital to manage their operations where they
conduct regular tasks to accomplish their goals and objectives.
2. Use investment appraisal techniques
Payback Period: It is one of the simple methods of capital budgeting which help the
organizations to evaluate recovery period of their spending. High the recovery period is not
beneficial because it means proposal will take more time to recover their initial investment. On
the other side, lower payback period is favourable and managers will consider it for the
investment purpose. Calculation of payback period for the purchase of new ferry:
Year Cash Inflow (£) Cumulative Cash Flow
Year 0 -£ 150000 -
Year 1 £ 55,230 £ 55,230
Year 2 £ 70,045 £ 1,25,275
Year 3 £ 88,375 £ 2,13,650
Year 4 £ 79,870 £ 2,93,520
Year 5 £ 57,555 £ 3,51,075
Formula:
Payback Period = Year before full recovery + Unrecovered amount / Cash flow during the year
= 2 + 24725 / 88375
= 2 + 0.27
= 2.27 year
Net Present Value (NPV): It is most popular capital budgeting approaches, since it relies
on the cash-flow discount method (Di Francescomarino And et.al., 2018). NPV is measured at a
discount rate that reflects risk to the enterprise. For most cases it is appropriate to continue with
the client's WACC and change it up or down depending on the difference between the individual
risk of the project and the average risk of the business as a whole. Positive NPV is more
favourable and it can ignore negative value. On the other side, negative NPV rejected because it
is not profitable for the organization. Further calculation new ferry is as follow:
Discount factor £000 DCF
Cost of ferry 1 -£150000 -150000
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Cash inflows for five years:
1 0.971 £ 55230 £ 53628.33
2 0.943 £ 70045 £ 66052.44
3 0.915 £ 88375 £ 80863.13
4 0.888 £ 79870 £ 70924.56
5 0.863 £ 57555 £ 49669.97
Sale of ferry in 5th year 0.863 £ 45000 £ 38835
NPV £ 209973.4
Internal rate of Return (IRR): It is a capital budgeting measurement used to assess the
profitable investments. The IRR is a discount rate which is equal to zero for the NPV of all cash
flows from a given project. High the IRR of any project is beneficial, so managers of Zylla
Limited select those project which provide higher return. Calculation of IRR is as follow:
Year Cash inflow PV @ 10% DCF PV @ 40% DCF
Initial Investment -150000 1 -150000 1 -150000
1 55230 0.909 50209.09 0.714 39450
2 70045 0.826 57888.43 0.510 35737.24
3 88375 0.751 66397.45 0.364 32206.63
4 79870 0.683 54552.28 0.260 20790.82
5 57555 0.621 35737.13 0.186 10701.46
5 45000 0.621 27941.46 0.186 8367.049
NPV 142725.8 -2746.8
IRR = L + [{NPV of Lower rate / (NPV of Lower rate – NPV of Higher rate)} * (H - L)] %
= 10 + [{142725.8 / (142725.8 – {-2746.8})} * (40 - 10)] %
= 10 + [{142725.8 / 145472.6}* 30] %
= 10 + [0.98 * 30] %
= 10 + [29.4] %
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= 39.4 %
From the above calculation it has been concluded that payback period of spending into
this ferry project is 2.27 years, NPV is £ 209,973.4 and IRR of the project is 39.4%. It is
analysed that Zylla Limited should invent in this project because it provide higher return that is
beneficial for the organization. Through spending money into this proposal, company receive the
positive NPV so managers will select this project which further helps in maximising productivity
as well as profitability.
CONCLUSION
On the basis of above findings, it has been concluded that businesses have to make
appropriate investment decisions at the time of investing any project to expand their product
demand in the market. There are also several short term or long-term sources of finances that
can be acquired by the entity to buy new ferry or fulfil their demand for working capital.
Furthermore, administrators make decisions to spend it or not with the aid of different risk
assessment techniques.
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REFERENCES
Books & Journals
Di Francescomarino, C. And et.al., 2018. Genetic algorithms for hyperparameter optimization in
predictive business process monitoring. Information Systems. 74. pp.67-83.
He, X. And et.al., 2018. Long-term impact of economic conditions on auditors' judgment. The
Accounting Review. 93(6). pp.203-229.
Hsiao, P. C. K. and Kelly, M., 2018. Investment considerations and impressions of integrated
reporting. Sustainability Accounting, Management and Policy Journal.
Warren, L. and Seal, W., 2018. Using investment appraisal models in strategic negotiation: The
cultural political economy of electricity generation. Accounting, Organizations and
Society. 70. pp.16-32.
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