Capital Budgeting and Project Evaluation

This assignment provides a comprehensive financial analysis of Zylla Limited's project, including the application of various capital budgeting methods such as Net Present Value (NPV), Internal Rate of Return (IRR), and Accounting Rate of Return (ARR). The project's initial investment, cash inflows, and average margin are also analyzed. The assignment recommends accepting the project based on its high profitability and potential for future growth.

BUSINESS SCENARIO FOR
INDIVIDUAL REPORT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1. Short term and long term sources of finance.....................................................................1
2. Evaluating different investment appraisal techniques for assessing viability of acquisition
and operation of new ferry.....................................................................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Zylla limited is the company which operates number of ferries that providers crossing
services such as river crossing for passengers, goods across rivers. The organisation is planning
to buy a new ferry due to increased demand. This report will include the sources of funding such
as short term and long term sources. Also, it will provide with various investment appraisal
techniques to identify the viability of the project.
TASK 4
1. Short term and long term sources of finance
Zylla Limited should uses sources of finance for funding acquisition of ferry and with
requirement of working capital are categorized in two types such as:
Short term sources of finance
Trade credit: This is referred as very important source of working capital which is
extended or produced with business. It could be elaborated as delay of payment which is directly
permitted through raw material's suppliers and creditor against goods purchased through him
(Yacus, Esposito and Yang, 2019). It is highly dependent on two things such as competition and
customs and other is credibility of buyer with perspective of position of liquidity, past payment
records and ability for generating margin.
Consumer credit: In various types, suppliers or manufacturers insist there customers for
advance in particular case of big or special orders. It frames part of product's price ordered as
consumer tends for full price as this finance is free through interest.
Accounts receivable financing: With this context, financing organization obtains
accounts receivable through money or customer as advance on security on its receivable. In
simple words, it is referred as method of obtaining credit through pledging book debts.
Long term sources of finance
Equity capital: It is also replicated as owned capital sourced through organisation's
promoter or through public with issuance of equity. Generally, business is started with promoters
through upbringing capital for any small venture or startup. There is absence of burden of
repaying instalments and interests such as borrowed capital (Sources of Short-Term and Long-
Term Financing for Working Capital, 2018). With this context, risk related to bankruptcy is
decreased and business at initial stage of infancy prefer owned or equity capital.
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Retained earning: Any organization had retained part of margin which is undistributed
with context of free reserves and utilised with objective of diversification and expansion
programmes is replicated as ploughing back of retained earnings and profit. Generally, these
funds have highly belonging to equity shareholders which will raise business's net worth.
Long term loan: this will be allowing bank for attaining requirement of working capital
which is full fledged for two or more than two years.
Public deposits: This is considered as very good source of finance for working capital
need undertaking for private sector with short term perspective (Arntzen, Alsos and Sørheim,
2018). Usually, it goes for liquidations and lenders would be directly paid with residue with
accomplishment of preferential and secured creditors.
2. Evaluating different investment appraisal techniques for assessing viability of acquisition and
operation of new ferry
Payback period
Merits
 It gives high importance to liquidity for decision making with context of investment
proposals.
 It dealt with risk and project with short PBP has less risk comparatively project with big
payback period (Ogunbayo and et.al., 2018).
Demerits
 Time value of money is not recognized.
 Lays special emphasis on liquidity and profitability is avoided.
Year Total Cash inflows Cash inflows cumulative
1 55230 55230
2 70045 125275
3 88375 213650
4 79870 293520
5 (57555+ 45000) 102555 396075
Initial investment: 150000
Payback period: 2.3 (2 years and 3 months)
Internal rate of return
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It reflects discount rate where present value pf future cash flow is equal to zero. It has
merits and demerits as well:
Merits:
 It is very easy for understanding perspective.
 There is consideration of time value of money (Al-Mutairi, Naser and Saeid, 2018).
Demerits
 It has involvement of tedious calculations.
 The outcome of NPV and IRR might contradict with under evaluation or project differing
in timings, size and life of cash inflows.
Year Cash inflows
0 (150000)
1 55230
2 70045
3 88375
4 79870
5 (57555 + 45000) 102555
Internal rate of return: 39%
Net Present value
Year Cash inflows
Present Value factor @
3% (cost of capital)
Discounted
cash inflows
1 55230 0.9709 53621
2 70045 0.9426 66024
3 88375 0.9151 80876
4 79870 0.8885 70963
5 (57555+ 45000) 102555 0.8626 88465
Total discounted cash flow: 359949
Initial investment: 150000
Net present value: Total discounted cash flow – Initial investment
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= 359949 – 150000
= 209949
Merits
 It helps in increasing value of firms.
 The risk and profitability of project is gives high priority.
Demerits
 It is very hard for using best discount rate and to use.
 It does not provide appropriate decision is invested amount is not equal and mutually
exclusive project.
Accounting rate of return
Year Cash inflows
1 55230
2 70045
3 88375
4 79870
5 102555
Average margin 79215
Initial investment: 150000
Accounting rate of return: 53%
Merits
 It is very easy for calculating and simple for understanding as well.
 There is consideration of total margin and saving over whole life of economic project.
Demerits
 It avoids discounting factor as it chooses alternative use of fund (DeBoeuf and et.al.,
2018).
 Fair value of return could not be identifies as it is discretion of management.
CONCLUSION
From the above scenario it had been concluded that Zylla Limited would be implying
both sources for funding acquisition of ferry and to meet requirements of working capital such as
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retained earnings, accounts receivable financing etc. In the similar aspect, during evaluation of
multiple investment appraisal techniques it is recommended to Zylla Ltd to accept this project as
its accounting rate of return is 53%, net present value is 209949, internal rate of return is 39%
and its initial investment is covered in 2 years and 3 months which is highly profitable.
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