Investment Appraisal for Zylla Company

This report is about the investment appraisal for Zylla company, which operates ferries and provides river crossing services. The company has two options for acquiring funds: short-term and long-term sources of finance. Various investment techniques such as IRR, payback period, and net present value are discussed to help investors choose the best option for the company.

Business Scenario for
Individual Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY .................................................................................................................................1
1. Short term and long term sources of finance ..........................................................................1
2 An evaluation of various investment appraisal techniques and recommending the viability of
the acquisition..............................................................................................................................4
CONCLUSION ...............................................................................................................................5
REFERENCES ...............................................................................................................................6

INTRODUCTION
Zylla Limited is established in United Kingdom and it operates a number of ferries which
provide river crossing services to the individuals, vehicles & goods across the river. The business
is good and there are prospects for expansion and the management has made a decision to buy a
new ferry to cater for the increased demand. As the corporation require funds for the purpose of
acquisition of the ferry & to meet the requirements for the expansion of business. This report has
discuss about various topics such as: short term and long term source of finance to fund the
acquisition of ferry and for the company's working capital needs. Apart from this, report also
discuss about evaluation of various investment appraisal and operation of the new ferry based on
one suitable investment appraisal technique.
MAIN BODY
1. Short term and long term sources of finance
There are various source of finance through which a company can raise funds so that it
can run its business operations and fulfil the needs of working capital in order to operate the
business activities. As finance is the backbone of every business and without it an organisation
can not perform its day to day business functions. From beginning to end a corporation require
funds until it does not wind up the business. The needs of funds are based upon the size of
business and type of business. Generally companies raise funds through two sources which are
short term and long term (Wright and Cairns, 2013).
Short term source of finance : The short term source of finance is usually for small period
that is up-to one year. As Zylla Limited can use short term source of finance in order to
acquisition of the ferry & for the corporation's working capital need. It is also consider as
working capital financing and generally it is used by the organisations when they require more
cash so that they can perform day to day business operations in effective manner. So to fulfil the
short term needs of business it can be used by business entities as a source of fund. A corporation
can arrange the funds from various sources such as:
Trade credit: It refers to the credit which is extended by the suppliers of goods and
associated with the normal course of business and in this regard company purchase the supplies
without making immediate payment to the party (Simmons and Levie, 2014). This facility is
generally used by the corporations as a source of short term finance. As Zylla Limited can use
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this facility to acquire the funds so that it can fulfil the needs of short term finance. As a result its
working capital needs of firm can be fulfilled.
Overdraft agreement: It is a source for the organisations to arrange funds so that it can
fulfil the needs of working capital. In this, banks allow the firm to borrow funds up-to a specific
limit and for that purpose bank can ask for collateral security & organisations have to pay
interest at variable rate. This facility can be used by Zylla Limited as a short term source of
finance to fund the acquisition of the ferry & for the working capital requirement of firm so that
it can perform the business operations effectively (Laursen and Thorlund, 2016).
Accounts receivable financing: As discounted invoice facilities are provided by various
banks and non banking financial institutions. Organisation takes commercial bills to the bank
that makes the payment minus a small fee. On the maturity date bank collects the amount form
the company. So Zylla Limited can arrange short term source of finance to fund the acquisition
of ferry & needs of working capital of organisation can be fulfilled.
Factoring: Through this method organisation can raise funds so that it can carry the
business operations smoothly. In this tool account receivable credit offered by banks to the
business entities. The banks can arrange finance by discounting invoices of consumers.
However, enterprise can receive immediate payment for sales made on credit basis. As Zylla
Limited can use this short term source of finance to fund the acquisition of ferry & to fulfil the
requirements of working capital. So that corporation can perform its regular business operations
effectively.
Commercial paper: These are the unsecured promissory notes which are issued by the
business entities in order to arrange finance for the short term. This is the money market
instrument. It is generally bought by investors which involves trust, banks and insurance
organisations to invest excess money for the period of short term. As compare to the bank credit ,
it is the cheapest source through which Zylla Limited can arrange short term source of finance to
fund the acquisition of the ferry and to fulfil the requirement of working capital for the
corporation (Iyer and Henderson, 2012).
Long term source of finance: It includes long term debts & financial obligations on a
business which last for a period of more than one year and normally for five to ten years of
period. Zylla Limited can arrange funds from long term source of finance so that it can acquire
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ferry and fulfil the needs of working capital. There are various source of long term finance which
are as mention below:
Equity shares: It is the long term source of finance and through it company can arrange
huge amount of funds in order to carry the business operations. As equity shares denotes the
share capital excluding preference share and shareholder have voting rights. These are issued to
the general public for the purpose of arranging finance. Mostly organisations use this so that it
can arrange huge funds to expand the business. It does not have maturity date & no obligation to
redeem it. As Zylla Limited can issue equity shares if it want to arrange huge funds from the
market and it help the company to expand the business. If corporation use this option than it can
acquire funds for the purpose of acquisition of ferry and also the need of working capital can be
fulfilled (Gardner and Nesi, 2012).
Debentures: It is issued by the organisation under its common seal and it involves
bonds, debenture stock etc. The debenture holders does not have voting rights in the corporation.
There are various types of debentures such as: unsecured, secured, redeemable and perceptual.
The corporation have to pay fixed rate of interest to the debenture holders. Zylla Limited can
issue debentures if it want to borrow funds and it is helpful for the firm in context to the
acquisition of ferry. Also the working capital needs of organisation can be fulfil so that it can
continue the business operations successfully.
Financial institutions: These are the big corporations which involves in the business of
dealing with monetary transactions such as: loans, deposits, currency exchange & investment etc.
Zylla Limited can borrow funds from the financial institutions and for that purpose it have to pay
the interest as per the agreement. The funds can be used by organisation in context to the
acquisition of ferry and for the working capital requirements it can be also used so that day to
day business activities does not get affected.
Bonds: It is a debt instrument which is used for the purpose of raising funds. For that
purpose it is require to create a loan agreement among investor & bond issuer and in this bond
issuer is liable to pay specific amount of funds at a pre-decided date. The corporate loans are
taxable & it have more rate of interest. To raise funds for long term Zylla Limited can issue
bonds so that get funds which is used for acquisition of ferry as well as to fulfil the needs of
working capital as a result business of company can operate successfully (Davidson and Kanter,
2014).
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2 An evaluation of various investment appraisal techniques and recommending the viability of
the acquisition
Investment is done by individuals and corporations in order to get higher returns on the
amount which is invested by them. Investment appraisal is the procedure of ascertaining the
desirability of investment proposal and for that purpose there are various methods can be used
such as: internal rate of return, net present value and average rate of return. With the help of
investment appraisal technique an investor can know the attractiveness of investment and on he
basis of it investment decision has been taken that which alternative is more suitable in order to
get higher returns for the growth of company (Chinosi and Trombetta, 2012).
To make investment it is important to analyse the risk which is associated with it so that
better decision can be taken in context to the higher returns. There are different appraisal
techniques can be use by the organisation in order to consider the performance of projects.
Payback period: With the help of this technique it is easy to analyse how much time is
require to cover the cost of an investment. All individuals and corporations want maximum
returns of their investment and want that in least minimum time the cost of investment can be
cover. By using this investment appraisal technique Zylla Limited can know in how much time
the cost of investment can be recover in context to the acquisition of ferry business. It is
calculated by using the formula:
Payback period = Project cost/ annual inflow
Project cost = Value of investment – scrap value
Net present value: This investment appraisal technique can be used in order to know the
attractiveness of an investment. It shows the difference among the present value of cash inflow &
out flow related to a specific period of time. By using this investment technique Zylla Limited
can know the acquisition of ferry is profitable or not and after this analysis investment decision
can be taken. As a result company can get higher returns from the investment.
Net present value = Present value of cash inflow – Present value of cash outflow
Internal rate of return: It is the rate in that net present value of cash flows from a
project can be zero. By using this method Zylla Limited can analyse the attractiveness of new
project which is acquisition of ferry. The project will be desirable if internal rate of return of a
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project is more than organisation's rate of return. The project will not accepted if internal rate of
return goes down below the required rate of return (Amer and Jetter, 2013.
Calculation:
Working note:
Project cost : Value of investment – value of scrap
: 150000 – 45000
: 105000
Annual inflow : 55230 + 70045 +79870 + 88375 + 57555/ 5
: 70215
Payback period : Project cost / annual inflow
: 105000/ 70215
: 1.49 years
Summary: As Zylla company operates a number of ferries and provide river crossing
services to individuals. As there are two options for the Zylla company in order to acquire funds
which are short term and long term term source of funds. As per the requirement of company
best option can be chosen in order to acquire funds. There are various investment appraisal
techniques such as: IRR, payback period, net present value. For the investors it is require to
emphasis about that method through which company can get more returns in minimum time.
CONCLUSION
As from the above report, it has been concluded that it is important to analyse the
business scenario so that investment decision can be better. A company can acquire funds from
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the short term and long term source of finance and it is based upon the business need and size of
business. It is helpful to conduct the business operations effectively and as per the necessity.
There are distinct investment techniques which are used by the corporations in order to ascertain
the attractiveness of a project so that higher returns can be generated.
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REFERENCES
Books and Journals:
Amer, M., Daim, T. U. and Jetter, A., 2013. A review of scenario planning. Futures.46. pp.23-
40.
Chinosi, M. and Trombetta, A., 2012. BPMN: An introduction to the standard. Computer
Standards & Interfaces.34(1). pp.124-134.
Davidson, E. A. and Kanter, D., 2014. Inventories and scenarios of nitrous oxide emissions.
Environmental Research Letters.9(10). p.105012.
Gardner, S. and Nesi, H., 2012. A classification of genre families in university student writing.
Applied linguistics.34(1).pp.25-52.
Iyer, B. and Henderson, J. C., 2012. Business value from clouds: Learning from users. MIS
Quarterly Executive.11(1).
Laursen, G. H. and Thorlund, J., 2016. Business analytics for managers: Taking business
intelligence beyond reporting. John Wiley & Sons.
Simmons, S. A., Wiklund, J. and Levie, J., 2014. Stigma and business failure: implications for
entrepreneurs’ career choices. Small Business Economics.42(3). pp.485-505.
Victor, P. A., 2012. Growth, degrowth and climate change: A scenario analysis. Ecological
economics.84. pp.206-212.
Wright, G., Bradfield, R. and Cairns, G., 2013. Does the intuitive logics method–and its recent
enhancements–produce “effective” scenarios?. Technological Forecasting and Social
Change.80(4). pp.631-642.
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