Various Sources of Finance for Acquisition of New Ferry and Working Capital

This report discusses the various long and short term sources of finance that can be used to fund the acquisition of a new ferry and fulfill the working capital needs of the company. It also evaluates different techniques of investment appraisal to determine the viability of the acquisition and operation of the new ferry. The report concludes with recommendations for the finance director of Zylla Limited.

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Individual Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Various long and short term sources of finance to fund the acquisition of new ferry and
fulfil working capital needs of the company................................................................................1
2. Evaluation of different techniques of investment appraisal and recommendation regarding
viability of acquisition and operation of the new ferry................................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Zylla limited is operating different ferried which are used for the purpose of providing
river crossing services to the people and vehicles. Demand of the organisation is increasing
continuously therefore the financial officer have proposed to buy a new ferry so that it could be
met and higher profits are generated. The entity requires funding to acquire a new ferry and meet
working capital requirements therefore different sources of long and short term finance are
discussed in this report. Along with this, various investment appraisal techniques are also used to
analyse appropriateness of the new project.
MAIN BODY
1. Various long and short term sources of finance to fund the acquisition of new ferry and fulfil
working capital needs of the company
As Zylla Limited is planning to buy a new ferry therefore it requires to generate finance
to fund the acquisition. On the other hand, enterprise also require monetary resources to fulfil all
its working capital needs (Ararso, Mahendran and Merdasa, 2016). There are various long as
well as short term sources of funding which could be used by the organisation. Description of all
of them is as follows:
Long term funds: All the funds which could be acquired by an organisation for a long
period are considered as the part of it. Some of them are as follows:
 Retained earnings: All the profits which are retained for a long period could be used by
Zylla Limited to fund the acquisition of new ferry and fulfil working capital needs as it
will increase the cash and support the entity to acquire appropriate funds.
 Issuing debenture: It is another source of fund through which Zylla Limited can generate
finance by issuing debentures in the market. It will help to buy the new ferry and meet
working capital requirements of organisations to carry out operations properly (Short and
long term sources of funds, 2015).
Short term funds: All the sources of funds which are used to generate finance for short
term are treated as parts of it. Some of them are described below:
 Overdraft: By signing an agreement with a bank Zylla Limited will be able to make
overdrafts from the financial institute in difficult situations. It will help to fund the
proposed plan of buying a new ferry and fulfil needs of working capital.
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 Advances from customers: Zylla Limited can ask its clients to make payment in advance
before getting the services so that its future projects could be funded. It will be beneficial
for the organisation to meet WC requirements (Jiang and Wu, 2015).
2. Evaluation of different techniques of investment appraisal and recommendation regarding
viability of acquisition and operation of the new ferry
Zylla Limited is planning to buy a new ferry so that the increased demand could be met
and profits could be enhanced. For the purpose of analysing appropriateness of this investment
and assess that the organisation should invest in it or not different investment appraisal
techniques are used. Description of all of them along with calculations is as follows:
Pay back period: It can be defined as a time which is taken by a project to repay the
amount of investment to the organisation. Desirability of a proposed plan of an organisation is
related to the pay back period. It could be used by Zylla Limited to make sure that the new ferry
will be profitable for it or not (Arjunan, 2017). Calculation of it is as follows:
Formula for calculations: Completed year + [ Cost of new project – Cumulative cash
inflow of the year] / Cash inflow of upcoming year
Years Cash inflow Cumulative cash inflow
First year 55,230 55,230
Second year 70,045 1,25,275
Third year 88,375 2,13,650
Forth year 79,870 2,93,520
Fifth year 57,555 3,51,075
Pay back period = 2 + (150000 – 125275) / 88375
= 2 + 2.28
= 4.28
The above calculations are showing that the investment amount of 150000 will be
recovered by Zylla Limited in 4.28 years therefore the decision of buying a new ferry will be
beneficial for the organisation.
Net present value: It is a capital budgeting technique which is used by organisations to
determine the present value of all their cash flows which could be generated in future so that
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investment related decisions could be taken. It could be used by managers of Zylla Limited for
the purpose of determining current value of all its inflows of monetary resources that will be
generated in future.
Formula for calculations: Total Cash inflow / Cost of new project
Internal rate of return: While planning to make investment in a project it is used by
business entities to determine profitability of the same. In other words, it can be defined as a rate
where present value of all the cash inflow and outflow becomes zero. With the help of it Zylla
Limited will be able to determine that new ferry will be profitable for it or not (Pawananont and
Leephakpreeda, 2017).
Calculation of NPV and IRR are as follows:
Years Net cash flows PV factor Discounted cash
flow
Initial investment -1,50,000 1 -1,50,000
First year 55,230 0.971 53,628
Second year 70,045 0.943 66,052
Third year 88,375 0.915 80,863
Forth year 79,870 0.888 70,925
Fifth year 57,555 0.863 49,670
Scrap value 45,000 0.863 38,835
Net present value 2,09,973
IRR 38%
From the above calculations it has been determined that net present value and IRR for the
new project of buying a new ferry is very high therefore, the finance director of Zylla Limited is
being recommended to make investment in it.
CONCLUSION
From the above project report it has been concluded that for an organisation which is
planning to make an investment in future it is very important to acquire funding from short and
long term sources. There are various techniques which could be used to determine that decision
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of making investment in a new project will be beneficial for the business or not. These are pay
back period, net present value and internal rate of return.
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REFERENCES
Books and Journals:
Ararso, J., Mahendran, A. and Merdasa, T., 2016. RETURN RATIO ASSESSMENT
APPROACH TO FUNDS’MANAGEMENT: THE CASE OF COOPERATIVE BANK
OF OROMIYA, HEAD OFFICE, ADDIS ABABA, ETHIOPIA. CLEAR International
Journal of Research in Management, Sciences & Technology. 11(6).
Arjunan, K., 2017. A New Method to Estimate NPV and IRR from the Capital Amortization
Schedule and an Insight into Why NPV Is Not the Appropriate Criterion for Capital
Investment Decision. Available at SSRN 2899648.
Jiang, K. and Wu, J., 2015, August. An analysis of gap of funds supply and demand of region a
based on GM (1, 1) model. In 2015 IEEE International Conference on Grey Systems
and Intelligent Services (GSIS) (pp. 318-326). IEEE.
Pawananont, K. and Leephakpreeda, T., 2017. Feasibility analysis of power generation from
landfill gas by using internal combustion engine, organic Rankine cycle and Stirling
engine of pilot experiments in Thailand. Energy Procedia. 138. pp.575-579.
Online
Short and long term sources of funds. 2015. [Online]. Available through:
<https://www.invensis.net/blog/finance-and-accounting/sources-of-short-term-and-
long-term-financing-for-working-capital/>
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