Short and Long Term Sources of Finance and Investment Appraisal Techniques

This report discusses the short and long term sources of finance for Zylla Limited to fund the acquisition of a new ferry and meet working capital needs. It also explores various investment appraisal techniques to assess the viability of the investment and the operations of the new ferry.

Business Scenario for Individual Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Short term and long term sources of finance..............................................................................1
Investment appraisal techniques.................................................................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Zylla Limited is UK based company that operates ferries and provide the river crossing
services for the people, goods and vehicles across river. This company require the funds for
acquisition of ferry and pay for working capital needs of expansion (Singh and Wasdani, 2016).
In present report will be discuss about short and long term finance sources to fund an acquisition
of ferry and requirements of working capital of firm. Different investment appraisal techniques
and also viability of acquisition as well as operations of new ferry on the basis of effective
appraisal techniques.
MAIN BODY
Short term and long term sources of finance
Short term finance sources- This refers to loan and credit facility extended to company for less
than one year. It deals with raising required money for short period of time means few days to
one year. This is credit arrangement given to company to bridge gap among expenses and
income in short time period. In context to Zylla, short term source of finance helps business to
manage current liabilities like payment of wages and salaries to labours and also procurement of
inventory and raw materials (Gadenne, 2017). Different sources of finance are given below:
Commercial paper- It is form of financing includes short term basis promissory note
regarded as unsecured and sold in money market. They are mainly issued through large firms and
soled to the other companies, banks, pension funds etc. Zylla Ltd. can use commercial paper as
alternative financing source (Sanderatne, 2019).
Invoice discounting- It is short term finance where receivable invoices can discounted
with banks or third party. In this, bank will pay money to Zylla company during discounting and
gathers money from consumers when bill becomes due (Vinczeova and Kascakova, 2017).
Long term finance sources- It means financing through loan for team of more than the one year
through issuing the equity shares, long term loans, form of debt financing. It is done for large
size projects financing and also expansion of organisation. The long term financing is needed to
finance the long term project investment (Thurston and et. al., 2016). Some sources of long term
finance mention below:
Equity Shares- These are known as the ordinary shares and represents ownership capital
of firm. Holders of the equity shares are legal owners of firm. They have the unrestricted claim

on assets and income of firm and also posses all voting power in business. Zylla firm can use the
equity share because this is permanent capital and also available for use for long time (Harford,
Kecskés and Mansi, 2018).
Debentures- These are debt instruments which used to increase the additional capital
from general public and backed through integrity and creditworthiness of issuer. It provides
flexibility than term loan as there is variety with context to security, interest rates, maturity and
the special features (Flammer and Bansal, 2017).
Investment appraisal techniques
Investment appraisal is collection of the techniques which mainly used to determine the
attractiveness of investment. Its main purpose is to assess project viability and portfolio
decisions. Zylla Limited company is planning for purchase new ferry so enhanced demand can
be met and maximised profits (Alkaraan, 2017). For examining appropriateness of investment,
company should be invest. There are some investment appraisal techniques mention below:
Pay back period: It is explained as time that takes for recover investment cost. This is
length of the investment time that reaches break even point. This is capital budgeting related to
time needed to recoup funds expensed in investment to reach break even point (Mahmoud and
Neale, 2016).
The formula for calculation of Pay Back Period is 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 = Completed year + [ Cost of new project – Cumulative cash inflow of
the year] / Cash inflow of upcoming year

= 2 + (150000 – 125275) / 88375
= 2 + 2.28
= 4.28
Above calculation states about 150000 investment amount that will be recovered through
Zylla Limited company in 4.28 years therefore purchasing decision for new ferry will be
effective for company.
Net present value- It applies cash flow series occurring at various times. Present value of
cash flow is based on interval of time among now and cash flow. This is based on discount rate.
It can be used through Zylla company managers for identifying the current value of monetary
resources inflows that will generate in the future (Alkaraan, 2017).
Formula to calculate the Net present value- Total Cash inflow / Cost of new project.
Internal rate of return- While planning to investment in project, this is used through the
company to identify profitability of same (Mahmoud, 2016). It is mainly used in the capital
budgeting in order to estimate profitability of the potential investments.
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%

This has been examined from above table that NPV and IRR for new project of
purchasing new ferry is high and finance manager of Zylla company is being suggested to make
investment in this.
CONCLUSION
It has been concluded from mention report that funds is required to conduct the business
operations effectively. In given report has been studied about different sources of the short term
finance like Commercial paper and Invoice discounting and the long term sources such as Equity
Shares and Debentures. Different techniques has been used to identify investment decisions in
new project that will be effective for business. Techniques which used for investment decisions
are Pay back period, Internal rate of return and Net present value.

REFERENCES
Books & Journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. Advances in
Mergers and Acquisitions, p.67.
Alkaraan, F., 2017. Strategic Investment Appraisal: Multidisciplinary Perspectives', Advances in
Mergers and Acquisitions (Advances in Mergers & Acquisitions, Volume 16).
Flammer, C. and Bansal, P., 2017. Does a long‐term orientation create value? Evidence from a
regression discontinuity. Strategic Management Journal. 38(9). pp.1827-1847.
Gadenne, L., 2017. Tax me, but spend wisely? Sources of public finance and government
accountability. American Economic Journal: Applied Economics, pp.274-314.
Harford, J., Kecskés, A. and Mansi, S., 2018. Do long-term investors improve corporate decision
making?. Journal of Corporate Finance. 50. pp.424-452.
Mahmoud, O. and Neale, B., 2016. Managerial judgment factors and the real options approach in
the investment appraisal process: evidence from UK automotive firms. International
Journal of Business and Social Science. 7(5). pp.71-84.
Mahmoud, O., 2016. Managerial Judgement versus Financial Techniques in Strategic Investment
Decisions: An Empirical Study on the Syrian Coastal Region Firms. International
Journal of Business, Economics and Management. 3(3). pp.31-43.
Sanderatne, N., 2019. Informal Finance in Sri Lanka. In Informal finance in low-income
countries (pp. 85-101). Routledge.
Singh, C. and Wasdani, P., 2016. Finance for micro, small, and medium-sized enterprises in
India: Sources and challenges.
Thurston, G. D. and et. al., 2016. Ischemic heart disease mortality and long-term exposure to
source-related components of US fine particle air pollution. Environmental health
perspectives. 124(6). pp.785-794.
Vinczeova, M. and Kascakova, A., 2017. How do Slovak small and medium-sized enterprises
make decision on sources of finance. Ekonomicko-manazerske spektrum. 11(2). pp.111-
121.
Online
HAYES, A., 2019. Financing. [Online]. Available
through:<https://www.investopedia.com/terms/f/financing.asp>.

6