Sources of Finance and Investment Appraisal Techniques for Zylla Limited

This report discusses the short-term and long-term sources of finance for Zylla Limited, a ferry company. It also evaluates various investment appraisal techniques, including payback period, accounting rate of return, profitability index, and net present value. The report concludes that financing is important for the company to start their project and there are several sources of finance according to the time period of capital requirement.

Task 4: Business
Scenario for
Individual Report

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Short-term and long-term sources of finance ............................................................................1
Evaluation of various Investment appraisal techniques .............................................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Financing the company is most essential aspect of starting the business, companies opt
for several types of finances for their long term and short term capital requirement. Investment
done by the organisation in the projects must be backed by good techniques so that the
organisation would be able calculate the rate of return (Burkhanov, Hudoykulov and Tursunov,
2019). In this report Zylla Limited is considered which is a ferry company providing service of
crossing rivers to people and vehicles. This report covers the sources of finance that the company
can opt for their long term and short finance needs. Along with this it also covers the several
types of investment appraisal techniques and the technique used by Zylla in their project of ferry.
MAIN BODY
Short-term and long-term sources of finance
Short term finance refers to the acquisition of capital for a period of less than 1 year. This
finance is generated by the organisation in order to meet the working capital requirements in the
organisation. Long term finance refers to borrowing refers to acquisition of finance for a period
of more than 1 year (Casanova, Cornelius and Dutta, 2017). These finance is taken by the
business in order to fulfil their investment and production needs. Few sources of finance that
company can opt in order to invest and maintain the ferry are discussed below:
Long term sources of finance
Share capital- This refers to the money that the company raises by issuing stocks in the
market. Shares can by issued by the company by two types- equity shares and preference shares,
the difference is between the rights that the shareholders have on the company. Share capital
helps in meeting long term needs of the finance. Zylla limited can consider this option in order to
fund their investment in the new ferry.
Debentures- These are considered as debt instruments that are used by the organisations
in order to issue loans. They are issued in case the company wants to raise capital, they are
bound for a certain period of time with a fixed rate of return (Kreß Eierle and Tsalavoutas,
2019). Zylla limited can opt this, in case if they want to fix a certain percentage of return for
their lenders.
Short-term source of finance-
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Commercial paper- This instrument is a common form of short term unsecured debt that
is issued by the business to meet its short term liabilities and working capital requirements.
Maturity of a commercial paper is of few weeks or months. Zylla limited can issue commercial
paper to its lenders according to their funds requirements. This will give a surety to the lenders as
there is a maturity date mentioned on the paper and the company is liable to pay on or before that
date.
Commercial bank loans- This refers to the loan form commercial banks for a short
period of time. Zylla limited can take loans from commercial banks in order to meet the capital
requirement of ferry on a daily basis.
Evaluation of various Investment appraisal techniques
There are various types of techniques that are used by the businesses in order to gain an insight
on their investments in different projects (Vanaga and Sloka, 2020). The company further opts
for the second technique that is the discounted one as it seems to be more accurate. Two types of
investment appraisal techniques are further discussed below:
Non-discounted Techniques:
Payback period- This is considered as one of the simplest investment appraisal
techniques as it just tells that how long would it take for the project to generate the amount that is
initially invested.
Accounting rate of return- This rate of return which tells the amount of returns that are
expected from the project in the near future. The calculation of ARR is done by dividing the
Annual profit after tax by initial investment. The resulted projection is further multiplied by 100
to get a rate of return.
Discounted Techniques:
Profitability index- This tells the amount that the revenue company will generate on per
euro of investment. Here the present value of anticipated cash flow is divide by the initial
outflow.
Profitability index of Zylla Limited:
=Present value of anticipated cash flow/ initial cash outflow
=€359,916/ €150,000
= €2.39/per euro.
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Net present Value of the project- This is the sum of discounted cash inflow and outflow
of the project. This method helps in anticipating more exact value as compared to non-
discounted methods (Wallmeroth, Wirtz and Groh, 2018). With the help of discounting period,
the present value of the project is calculated. Further is the calculation of net present value of the
ferry project that Zylla Limited is opting in their business:
NPV Calculation of Zylla Limited
Year Cash flow Discounting rate Present value Cumulative flow
0
1
-
€55230
1
0.970
€150,000
€53573
-
-€96427
2
3
4
5
Scrap Value
€70045
€88375
€79870
€57555
€45000
0.943
0.915
0.888
0.863
0.863
€66052
€80863
€70924
€49669
€38835
-€30375
€50488
€121412
€171081
€209916
Net present value of ferry= €209,916
From the above calculation of profitability index it can be evaluated that the project is
good as it is giving returns of 2.39 euro per euro. Another method NPV is used above to gain
more insight on the investment. By above calculation of NPV of the project it shows that the
project would give total return of €209,916, which is a good investment as the percentage return
of project is more than 100%.
CONCLUSION
From the above report it can be concluded that financing is important for the company in
order to start their project. There are several sources of finance according to the time period of
capital requirement. The company can opt for various kinds of finance when they are looking for
investment or working capital requirement. There are various kind of investment appraisal
techniques that company can use in order to evaluate their investment in the project.
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REFERENCES
Books and Journals
Burkhanov, A.U., Hudoykulov, H.H. and Tursunov, B.O., 2019. The factors effecting net actives
of investment funds. Economics and Innovative Technologies, 2019(2), p.6.
Casanova, L., Cornelius, P. and Dutta, S., 2017. Financing entrepreneurship and innovation in
emerging markets. Academic Press.
Kreß, A., Eierle, B. and Tsalavoutas, I., 2019. Development costs capitalization and debt
financing. Journal of Business Finance & Accounting, 46(5-6), pp.636-685.
Vanaga, R. and Sloka, B., 2020. Financial and capital market commission financing: aspects and
challenges. Journal of Logistics, Informatics and Service Science, 7(1), pp.17-30.
Wallmeroth, J., Wirtz, P. and Groh, A.P., 2018. Venture capital, angel financing, and
crowdfunding of entrepreneurial ventures: A literature review. Foundations and
Trends® in Entrepreneurship, 14(1), pp.1-129.
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