Financial Decision for Zylla Limited: Short and Long Term Sources of Finance and Investment Appraisal Techniques

This report discusses the various short term sources of finance such as factoring services, trade credit, short term loans from commercial banks, and commercial paper, and long term sources such as share capital, debentures, and ploughing back of profits for Zylla Limited's expansion purpose. It also evaluates the investment project for acquiring a new ferry through various investment appraisal techniques such as net present value, internal rate of return, average rate of return, and payback period, and recommends the net present value method as the most suitable technique for finding the viability of the investment project.

Financial decision

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Short and Long Term Sources to Finance:..............................................................................3
2. Evaluating various investment appraisal techniques and recommending on viability............4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................1

INTRODUCTION
Zylla Limited is a company that provides services for river crossing for people, vehicles
and goods across a river. The company owns various ferries to operate its business. The
company wants to expand its business and for the expansion purpose the management decides to
purchase a new ferry to cater the increasing demand for its services.
This report will highlight the various short term sources of finance to meet the working
capital requirement of the company. In addition, for acquiring the ferry some long term sources
to finance will be discussed in the report. Further the report will evaluate the project for
acquisition of ferry through various investment appraisal technique.
MAIN BODY
1. Short and Long Term Sources to Finance:
Short Term Sources
Factoring Services: Short term requirements of funds for working capital of Zylla
Limited can be meet through factoring services. Factoring Services is a process in which for
raising money the company sell its customer invoices to a bank or a funder (Shrotriya, 2019).
The lender evaluates the money that can be funded on the basis of the invoices, customer base of
the business.
Trade Credit: Through trade credit Zylla Limited can buy goods without paying for it
through cash or cheque immediately. It is a business to business agreement that allow Zylla
Limited to purchase goods from its suppliers and make payment at a later date. It is a type of
zero percent financing through which a company increases its assets.
Short Term Loans from commercial banks: Zylla Limited can also meet its short term
fund needs through acquiring short term loan from commercial bank. Working capital loan can
be taken by Zylla Limited for meeting its working capital requirements. It is a way through
which the company can overcome its seasonal deficiency of cash, cash flow irregularity and
cater its sudden need in business.
Commercial paper: It is commonly used unsecured way to raise funds by the
corporations. Commercial paper is a debt instrument issued by companies to raise short term
finances. It is issued at discounted value.
Long Term Sources

Share Capital: Share capital or Equity shares fall under the category of long term sources
of finance as legally equity shares are not redeemable. The capital can be raised by the Zylla
Limited through the sale of shares. The company through selling of shares effectively sells the
ownership of its company in exchange for cash. Shares are the certificate for company's
ownership to an investor (Turkson, Amissah and Gyeke-Dako, 2020). Investors are entitled to
profit sharing and also at the event of liquidation of company the have residual claim over the
assets of the company. Company also gives voting rights to the equity share holders.
Debentures: Zylla Limited can raise funds by issuing debentures, having an interest rate
that is fixed. Debentures are the acknowledgement regarding the funds being borrowed by the
company and that the company promises to pay the amount borrowed to the lenders at a specific
future date. It is advantageous for the company to issue debentures to raise funds for the
requirement of purchasing the ferry as debenture holders does not dilute the control of equity
shareholders. Also, raising funds through debentures is less costly that through equity shares.
Ploughing Back of Profits: Zylla Limited for meeting its long term fund requirement for
purchase of ferry can also raise funds through the method of ploughing back of profits or
retained earnings. In this method all the earning of the company are not distributed as dividend
among the shareholders and kept within the business itself. This is a kind of internal financing.
2. Evaluating various investment appraisal techniques and recommending on viability
Computation of NPV
Year Cash inflows PV factor @ 10%
Discounted
cash inflows
1 55230 0.971 53628.33
2 70045 0.943 66052
3 88375 0.915 80863
4 79870 0.888 70925
5 57555 0.863 49670
Total discounted cash 321138

inflow
Initial investment 150000
NPV (Total discounted
cash inflows - initial
investment) 171138
This technique gives the sum total of discounted cash inflows of future and outflows in
relation to the project, called as net present value (Investment Appraisal Techniques, 2022).
Computation of IRR
Year Cash inflows
0 -150000
1 55230
2 70045
3 88375
4 79870
5 57555
Internal rate of return (IRR) 36%
The discounting rate that will bring the future cash flow, that is at discounted value, at par
with the initial investment is called internal rate of return.
Computation of Average rate of return
Year Cash inflows
1 55230
2 70045
3 88375
4 79870
5 57555

Average profit or cash inflow 70215
Average initial investment 97500
Average initial investment = [(initial investment +
scrap value) / 2]
ARR 72%
This accounting technique measures the profit that is expected from the investment made
(Baum, Crosby and Devaney, 2021). The expected profit is represented as the percentage of the
capital investment through this technique.
Computation of Payback period
Year Cash inflows Cumulative cash inflows
1 55230 55230
2 70045 125275
3 88375 213650
4 79870 293520
5 57555 351075
Initial investment 150000
Payback period 2
0.4
Payback period 2 year and 4 months
This technique indicates the period that will be taken to generate enough cash flow for
covering the initial cost incurred for the project by the profit from the project.
Recommendation:
On the basis of the above calculation of net present value of the ferry investment it is
recommended for Zylla Limited to invest in the asset. The value calculated as the net present
value is positive this indicates that project is profitable. NPV method is recommended as the
technique considers the time value of money along with the cost of capital for the company. The

technique also takes into account the inherent uncertainty that may happen in future events
through its discounting regarding future estimates (Fatimah and Kartikaningsih, 2020).
CONCLUSION
Based on the report various long and short sources of finance to cater the needs of Zylla
Limited expansion purpose have been highlighted. The report has evaluated that net present
value investment appraisal technique is suited for the firm for finding the viability of the
investment project.

REFERENCES
Books and Journals
Shrotriya, D. V., 2019. Internal sources of finance for business organizations. International
Journal of Research and Analytical Reviews. 6(2). pp.933-940.
Turkson, F. E., Amissah, E. and Gyeke-Dako, A., 2020. The role of formal and informal finance
in the informal sector in Ghana. Journal of Small Business & Entrepreneurship, pp.1-
24.
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Fatimah, N. and Kartikaningsih, D., 2020. ANALYSIS OF RENT, BUY AND RENT-TO-BUY
WITH NET PRESENT VALUE METHOD IN THE DECISION OF TRUCK
PROCUREMENT AT PT. XYZ. Journal of Islamic Economics Perspectives. 2(1).
pp.48-65.
Online
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