Financial Analysis and Investment Decision

This assignment involves a detailed financial analysis of Zylla Limited, including an examination of long-term and short-term sources of finance. It also evaluates an investment proposal for a new ferry using various methods such as Internal Rate of Return (IRR), Net Present Value (NPV), Average Rate of Return (ARR), and Payback Period method. The report concludes that the project should be accepted based on the positive NPV result, indicating a potential return on investment.

Introduction to
Business Studies

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Sources of finance ..................................................................................................................1
2. Evaluation of Investment Proposal of new ferry.....................................................................2
CONCLUSION ..............................................................................................................................4
REFERENCES................................................................................................................................5
.........................................................................................................................................................5

INTRODUCTION
Business Studies means degree of management of business that allow to develop a broad
understanding of the business organisations and it also provides subject specific knowledge in
the field of markets, customers, finance, operations, information technology and business
strategy and policy. Zylla Limited operates a number of ferries providing river crossing services
for people, vehicles and goods across the river. In the given report short term and long term
sources of finance for Zylla Limited are discussed and the proposal for investment in new ferry is
also evaluated through various methods like IRR, NPV, ARR and pay back period and the
investment recommendation is given to the company (Forsgren,2015).
MAIN BODY
1. Sources of finance
Financing is very important for every business. It means equity, debt, debentures,
retained earning, working capital, term loans, letter of credit, working capital loans etc. These are
used in different situations of the business. There are two type of finance and they are as follows:
(a) Long Term Sources:
These are generally used for acquiring new equipment, company expansion, R & D etc.
They are repaid out of the company's free cash flow from the operations which are not from the
conversion of assets like in the short term borrowings (Arqueroand Romero-Frías ,2013). Some
of the major methods for long term financing are:
 Equity Financing
 Corporate Bond
 Capital Notes
(b) Short Term Financing:
It is a financing which is borrowed for a time duration of up to one year and are used for
day today operations like increase inventory order, daily supplies and payrolls(Doyle, 2013).
They are used to make up the fluctuations in the company's cash flow cycle of the current assets
(Dudovskiy, 2016). It can be done with the help of following financial instruments:
 Commercial Paper
 Promissory Note
 Asset Based Loan
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 Repurchase Agreement
 Letter of Credit
2. Evaluation of Investment Proposal of new ferry
(a) The Payback Period Method
Payback Period = Years before full recovery of cost + Unrecoverable cost at the start of the
years / Cash inflows of the year of full recovery of cost
Outflows (in £) (000) = 150000
Years Cash Inflows (in £000)
Cumulative cash Inflows
(in £000)
1 55230 55230
2 70045 125275
3 88375 213650
4 79870 293520
5 102555 396075
Total 396075
Payback Period = 2+(150000-125275) / 88375
= 2.28 Years
It means initial cost of £ 150000(000) will be recovered by the company Zylla in 2.28
Years. Its gives a positive sign to the company for accepting the project.
(b) The Accounting Rate of Return Method
Accounting Rate of Return= Average Net Profit / Average Investment *100
Outflows (in £) (000) = 150000
Salvage Value at end of 6th Year (in £000) = 45000
Years Cash Inflows (in £) Depreciation Net Profit
1 55230 21000 34230
2 70045 21000 49045
3 88375 21000 67375
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4 79870 21000 58870
5 57555 21000 36555
Total 351075 246075
Average Net Profit (in £000) = 246075 / 5
= 49215
Average Investment (in £000) = (Initial investment + Salvage Value) / 2
= (150000+45000) / 2
= 97500
Accounting Rate of Return(%) = 49215/97500*100
= 50.48 %
It means estimation of accounting profit to the average investment made in a project.
Zylla will have 50.48% of accounting rate of return from the project which is very high rate for
accepting the project.
(c) The Net Present Value Method
Net Present Value = Present value of cash inflows – cash outflow
Outflows (in £000) = 150000
Years Cash Inflows (in £000) Present Value Factor
Present Value
(in £000)
1 55230 0.971 53628
2 70045 0.943 66052
3 88375 0.915 80863
4 79870 0.888 70925
5 102555 0.863 88505
Total 396075 359973
Net Present Value (in £000) = 359973-150000
= 209973
Net Present Value means cash outflow will be reduced from the present value of cash
inflows of the project. If the result is positive then project will be accepted. In the present case
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Zylla have net present value of £ 209973(000), which is positive, therefore project will be
accepted.
(d) The Internal Rate of Return Method
Internal Rate of Return = lower discount rate + NPV of lower discount rate / NPV of lower
discount rate - NPV of higher discount rate ( higher discount rate - lower discount rate)
Years Cash Inflows (in £000) Present Value Factor
Present Value
(in £000)
0 -150000 1 -150000
1 55230 0.971 53628
2 70045 0.943 66052
3 88375 0.915 80863
4 79870 0.888 70925
5 102555 0.863 88505
Total 396075 359973
IRR 34.97%
Internal Rate of Return means the discounted rate on which whole cost of project is
recovered during the life of the project. Zylla have a 34.97 % of IRR from the above project
which is acceptable by the company.
Recommendation on the basis of NPV:
For making decision regarding the acceptance of any project, Net Present Value is always
considered as best method since it cover all the present value of cash inflows of entire life of the
project. In the present case, Zylla have net present value of £ 209973(000), which is positive, so
it is preferable to the company to accept the project of investment in new ferry.
CONCLUSION
In the above report, sources of finance for Zylla Limited are discussed that is long term
and short term source of finance are discussed and investment proposal of new ferry is also
evaluated through various methods namely IRR, NPV, ARR and pay back period method. All
the methods are giving positive result for making investment in the new ferry. Since the Net
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Present Method is preferable more for taking investment decision, so project of new ferry will be
accepted on the basis of NPV of £ 209973(000).
REFERENCES
Arquero, J.L. and Romero-Frías, E., 2013. Using social network sites in higher education: An
experience in business studies. Innovations in Education and Teaching International. 50(3).
pp.238-249.
Doyle, G., 2013. Re-invention and survival: newspapers in the era of digital multiplatform
delivery. Journal of Media Business Studies.10(4). pp.1-20.
Dudovskiy, J., 2016. The Ultimate Guide to Writing a Dissertation in Business Studies: A Step-
by-Step Assistance. Pittsburgh, USA.
Forsgren, M., 2015. Managing the Internationalization Process (Routledge Revivals): The
Swedish Case. Routledge.
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