Evaluation of Investment Appraisal Techniques for Funding Acquisition of Ferry

This report discusses the short and long term sources of finance for funding the acquisition of a ferry and the requirement of working capital. It also evaluates investment appraisal techniques such as NPV, IRR, ARR, and payback period to determine the viability of the operation and acquisition of a new ferry.

INTRODUCTION TO
BUSINESS STUDIES(Task 4)

TABLE OF CONTENTS
TASK 4............................................................................................................................................1
INTRODUCTION...........................................................................................................................1
Evaluation of different investment appraisal techniques............................................................6
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

TASK 4
INTRODUCTION
Zylla Limited operates in number of ferries which give services of river crossing to
people, vehicles and goods across river. The present report will discuss about short and long term
sources of finance for funding acquisition of ferry along with requirement of working capital.
Furthermore, there will be evaluation of investment appraisal techniques such as NPV, IRR,
ARR and payback period. In this aspect, there will be recommendation about viability of
operation and acquisition of new ferry on basis of these techniques.
Long and short term sources of finance for funding acquisition of ferry and need of working
capital
There are two types of sources of finance for acquiring funds for ferry of Zylla company
and working capital such as short and long term sources.
Short term financing
 Accounts receivable financing: Various banking and non banking financial institutions
gives facilities of invoice discounting. The organization will undertake commercial bills
to banks which is payment minus small fee (Sources of Short-Term and Long-Term
Financing for Working Capital, 2018). In this aspect, bank gathers money through
customer on due date.
 Overdraft agreement: By undertaking overdraft agreement with ban, it would allow
business unit for borrowing with certain limit with absence of any discussion. In this
context, bank might have condition of collateral which will charge daily interest on
outstanding debt with variable rate.
 Customer advances: There are various business which asks consumer to make advance
payment prior to selling good and to give services (Liu, 2019). Especially, it is true for
dealing with big orders and this will take long time for fulfil this. It ensures about some
funds for channelizing its operations to attain those particular orders.
Long term financing
 Long term loan: The full fledged long term loan which will allow bank to accomplish
need of working capital for two or more years.
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 Issue Debentures and Equities: The bonds or debentures might be issued to public and
in even equity stock as well. Generally, it is performed through conglomerate with need
of high quantum of funds.
 Retain profits: Instead of creating dividend payments for investing or to shareholders in
any new venture or to acquire, various business will retain portion of margin so that it
might use this for purpose of working capital (Van Dan and Binh, 2019). In this method,
there is no need for paying interest, taking loan or to incur losses on discounted bills
which is self sufficient for funding objective.
Evaluation of different investment appraisal techniques
Net present value of New ferry
Year Cash inflows PV factor @ 3%
Discounted
cash inflows
1 55230 0.9709 53621
2 70045 0.9426 66024
3 88375 0.9151 80876
4 79870 0.8885 70963
5 102555 0.8626 88465
Discounted cash flow (Sum) 359949
Initial cost of ferry 150000
Net Present value
[Discounted cash flow
(Sum) - initial cost of
ferry] 209949
Net present value is replicated as present value of cash flow with required rate of return
of project comparatively to initial cost as it is very crucial concept in investment appraisal.
Generally, this is used for analysing profitability of any particular project or investment (Dean,
Hickman and Chen, 2019). In the above table, NPV of ferry has been extracted with cost of
capital of 3% and in 5th year sale of decommissioned ferry with 45000 has total discounted cash
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flow of 359949. The initial cost of ferry was 150000 which had given its present value as 209949
which could be elaborated that ferry is beneficial to Zylla Limited.
Advantages Disadvantages
Consideration of time value of money It might not provide satisfactory outcome
during comparison of project with investment's
different amount.
IRR of New ferry
Year Cash inflows
0 -150000
1 55230
2 70045
3 88375
4 79870
5 102555
Internal rate of return (IRR) 39%
Internal rate of return is referred as discount rate used for ensuring about investment
which forms money as compared to actual cost. The IRR of new ferry is 39% which is far higher
than its cost of capital then it is acceptable to Zylla Limited.
Advantages Disadvantages
Consideration of time value of money and cash
flow over whole life of project.
Complicated computation problems and unique
answer in every situation.
Average rate of return of new ferry
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Year Cash inflows
1 55230
2 70045
3 88375
4 79870
5 102555
Average profit 79215
Initial cost of ferry 150000
Average initial investment [(initial investment + scrap value) / 2]
ARR 53%
The average rate of return is average yearly amount of cash flow produced over life of
investment (Coburn and Stirling, 2019). It is aggregated with expected cash flow along the scrap
of decommissioned value of new ferry divided through life of years and has return of 53% which
is acceptable.
Advantages Disadvantages
Application of entire stream of income Does not consider time value of money
Payback period of new ferry
Year Cash inflows Cumulative cash inflows
1 55230 55230
2 70045 125275
3 88375 213650
4 79870 293520
5 102555 396075
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Initial cost of ferry 150000
Payback period 2
0.3
Payback period 2 year and 3 months
Payback period is considered as length of time need for recovering initial investment cost
as it is very significant determinant for knowing that project should be undertaken or not. In the
above scenario, initial cost of ferry is 150000 which is recovered in 2 years and 3 months along
with decommissioned sales of 45000.
Advantages Disadvantages
Favorable short run impact on EPS by setting
short payback period.
It does not account cash inflow earned after
payback period.
CONCLUSION
On basis of above report, it had been concluded that short and long term sources are very
important for arranging funds and to manage working capital needs. While considering all
investment appraisal techniques, the ferry is giving net present value of 209949, 39%as internal
rate of return, 53% as average rate of return and initial investment is covered in 2 years and 3
months which is profitable and acceptable.
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REFERENCES
Books and Journals
Liu, C., 2019. Finance Strategies for Medium-Sized Enterprises: FinTech as the Game Changer.
In Strategic Optimization of Medium-Sized Enterprises in the Global Market (pp. 162-
184). IGI Global.
Van Dan, D. and Binh, V. D., 2019, January. Evaluating the Impact of Official Development
Assistance (ODA) on Economic Growth in Developing Countries. In International
Econometric Conference of Vietnam (pp. 910-918). Springer, Cham.
Dean, M., Hickman, R. and Chen, C. L., 2019. Testing the application of participatory MCA:
The case of the South Fylde Line. Transport Policy. 73. pp.62-70.
Coburn, J. and Stirling, A., 2019. Multicriteria mapping as a problem structuring method for
project front-ending. In Problem Structuring Approaches for the Management of
Projects (pp. 63-90). Palgrave Macmillan, Cham.
De Vito, L and et.al., 2018. Employee motivation based on the hierarchy of needs, expectancy
and the two-factor theories applied with higher education employees. IJAMEE.
Hur, Y., 2018. Testing Herzberg’s Two-Factor Theory of Motivation in the Public Sector: Is it
Applicable to Public Managers?. Public Organization Review. 18(3). pp.329-343.
Online
McLeod, S., 2018. Maslow's Hierarchy of Needs. [ONLINE]. Available through
<https://www.simplypsychology.org/maslow.html>
Sources of Short-Term and Long-Term Financing for Working Capital. 2018. [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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