Viability of Buying a New Ferry for Zylla's Business Expansion

The assignment discusses the viability of buying a new ferry to expand Zylla's business based on investment appraisal techniques. It calculates the Net Present Value (NPV) of the project and concludes that it is viable due to a positive NPV. The recommended acquisition of the ferry will cater to the company's demand, leading to more business for Zylla in the next five years.

TASK 4: BUSINESS
SCENARIO FOR
INDIVIDUAL REPORT

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
SOURCES OF FINANCE...............................................................................................................1
Short Term Sources......................................................................................................................1
Long Term Sources......................................................................................................................3
INVESTMENT APPRAISAL TECHNIQUES...............................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Zylla Limited is a ferry based organisation that operates a number of ferries that provide
river crossing services for people, vehicles and goods from one shore to another. Looking at its
current financial prospects, Zylla is in consideration of undertaking expansion activities. For this
purpose, the management has made a decision to buy a new ferry to cater for the growing
demand. This Financial Reports aims to take note of all the possible sources of finances available
for the company to fund both its acquisition as well as working capital requirements for the
expansion (Peyroux, Pütz and Glasze, 2012). In addition to this, valuable recommendations have
also been made in the light of various investment appraisal techniques on the viability of
acquiring ferry and further their expansion plans.
MAIN BODY
SOURCES OF FINANCE
In order to fund the acquisition of ferry as well as successfully fulfil Zylla's Working
Capital needs, the following sources can be taken into account:
Short Term Sources
 Overdraft Agreement:
Bank Overdraft Facilities suffice the short term needs of a business with the help of an overdraft
agreement between the bank and the account holder (Caglayan and Demir, 2014). This will allow
the organisation to keep check of its working capital which can be further extended once the
amount present in their account lapses.
Advantages:
 It is more flexible and adjustable according to the short term needs of the
business.
 As a short-term debt, it is not normally included while determining the business'
financial gearing requirements.
Disadvantages:
 High rate of interest is charged which is more than the Banks' Base Rate.
 One may be required to provide collateral security which increases the risk more
than the returns provided by the bank.
 Loans from family and friends:
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One of the most simple loan is one taken from family and friends based on trust and goodwill
(Scheer, 2012).
Advantages:
 Low or no interest rate may be expected to be paid to the lender.
 Less likely to need a review of business plan as family and friends are already
aware of one's circumstances personally.
Disadvantages:
 Such transactions can be complex.
 Any misunderstanding in regards to the arrangement may adversely hamper the
relationship between the parties.
 Trade Credit:
This arrangement comprises of no immediate payments made by the owner to the lenders in the
form of cheques or cash for goods purchased or services availed (Barquet and et. al., 2013).
Advantages:
 Reduces pressure on cash-flows by postponing payments to a later date.
 Acts as a low cost form of working capital financing.
Disadvantages:
 Violation of conditions may damage vendor-company relationships.
 Only Cash-flow advantage availed, there is no additional finance gained by the
business.
 Debt Factoring and Invoice Discounting:
Both Debt Factoring and Invoice Discounting are a form of short-term accounts receivable
financing sources which enable a business to sell its outstanding invoices to a third-party for the
purpose of collection, managing credit control as well as processing invoice payments (Dalton,
2013).
Advantages:
 Funding does not require collateral security.
 Cash-flows are freed which can be utilised for expansion purposes.
Disadvantages:
 May burden organisation with a short-term debt.
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 Reduces overall profits of the business as the third-party may charge a higher
collection fee depending on the size of the contracts.
Long Term Sources
 Long Term Loan from Banks:
Bank Loans are a widely used source of finance. Under this type, a set period, interest rate,
repayment date as well as schedule are maintained.
Advantages:
 Ownership or share of business is not transferred to the Bank.
 Fixed Interest Rates facilitate easier forecasting of future cash-flows and
Taxation.
Disadvantages:
 Collateral Security needs to be provided.
 Difficult to secure bank loans unless one is highly credible in the market.
 Retain Profits:
Retained Earnings are the leftover profits accumulated over the years by a business (Mergaerts
and Vander Vennet, 2016). These are created or maintained internally to fund the future
contingencies as well as expansion activities undertaken by an organisation.
Advantages:
 Cheapest source of finance.
 Do not dilute the ownership of the company.
Disadvantages:
 It deprives shareholders of the money rightfully owed to the shareholders.
 If not utilized in a long time, it may ultimately result in wastage on company's
part.
 Equity Financing:
This source of finance is undertaken by a business entity through sale of ordinary shares to the
investors or public in general.
Advantages:
 Less Risk involved as they do not require monthly repayment of loaned amounts.
 They do not reduce the existing cash-flows of the business.
Disadvantages:
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 Dilute ownership of the business as part of share is owned by an investor or
individual.
 Costlier form of financing as dividend paid to investors may exceed interest
payments made debt financiers.
 Debt Financing:
This long-term source of finance overcomes the shortcomings of Equity Financing and can prove
to be a valuable resource for a business (Wirtz and et. al., 2016).
Advantages:
 No dilution of ownership.
 Tax Deductible interest payments reduce tax liability of company.
Disadvantages:
 Compulsory restriction on certain cash-flows in form of interest repayments to
debt financiers.
 Difficult to attain without high credibility in the market.
INVESTMENT APPRAISAL TECHNIQUES
 Net Present Value (NPV):
It is a widely popular technique used by organisations to ascertain the feasibility and
acceptability of a given project(s) (Hunjra and et.al., 2012).
Advantages:
 Takes into account time value of money.
 Indicative of how much value an investment can create.
Disadvantages:
 Misleading when comparing two projects of different sizes.
 Internal Rate of Return (IRR):
The point at which the NPV of two projects equals zero is known as Internal Rate of Return or
IRR.
Advantages:
 Takes into account time value of money.
 Simple to interpret.
Disadvantages:
 Economies of scale is ignored.
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Particulars Discount factor £'000
Discounted Cash
Flows
Cost of ferry 1 -150000 -150000
Cash inflows for five years:
Year 1 0.971 55230 53628.33
Year 2 0.943 70045 66052.435
Year 3 0.915 88375 80863.125
Year 4 0.888 79870 70924.56
Year 5 0.863 57555 49669.965
Sale of decommissioned ferry
in year 5 0.863 45000 38835
NPV 209973.415
CONCLUSION
From the above discussions as well calculations, it can be concluded that since the NPV
of buying a new ferry to expand Zylla's business is positive, which is 209973.415, it is viable to
undertake this project. I would recommend the acquisition of the ferry, it will cater to the
demand of the company and help in gaining more business for Zylla in next five years (Aggarwal
and Thakur, 2013).
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REFERENCES
Books and Journal
Aggarwal, A. and Thakur, G. S. M., 2013. Techniques of performance appraisal-a
review. International Journal of Engineering and Advanced Technology (IJEAT). 2(3).
pp.617-621.
Hunjra, A. I and et.al., 2012. Investment appraisal techniques and constraints on capital
investment. Actual Problems of Economics. 2(4).
Caglayan, M. and Demir, F., 2014. Firm productivity, exchange rate movements, sources of
finance, and export orientation. World Development. 54. pp.204-219.
Dalton, H., 2013. Principles of public finance. Routledge.
Hyun, J. S. and Rhee, B. K., 2011. Bank capital regulation and credit supply. Journal of Banking
& Finance. 35(2). pp.323-330.
Mergaerts, F. and Vander Vennet, R., 2016. Business models and bank performance: A long-
term perspective. Journal of Financial Stability. 22. pp.57-75.
Wirtz, B. W. and et. al., 2016. Business models: Origin, development and future research
perspectives. Long range planning. 49(1). pp.36-54.
Barquet, A. P .B. and et. al., 2013. Employing the business model concept to support the
adoption of product–service systems (PSS). Industrial Marketing Management. 42(5).
pp.693-704.
Scheer, A. W., 2012. ARIS—business process modeling. Springer Science & Business Media.
Peyroux, E., Pütz, R. and Glasze, G., 2012. Business Improvement Districts (BIDs): the
internationalization and contextualization of a ‘travelling concept’.
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