Investment Appraisal Techniques for Zylla Limited

This report discusses the investment appraisal techniques used by Zylla Limited to evaluate the viability of investing in a new ferry. It explores the sources of short and long term finance and provides recommendations based on the analysis. The report also includes a case study of Zylla Limited, a company operating in the business of ferries.

TASK 4

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Various short and long term sources of finance..........................................................................1
Evaluation of investment appraisal techniques with recommendations......................................2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................5

INTRODUCTION
Investment appraisal is the concept of ascertaining the viability and relevancy of an
investment in an organisation. There are various specific techniques by which profitability of the
investments can be determined (Harris, 2017). A specific case of Zylla Limited is given for this
report. This company is operating in the business of ferries in which they provide river crossing
services to vehicles, goods and individuals. The main aim of this report is to present an evidence
based investigation to the BOD of this company in order to seek approval for the investment in
new ferry. This report includes various long and short term finance options along with appraisal
of the new ferry investment using techniques of Net present value, IRR and payback period.
MAIN BODY
Various short and long term sources of finance
Zylla limited is engaged in the business of ferries which is currently at growing stage, due
to which this company is seeking investment for a new ferry. Zylla will require funds for
investment in the ferry (long term) and funds for working capital for ferry operations (short
term). There are various sources of finance which this organisation can use to fund its investment
as well as for working capital requirements and that are discussed below:
Sources for short term finance
 Trade credit – This source allows organisation to procure credit from their trade partners
such as suppliers against the guarantee of their business relations. By this mode, Zylla
can fulfil its working capital requirements by procuring credit from their trade partners.
 Overdraft bank facility – This facility is the short term finance which allow individuals
and organisations to withdraw additional money apart from their existing balance from
their bank account. This source will help Zylla limited to gain funds from their bank
accounts for which they have to pay minimal amount of fees.
 Commercial paper – This type of short term finance has maximum maturity period of 270
days which allows organisations to issue a promissory note to individuals by which they
can gain funds (Balaban, Župljanin and Ivanović, 2016). Using this source, Zylla limited
can procure funds from general public for which they only have to pay a minimum
interest which is also optional.
Sources for long term finance
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 Commercial bank loan – This is a long term source of finance which allows companies to
procure huge funds against a guarantee which levies a stress on organisation as the
interest which has to be payable against the loanable fund is of high percentage. By using
this source, Zylla can procure effective funds to invest in their new ferry for which they
have to pay interest.
 Retained profits – This is a long term source of finance as there is no specific payback
limit of this source. This source allows an organisation like Zylla to procure funds from
their retailed earnings which organisations usually spare for future contingencies. By this,
Zylla can fulfil their capital requirements to invest in ferry.
 Sale of assets – In the case where organisations does not have any retained earnings and
they are unable to pay high interest rates on loans to banks, then they can also sell their
assets (McArthur, 2019). By this long term funding source, Zylla can sell their old ferries
and other assets to procure funds and invest it in a few ferry.
From the above sources of funds, it has been observed that for the requirements of working
capital funding, Zylla can use two combined short term finance source which are commercial
paper and bank overdraft facility by this they can minimise the funding fee and can effectively
fulfil all their requirements. Apart from this, long term finance of bank loan and sale of assets is
most effective for Zylla as it will balance out the interest payable and assets will also be realised.
Evaluation of investment appraisal techniques with recommendations
Investment appraisal is the method of analysing the viability of an investment so that
effective decision can be taken. In the case of Zylla limited, this organisation is seeking finance
to invest in a new ferry. In order to analyse whether it is suitable for Zylla to invest in this new
ferry, techniques of Net present value, Internal rate of return and payback period is used.
Year Net cash flows PV factor @ 10% Discounted cash flow
0 -150000
1 55230 0.971 53628.33
2 70045 0.943 66052.435
3 88375 0.915 80863.125
4 79870 0.888 70924.56
5 57555 0.863 49669.965
5 45000 0.863 38835
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Total discounted cash flow 359973.415
Less: initial investment 150000
NPV 209973.415
IRR 38%
NPV is calculated by discounting the net cash flows for five years. NPV for the new ferry
investment is calculated as 209973.415 which implies Zylla will gain high profit of 209973
pounds in the period of five years due to this investment. IRR for this investment is computed as
38% which is considerably a high percentage which implies this company will be able to gain
high internal return on the cost.
Year Net cash flow Cash Flow
1 55230 55230
2 70045 125275
3 88375 213650
4 79870 293520
5 57555 351075
5 45000 396075
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-0.79691999
Payback period 2.203080005
The investment appraisal technique of payback period is also used from which it has been
ascertained that Zylla will coup up its initial investment in ferry within 2 years and 2 months.
As NPV considers time value of an investment and also determines profitability (Alkaraan,
2017), it has been ascertained that this investment technique is appropriate for Zylla to consider
as a base to ascertain the viability of acquisition of new ferry. On the basis of above computed
net present value of 209973 pounds. It can be said that it is suitable for Zylla to acquire new ferry
as they will earn high profit from this asset.
CONCLUSION
From the above report, it has been summarised that every operation of an organisation
requires different source of fund. These funds are short and long term and levies a liability of
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fees and interests. It is also found from above report that net present value is the most effective
investment appraisal technique as this considers time value of money and even determines
profitability.
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REFERENCES
Books and Journals
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. In Advances
in Mergers and Acquisitions (pp. 67-82). Emerald Publishing Limited.
Balaban, M., Župljanin, S. and Ivanović, P., 2016. Sources of Finance for Entrepreneurship
Development. Economic Analysis. 49(1-2). pp.48-58.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
McArthur, J., 2019. Reframing Finance: new models of long-term investment management.
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