Financial Decision Report: Evaluating a New Ferry for Zylla Limited

This report, prepared for Zylla Limited, a company operating ferries, analyzes the financial viability of acquiring a new ferry to meet increased demand. It explores both short-term and long-term financing options, including bank overdrafts, trade credit, bank loans, and retained earnings, to fund the acquisition and working capital needs. The report utilizes investment appraisal techniques, specifically payback period and net present value (NPV), to evaluate the project's profitability. The calculations determine a payback period of 2.27 years and a positive NPV of approximately £209,973, supporting the recommendation to invest in the new ferry to maximize demand and profitability. The conclusion emphasizes the importance of effective financial decision-making and recommends acquiring the new ferry to enhance productivity and performance, based on the positive financial analysis.

Financial
Decision

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Short term or long tern source of finance for the acquisition of new ferry and fulfil the need
of working capital........................................................................................................................1
2. Use Investment appraisal techniques to evaluate the viability of the project..........................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Financial decision is the essential process which helps the managers to decide the activities
which are profitable for them or maximise their earnings (Chen and et.al., 2018). This
assessment based on the Zylla Limited which wants to buy new ferry to maximise demand for
their services and it further helps in maximising profitability as well. This report covers several
topics such as investment appraisal techniques and short term or long source of finance.
MAIN BODY
1. Short term or long tern source of finance for the acquisition of new ferry and fulfil the need of
working capital
There are numerous sources of finance which can acquire by the organization to fulfil their
working capital needs. Some of the short term or long term finances are discussed below which
helps the managers of Zylla Limited to acquire money to buy new ferry. Discussions are as
follow:
Short term source of finance:
 Bank Overdraft: The loan would encourage the company to lend up to that amount
without the need for additional negotiation by going into an overdraft arrangement with
the Bank (Hastings and Mitchell, 2020). They could apply for protection in form of
security and they could charge regular interest on the remaining loan at a variable rate.
 Trade credit: It is the most significant and easiest source of short-term source of finance
offered for businesses. Trade credit includes multiple items but the basic concept is an
agreement to buy products or services on account without making urgent transactions in
cash or cheque.
Zylla Limited can use bank loan as short term finance to acquire money to buy new ferry or
achieve organizational working capital needs. In order to run their operations, managers required
working capital where they perform daily activities to achieve their goals and objectives.
Long term source of finance:
 Bank Loan: It is a sum of money lent under the agreed payment timeline for a specified
time (Klasa And et.al., 2018). Organizations use bank loans as an integral part of the
procurement system. In reality, bank loans appear to become more available well to-
established and it also helps in organizations to expand their operations.
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 Retain earnings: It is the company’s earning which they used to share dividend to the
shareholders or retain the profit to invest in the organization to expand their operations. It
is considered under long term finance which can be used by the managers to fulfil their
working capital requirement.
Above discussed long term source of finance is help the organization to fulfil their money
related needs or able them to achieve the desired outcomes. In context of Zylla Limited,
managers use bank loan to buy new ferry in order to maximise the demand of it.
2. Use Investment appraisal techniques to evaluate the viability of the project
There are several project appraisal techniques which can be used by the Zylla Limited in
order to measure that buying new ferry to increases demands is profitable or not. Further
calculations are as follow:
Payback period:
It is the duration that an investor is supposed to recover its initial outlay by the cash
inflows created by the project. It is one of the easiest methods for evaluating investments. It
helps in measuring risk which inherent in a project as it takes into account initial inflows and
excludes the cash flows beyond the turnaround stage of the original investment. Projects with
greater cash inflows in the previous cycles are usually rated higher when measured with payback
time, relative to comparable projects with greater cash inflows throughout the later periods.
Calculation of payback period is mentioned below:
Year Cash Inflow Cumulative Cash Flow
0 -150000 -
1 55,230 55,230
2 70,045 1,25,275
3 88,375 2,13,650
4 79,870 2,93,520
5 57,555 3,51,075
Formula:
Payback Period = Year before full recovery + Unrecovered amount / Cash flow during the year
= 2 + 24725 / 88375
= 2 + 0.27
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= 2.27 year
NPV (Net Present Value):
It reflects the adjustment in the net worth / equity of a company that will benefit from the
project's approval during its lifespan. It represents the total cash inflows of the current valuation
of the project minus the current investment outlay (Metawa And et.al., 2019). This is one of the
most effective strategies of capital budgeting, as it is focused on the discount approach to cash
flow. NPV is calculated at a rate of discount representing project risk. In most situations,
beginning with the company's WACC and changing it up or down based on the gap between the
actual project risk and the company's overall risk as a whole, is acceptable. Positive NPV value is
more favourable and negative value will be going to reject. Calculations are as follow:
Discount factor £000 DCF
Cost of ferry 1 -150000 -150000
Cash inflows for five years:
Year 1 0.971 55230 53628.33
Year 2 0.943 70045 66052.44
Year 3 0.915 88375 80863.13
Year 4 0.888 79870 70924.56
Year 5 0.863 57555 49669.97
Sale of decommissioned ferry in
year 5
0.863 45000 38835
NPV 209973.4
NPV = Present Cash Inflow – Cash Outflow
= 359973.4 – 150000
= 209973.4
From the above calculation, it is observed that payback period of this proposal is 2.27
years and NPV is approx. 209973. Managers of Zylla Limited should invest in new ferry to
maximise the demand or earn more profit. It is analysed that, this proposal is viable because
present value of project is positive that is good because if NPV is negative then it will be rejected
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because it is not beneficial in context of organization to invest. In addition, recovery period is
also enough to make decision accordingly. It is recommended that, company have to invest or
buy new ferry to maximise the productivity as well as performance.
CONCLUSION
From the above discussion it has been observed that, companies have to make effective
financial decisions when they required investing into new project. There is several short term as
well as long term source of finances which can acquire by the organization to buy new ferry or
fulfil their working capital requirement. In addition, with the help of different investment
appraisal techniques managers make decisions to invest it or not.
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REFERENCES
Books & Journals
Chen, C. W. and et.al., 2018. Financial statement comparability and the efficiency of acquisition
decisions. Contemporary Accounting Research. 35(1). pp.164-202.
Hastings, J. and Mitchell, O. S., 2020. How financial literacy and impatience shape retirement
wealth and investment behaviors. Journal of Pension Economics & Finance. 19(1). pp.1-
20.
Klasa, S. And et.al., 2018. Protection of trade secrets and capital structure decisions. Journal of
Financial Economics. 128(2). pp.266-286.
Metawa, N. And et.al., 2019. Impact of behavioral factors on investors’ financial decisions: case
of the Egyptian stock market. International Journal of Islamic and Middle Eastern
Finance and Management.
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