Financial Analysis and Investment Appraisal for Zylla Limited's Ferry

This report analyzes the financial strategies for Zylla Limited, a company planning to invest in a new ferry. It examines both short-term and long-term financing options, including bank overdrafts, loans, promissory notes, internal accruals, and debentures. The report also assesses investment appraisal techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), and payback period, recommending the NPV method for its comprehensive approach. The NPV calculation reveals a positive outcome for the ferry investment, leading to the recommendation that Zylla Limited should proceed with the purchase. The report concludes by emphasizing the importance of a thorough financial analysis and the selection of appropriate funding sources before investing in new assets.

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Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Short and long term finances for Zylla Limited..........................................................................1
Investment appraisal techniques along with recommendation of validity of new asset (ferry). .2
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................4

INTRODUCTION
Investment appraisal is the procedure of checking relevancy of an investment in order to
help organisation in the process of decision making. The main objective of this report is to
recommend Zylla limited regarding the suitability in investing in a new ferry. Zylla limited is a
growing company which intend to invest in new ferry so that they can attain growth and
development in the business environment. This business provides river crossing services for
which they are investing in a new asset from which both short and long term sources of finance
and evaluated. In second section of this report, various investment appraisal techniques are
analysed for the purpose of mentioning the suitability of the investment in new ferry.
MAIN BODY
Short and long term finances for Zylla Limited
Every organisation whether small scale or large scale requires sources of finance to fulfil
their operational requirements. In the present case of Zylla limited, this company has
requirement for both short term and long term finance. This company requires short term finance
to fund their working capital and long term finance for capital expenditure. In order to assist this
company various short term and long term sources of finance are analysed below:
Bank over draft facility – This is a short term finance source which enable an organisation
to withdraw amount from their bank account by exceeding the balance limit (Prajogo and
Olhager, 2012). This source can be used by Zylla limited in which they do not have to pay any
interest and they can operate effectively by paying overdraft facility fees.
Short term bank loan – As its name suggests, this type of loan is acquired for short time
period usually less than one year. This source of finance allows organisations like Zylla limited
to procure funds from bank but the demerit in this case is that they have to pay a certain interest
rate against the loaned fund and also have to provide some guarantee to the bank.
Promissory note – This is another short term finance source in which organisation can
issue promissory notes to their trade partners to promise to pay a specific amount on future date.
By using this source, Zylla limited can effectively operate and fulfil its working capital
requirement without paying any interest.
Long term bank loan – This source of finance is used to fulfil the long term capital
requirement of an organisation. Zylla limited can use this source by which they can procure
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funds from banking authorities and can purchase new ferry. This source of finance levies stress
of paying the high interest rates on the organisation which can even result in low profitability.
Internal accruals – It is another long term finance source which allows an organisation to
use the funds which a company preserves from their profits for the purpose of utilising it in
future contingent situations (Bruton and et.al., 2015). This fund can only be used if the company
has policy to develop a spate account for retained earnings. By using this fund, Zylla limited can
invest in the new ferry by using internal accruals for which they do not even have to pay fees or
interest.
Debenture issue – Companies like Zylla limited can issue debentures in which they can
seek money from external parties for which they pay interest. The issuance of debenture involves
formalities of being a public company which makes it non suitable for Zylla.
From the above analysis, it has been observed that the most appropriate short term finance
source for this company is promissory note as by this company can seek funds from external
parties without paying any interests. It has also been analysed that most appropriate long term
finance source for Zylla limited is bank loan as by this they can purchase new ferry.
Investment appraisal techniques along with recommendation of validity of new asset (ferry)
Investment appraisal is the concept of checking the relevancy of an investment so that its
impact on company’s profitability and productivity can be determined. There are various
investment appraisal techniques which can help in this process. Net present value, internal rate of
return and payback period are few investment appraisal techniques which are evaluated below.
NPV – This technique allows an organisation to identify the profit which they can make by
investing in a specific asset. This technique works to determine the net present value which is the
difference between cash outflows and inflows (Higham, Fortune and Boothman, 2016). This
technique can be used by Zylla by which they can ascertain the profit which they can gain by
investing in new ferry.
IRR – This technique determines the interest rate at which company like Zylla can gain
profit.
Payback period – Unlike above two techniques, this method does not consider time value
of money and only helps to compute the time period in which an organisation can recoup its
initial investment (Harris and El-Massri, 2011).
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From the above evaluation of three investment techniques it has been analysed that NPV is
the most appropriate technique for Zylla limited as it can determine the profit and also considers
the time value of money. For this purpose, NPV technique is used for the new ferry investment
below:
Year Net cash flows PV factor @ 10% Discounted
cash flow
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
Total discounted
cash flow 359973.415
Less: initial
investment 150000
NPV 209973.415
From the above NPV computation, it can be interpreted that by invested the amount of
150000 pounds against the purchase of new ferry will result in profit of 209973 pounds. From
this, it is recommended that Zylla limited should invest in new ferry as it will be profitable for
them.
CONCLUSION
From the above report, it has been concluded that if an organisation intends to invest in a
new asset then they should first analyse their options to procure funds so that best suitable source
of fund can be identified. It is also found from the above content that every organisation uses
analyses their investment by the techniques of NPV, IRR and payback period so that they can
make an informed decision.
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REFERENCES
Books and Journals
Bruton, G. and et.al., 2015. New financial alternatives in seeding entrepreneurship:
Microfinance, crowdfunding, and peer‐to‐peer innovations. Entrepreneurship Theory and
Practice. 39(1). pp.9-26.
Harris, E. P. and El-Massri, M., 2011. Capital investment appraisal. In Review of Management
Accounting Research (pp. 343-377). Palgrave Macmillan, London.
Higham, A. P., Fortune, C. and Boothman, J. C., 2016. Sustainability and investment appraisal
for housing regeneration projects. Structural Survey. 34(2). pp.150-167.
Prajogo, D. and Olhager, J., 2012. Supply chain integration and performance: The effects of
long-term relationships, information technology and sharing, and logistics integration.
International Journal of Production Economics. 135(1). pp.514-522.
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