Finance Report: Zylla Ltd Expansion Plan and Investment Appraisal

This report, prepared on behalf of the Director of Finance for Zylla Ltd., examines the company's proposed expansion plan, which involves acquiring a new ferry to meet increasing demand. The report analyzes various sources of finance, including short-term options like trade credit and customer advances, and long-term options such as term loans, equity/debenture issuance, and retained earnings. It evaluates investment appraisal techniques, including Accounting Rate of Return (ARR), Net Present Value (NPV), Payback Period, and Internal Rate of Return (IRR), to determine the financial viability of the expansion. Based on the analysis, particularly the positive and high NPV, the report recommends that Zylla Ltd. proceed with the expansion plan, concluding that investment decision-making is crucial and requires careful consideration of various financial aspects.

Report on behalf of the Director
of Finance

TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................3
MAIN BODY.............................................................................................................................3
Different sources of finance...............................................................................................3
Evaluation of various investment appraisal techniques................................................4
CONCLUSION.........................................................................................................................6
REFERENCES...........................................................................................................................7

INTRODUCTION
The process of making decision is an integral part of every business
organization which requires to carry out complete analysis. This report presents
about the organization Zylla Ltd. which provides ferries for the purpose of river
crossing services to the people and vehicles and goods. The company is looking for
an expansion plan for which various sources of financing is being analysed. It also
covers whether the company should continue with the expansion plan or not.
MAIN BODY
Different sources of finance
Short Term Financing
The short term sources of finance is essential for managing the working
capital requirements of the business (Abor, 2017). It covers wages, salaries,
purchasing material, marketing and advertising and other overhead cost. The various
sources of short term finance that are available to the company are stated below.
Trade credit: It refers to the amount of credit provided by the supplier of the
raw material or products in the normal business operation. It is most widely used
method but requires to have a credit worthiness of the company along with the
confidence of the suppliers for doing trade credit. There are certain limitation of this
method but the major factor is that sometimes suppliers may charge higher prices or
cause loss of cash discount.
Customer advances: Under this, the company can ask its customers to
make certain amount of payment in advance before providing any goods and
services. This can used by the businesses and is affair deal as well.
Factoring services: This service is provided by banks or other financial
institutions. Under this, the finance is provided by discounting the bill of exchange
received from the customers. The organization gets the payment from the bank by
paying certain amount of discounting charges and afterwards bank collects the
money on the due date from the customers.
Long-Term Financing
The long term funds refers to those funds which are required for a longer
duration at least more than 1 year (Leon, 2019). This is mainly for the long term

business project such as entering the new market, new product development etc. the
various sources of long term finance are described below.
Term loans: In this, the company can avail the funds in the form of loan for a
particular period which will help in meeting its long term working capital
requirements. The company is required to pay back the loan amount along with
interest as per the terms of loan.
Issue of equity or debentures: Sometimes when there is a big project to be
undertaken it is essential for the business to find a feasible source of finance which
will not have much burden on it. Thus, the company might issue shares and
debentures. But it also comes at certain cost, like loss of ownership and control. In
case of debentures, the company will not loss ownership but is required to pay fixed
amount or percentage in the form of interest to the debenture holders.
Retained earnings: This is the amount of profit which the company has
retained and not distributed as dividend for the purpose of further expansion and
growth plans of the company. It is also called ploughing back of profits. It is the
cheapest source of finance that is available to the company without incurring any
financial leverage. It will also help in increasing the net worth of the business.
Evaluation of various investment appraisal techniques
Before making investment in a particular project, it is essential for the
businesses to carry out a fundamental analysis process in order to determine the
feasibility and profitability of the project. There are various techniques which can be
used, few of them are stated below.
Accounting Rate of Return
This investment appraisal technique enables the organization in determining
the increase in the accounting profits with respect to the amount of investment made
(Levin and Hallgren, 2017). It is favourable to have higher rate of return which is
beneficial for the company. It does not take into account time value of money.
Average
investment
Initial investment +Salvage value
2
£ 150000+ £ 15000
2

£82500
Year Cash inflows
1 55230
2 70045
3 88375
4 79870
5 102555
Average profit or
cash inflow 79215
Average initial
investment 82500
Average initial
investment
[(initial
investment +
scrap value) / 2]
ARR 96%
Net Present Value
This technique is used to evaluate the profitability associated with the project
(Gupta, 2017). The positive NPV means that the company should continue with the
investment plan.
Year
Cash
inflows PV factor @ 3%
Discounted
cash inflows
1 55230 0.971 53621
£ 165000
2

2 70045 0.943 66024
3 88375 0.915 80876
4 79870 0.888 70963
5 102555 0.863 88465
Total discounted
cash inflow 359949
Initial investment 150000
NPV (Total
discounted cash
inflows - initial
investment) 209949
Payback Period
The determines the time period within which the company can recover its
capital invested (Kengatharan, 2016). The shorter the number of days favourable it is
for the company. It identifies the break-even point after which it starts generating
profits
Year Total cash
flow
Cumulative cash
flow
0 -150000 -150000
1 55230 -94770
2 70045 -24725
3 88375 63650
4 79870 143520
5 102555 246075
Payback period 2.27 years
Internal rate of return
IRR is the discounting rate at which the NPV of the project is zero (Ghiyasi,
2018). It takes into account only the internal factors and excludes external factors.
Year Cash inflows

0 -150000
1 55230
2 70045
3 88375
4 79870
5 102555
Internal rate of return
(IRR) 39%
Recommendation: Based on the analysis, it can be said that Zylla should invest in
the expansion plan. Even though, all the indicators are good but based on NPV
which is positive and also very high than outflow, it is feasible to invest.
CONCLUSION
It can be concluded that the investment decision making is crucial and
requires to undertake various aspects. The various sources of finance were
evaluated such as equity, loans, factoring etc. Also, the various techniques were
used for evaluating eth proposal like, NPV, IRR, payback period etc. Based on the
analysis, it is concluded that Zylla Ltd should acquire ferry.

REFERENCES
Books and Journals
Abor, J. Y., 2017. Financing Choice. In Entrepreneurial Finance for MSMEs (pp. 359-
369). Palgrave Macmillan, Cham.
Ghiyasi, M., 2018. Performance assessment and capital budgeting based on
performance. Benchmarking: An International Journal.
Gupta, D., 2017. Capital budgeting decisions and the firm’s size. International
Journal of Economic Behavior and Organization. 4(6). p.45.
Kengatharan, L., 2016. Capital budgeting theory and practice: a review and agenda
for future research. Applied Economics and Finance. 3(2). pp.15-38.
Leon, F., 2019. Long-term finance and entrepreneurship. Economic Systems, 43(2),
p.100690.
Levin, V. and Hallgren, A., 2017. The choice of capital budgeting techniques: a
human capital approach.