Investment Appraisal and Sources of Finance for Zylla Limited

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BUSINESS SCENARIO TASK 4
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Executive summary
The study has dealt with Investment appraisal and sources of finance in detail. Zylla limited,
has been taken into consideration and investment appraisal as well as sources of finance have
been accounted for in the study. It has been observed that, the company has witnessed growth
over the recent years. Moreover it has been seen that the demand for its services has
increased. The study has offered an in depth understanding of different investment appraisal
techniques. Recommendation on viability has been offered in the study. Furthermore
investment appraisal techniques such as, net present value and accounting rate of return, has
been analysed thoroughly.
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Table of Contents
Introduction................................................................................................................................4
1. Long term and short term sources of finance.........................................................................4
2. Investment appraisal techniques and recommendation..........................................................6
Conclusion..................................................................................................................................7
Reference list..............................................................................................................................9
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Introduction
In order to expand large number of business organisations identifies different alternatives.
Thus in order to expand properly companies makes decisions about the sources of funds that
they should use. Moreover investment appraisal or capital budgeting techniques are used by
them to choose the best alternative. In this study, Zylla Limited’s case has been evaluated.
Accounting rate of return and net present value as the investment appraisal technique has
been chosen to be discussed. Different long term and short term sources of finance has been
chosen. The problem statement of the study is to analyse the best sources of finance and
assess the viability of buying new ferry by Zylla Limited.
Zylla limited has been seen to be operating under transportation industry. Large number of
ferries operates under the company and offer services of making customers travel across
river. In addition to people, goods and large number of vehicles are also transported.
1. Long term and short term sources of finance
Long term sources of finance
There exists large number of long term finance such as loans, equity and venture capital.
These have been discussed below;
Loans
In UK there are large numbers of commercial banks that offer loans at reasonable rate of
interest. Zylla limited would be benefitted from this source of finance as it would help in
obtaining £150000 easily and at low costs of interest. Companies like Zylla Limited that has a
good reputation in the market of UK and is expanding considerably would be able to get
loans. Since commercial banks are willing to provide loans for such companies (Gitman,
Juchau & Flanagan, 2015).
Equity shares
In order to purchase a new ferry, Zylla limited can also take the help of equity shares
effective source of long term finance. Since Zylla limited has a good reputation hence it
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would be able to attract large number of investors. On the contrary it has been seen that, it
would have to maintain a good balance between debts and equity so that ownership is not
compromised. On the other hand, it would have to pay off dividends on an annual basis
(Heaton, Polson, and Witte, 2016).
Figure 1: Sources of funds
(Source: Influenced by Gitman, Juchau & Flanagan, 2015)
Venture capital
Venture capital can also be used to procure fund requirements for the purchase of new ferry.
It has been seen that, large number of firms are there that offer funds for expansion or to start
a new business (Eilon, 2018). In return a share of ownership is required to be given to those
firms. This is because; it is a form of private equity and hence can be considered to be a part
of equity financing (Pilbeam, 2018).
Short term sources
Short term financing is required to meet Zylla Limited working capital needs on a daily basis.
Hence following two sources of short term finance have been discussed below;
Trade credit
Trade credit would help in buying goods at the current time period and payment on a later
date. It helps in using the services however the payment is done to supplier on a later stage of
the financial year (Eilon, 2018). Hence company Zylla limited can use it for short term funds
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Long term sources
Loans
Equity shares
Venture Capital
Short term sources
Trade credit
working capital loan

requirement. On the contrary it has been observed that it would increase the burden on the
company and furthermore this type of credit facility is always not available.
Working capital loans
Working capital requirements can also be met with the help of working capital loans that are
offered by large number of banks in UK. It has been seen that it can be used by Zylla Limited
for a period of 6 months or 1 year and it would be required to pay a minimum rate of
interests.
Therefore it can be recommended to the company to take up loans from commercial banks as
long term sources of finance and use working capital loan for short term basis.
2. Investment appraisal techniques and recommendation
Figure 2: Investment appraisal techniques
(Source: Influenced by Alkaraan, 2017)
 Accounting rate of return (ARR)
Accounting rate of return also called as ARR is an effective investment appraisal technique.
It helps in finding out the rate of return that an investment would generate at the end of a
certain period (Magni and Marchioni, 2018). It has a limitation too that has been found out to
be that it does not takes into account time value of money and hence does not determine
correct returns (Alkaraan, 2017). For Zylla Limited this method cannot be considered as it
will not help in finding out the accurate results of the purchase.
 Net present value (NPV)
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Accounting rate of return
Net present value

Cash inflows and outflows are all determined in term of their present value under net present
value method. It has been seen that this method helps in overcoming the limitations found in
accounting rate of return that is time value of money is taken into consideration. However
risk factors and various other types of uncertainties are also not accounted by this technique.
Figure 3: Net present value
(Source: learner)
In spite of its inability to assess other risk factors net present value technique has been found
to be the most effective one. This is due to the fact that it considers time value of money and
present value of inflows as well as outflows are determined properly (Lima et al. 2015).
Hence as per this technique, £ 209973 has been calculated to be the net present value of the
purchase amount of ferry. Therefore this investment is observed to be viable for Zylla
limited.
Conclusion
From the above evaluation of different techniques of investment appraisal and sources of
finance, it can be concluded that, purchase of new ferry is viable for Zylla Limited. Long
term sources of finance have been found out to be equity shares, venture capital, and loans.
On the other hand short term sources of finance have been observed to be working capital
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loans and trade credit. It has been recommended to the firm that they should use working
capital loans as short term finance and as long term loans should be used. Investment
appraisal techniques have been discussed to be Accounting rate of return and Net present
value. Out of these two net present value method has been chosen.
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Reference list
Books
Eilon, S. (2018). Management practice and mispractice. Abingdon: Routledge.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Australia:
Pearson Higher Education.
Pilbeam, K. (2018). Finance & financial markets. UK: Macmillan International Higher
Education.
Journals
Alkaraan, F. (2017). Strategic investment appraisal: multidisciplinary perspectives.
In Advances in Mergers and Acquisitions pp.67-82. Emerald Publishing Limited.
Heaton, J. B., Polson, N. G., and Witte, J. H. (2016). Deep learning in finance. arXiv preprint
arXiv:1602.06561. 45(3), pp.74-83.
Lima, J. D. D., Trentin, M. G. A., Oliveira, G. A., Batistus, D. R., and Setti, D. (2015). A
systematic approach for the analysis of the economic viability of investment
projects. International Journal of Engineering Management and Economics, 5(1-2), pp.19-
34.
Magni, C. A., and Marchioni, A. (2018). Project appraisal and the Intrinsic Rate of
Return. 7(11), pp.63-71.
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