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Importance of Finance Management In an Company

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  • Unit No: N/A
  • Level: High school
  • Pages: 5 / Words 1373
  • Paper Type: Assignment
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  • Downloads: 525
Question :

This assessment will cover the following questions:

  • Zylla Limited is a small-scale company and it facilitates ferry services. Examine short term and long-term sources of finance to fund the acquisition of the ferry and for meeting the capital needs of the company.
  • Analyse the various techniques pertaining to investment appraisal and recommend the viability of acquisition and functioning of the ferry on the basis of one suitable investment technique.
Answer :
Organization Selected : Zylla Limited

INTRODUCTION

Finance is key for any type of business entity in order to conduct different activities and operations (Romani and Stern, 2016). Companies acquire funds from various kinds of sources. The project report is based on a company which operates in providing river crossing services through ferries. Company is planning to expand its business and planning to acquire new ferry. The report covers detailed information regards to sources of finance. As well as evaluation of different investment appraisal techniques.

MAIN BODY

1. Short Term and Long Term Sources of Finance to Fund The Acquisition of The Ferry and For The Company’s Working Capital Needs

There are different kinds of sources of funds which are needed by business entities in order to acquire funds. Mainly, these source of funds can be categorised into two parts which are as follows:

(i) Short Term Source of Funds-

These are type of source of funds which are acquired by business entities for short time period less then one year. Basically, short term funds are needed in order to fulfil working capital requirement. Such as Zylla Limited company can acquire funds from below mentioned short term funds:

  • Bank credit- Commercial banks provide short term funds to companies that is known as bank credit. This can be provided by banks in many ways such as:

* Loans- This is granted to companies against security of assets. By help of it, this become easier for business entities to acquire funds at lower cost. Such as Zylla limited company can acquire short term loan for quick term and can fulfil own working capital requirement.

* Overdraft- It is type of facility that is provided by banks to customer to withdraw funds in excess balance of bank account. In Zylla limited company, they can get short term funds to make payment of day to day activities after acquiring ferry.

  • Commercial paper- It is a type of short term financing tool which is used by companies with higher credit rating to acquire funds from market (Jerzmanowski, 2017). This is suitable for those business entities which have a better reputation in market. Like in the above company, they can raise short term funds by this alternative for making payment of short term debts.

 

(ii) Long Term Source of Funds-

These are type of source of funds which are acquired by business entities for long time period more then one year. Basically, long term funds are needed in order to do large expenses. Such as Zylla Limited company can acquire funds from below mentioned long term funds:

  • Retained earnings- It is a type of source of fund which is generated internally. This becomes possible when companies do not distribute whole profits to shareholders (Prizzon, Greenhill and Mustapha, 2017). Such as in the above company they can produce retained earnings and it may help in order to fulfil long term funds need.
  • Loan from financial institutions- This is a main source of long term funds in which companies can take loan from major financial institutions. Zylla limited company can get long term financial assistance by taking long period loan from banks.

 

2. An Evaluation of Various Investment Appraisal Techniques and Recommending The Viability of The Acquisition and Operation of The New Ferry Based on One Suitable Investment Appraisal Technique

There are vital range of investment appraisal techniques which are being used by companies in order to make proper evaluation of any project (Throsby, 2016). Herein, below some types of techniques of investment appraisal are mentioned such as:

  • Payback Period Method- It can be defined as a technique in that estimated time period is calculated which may occur in order to recover debt amount. There is a particular formula to compute payback period which is as follows:

Payback period = Initial investment / cash flow

or

 

  • Accounting Rate of Return- It is type of technique which is used to measure expected amount of profit from an investment. This is calculated by below mentioned formula that is as:

ARR= (Average annual profit after tax / initial investment) x 100

  • Net Present Value- This is one of the most using method of investment appraisal (Alkaraan, 2015). Basically, net present value is addition of discounted cash in & out flows regards to project. It is computed by below mentioned formula:

NPV= Discounted cash flow- initial investment

  • Internal Rate of Return- This is defined as an discounting rate on which company can generate profit or may face loss. It is computed by below mentioned formula:

.

 

Evaluation of Viability of Ferry:

Initial Investment = 150000

Year

Cash flow

PV factor

Discounted cash flow

1

55230

0.971

53628.33

2

70045

0.943

66052.44

3

88375

0.915

80863.13

4

79870

0.888

70924.56

5

57555

0.863

49669.97

 

 

 

321138.41

 

NPV = 321138.41-150000

= 171138.41

Analysis- In accordance of net present value of ferry, it can be find out that its current value is of 171138.41 which shows that this may be beneficial for above company if they acquire it. This is so because produced outcome is positive. Thus, they should acquire the ferry.

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CONCLUSION

On the basis of above project report, it has been concluded that financial need can be fulfilled by help of different sources of funds. Report concludes about both short and long term source of finance such as commercial paper, retained earnings and many more. In addition, further part of report concludes about various method of investment appraisal such as payback period, net present value method etc. In the end, this can be articulated that acquisition of ferry will be beneficial for above company. To get more details about online assignment help ask our experts.

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