Capital Budgeting Report - Just For You Ltd.pdf

7/28/2019 Capital Budgeting Report - Just For You Ltd.pdf

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CapitalBudgeting Report F301 - Financial Management I

Instituteof Business

Administration(IBA)

University of Dhaka

6 / 2 3 / 2 0 1 3

Submitted to:

Dr. Md. Jahangir AlamProfessor

Institute of Business AdministrationUniversity of Dhaka

Prepared by:Jinhar Zahidi RH-16

Bushra Ahmed RH-21

Rubyat Tasfia Rahman RH-29

Maruf Hassan ZR-14

BBA 20th, Section A


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Letter of transmittal

23 rd June 2013

Dr. Md. Jahangir Alam

Professor

Institute of Business Administration

University of Dhaka

Subject: Letter of Transmittal

Sir

We are pleased to submit our report on the Capital Budgeting of Just For You Ltd. Anoverview of the company and the market is provided. We have completed the reportthrough putting the theories and calculations learnt in the F301 FinancialManagement I course. This report contains evaluation of the companys investment ona new outlet through the calculations of NPV, IRR and with Pro Forma Incomestatement. We have also provided some recommendations for the company.

We have tried our very best to tailor the report according to your guidelines. Therefore,we request you to accept our report. We believe that you will find it in order. We areeagerly expecting your feedback on the overall report.

Yours sincerely

Jinhar Zahidi RH-16

Bushra Ahmed RH-21 ..

Rubyat Tasfia Rahman RH-29 ..

Maruf Hassan ZR-14


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Executive Summary

This report is aimed at presenting the capital investment decisions of a cake & pastry shop, Just For You Ltd.

Just For You Ltd is a joint venture between Thailand and Bangladesh. This Pastry Shop was opened in March 2013 in Banani. The owners currently have a plan to opena new outlet in a prime location of the city. To evaluate the feasibility of the projectand whether it should be undertaken, we are considering the market situation as wellas the companys rate of return, expected return and projected net income for the nextten years.

The company had an initial investment of Tk. 11000000 in its first outlet, and it isexpected that the main outlet will bring reasonable returns for Just For You Ltd in andas a result will aid in the opening of a new outlet.

Our main findings, further elaborated in the report, include

1) Expected cost and returns on the new project2) The companys IRR , NPV and PI.

Based on the calculations, we estimate that opening a new outlet is favorable for thecompany but limitations of the methodology do exist. We believe that Just For YouLtd. will benefit from our analysis.


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Table of contents

Topic PageLetter of transmittal 01

Executive summary 02

Introduction 04

Overview 05

Market analysis summary 06

Financial statements 07

Project 08

Cost of the project 09

Estimated returns 10

Project end 13

Capital budgeting 14

Decision 16

Recommendations 17

Appendix: A 18

Appendix: B 19


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Introduction

This report addresses the financial assessment of Just For You Ltd, a new bakery andpastry shop.

Objectives

This report has two main objectives: (a) to use the methods of capital budgeting to findout if the project of opening a new outlet should be undertaken, and (b) to giverecommendations on the basis of the discoveries

Scope

The report will cover the financial statements of the first quarter of the first business year and the expected cost and returns of the project that the company aims toundertake. All the numerical values in the financial statements were provided by theinterviewee in verbal form.

Methodologies

The report is based on primary and secondary research. Discussion with one of theowner was carried out. Simplified calculated model was prepared.


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Overview

The company:

Just For You Ltd is a bakery and pastry shop which started its journey in March2013. It is located in Banani-11. It is a joint venture between Bangladesh and

Thailand and the brainchild of Al-Mamun Sikder and Janyaluc Kanchanabul.

Mission:

The companys motto is to create a loyal customer base b y catering its customers withhygienic and healthy food. The owners focus on keeping each customer satisfiedbecause to them losing one customer is losing the entire market.

Strategic goal:

Achieve 99% customer satisfaction and develop repeat customer base Gain 10% of total bakery market share by the end of year 4.

Products and services:

The main products of Just For You Ltd. are

Pastries Cupcakes

The market:

Just For You Ltd has its target set at a diversified market which includes customers of all ages living in the capital. It specifically targets people with higher discretionary income and people who want to enjoy fresh food at a reasonable price.

Financial considerations:

As Just For You Ltd has just started its business operations, it has to take financialabilities and situations into consideration. The companys current rate of return is6.014%. And the company anticipates good return in the next 5 years. With this inconsideration, the company expects to expand its outlets and introduce new flavors toits product range.


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Market analysis summary

Market segmentation:

Just For You Ltds target market ranges from middle to high - income consumers. These market segments consume the higher share of pastry, cupcake and similarproducts. As they currently have a store in Banani, their current focus is oncustomers of that area mainly. After expansion, Just For You will try to cater to thedemands of the city as a whole.

Target market segment strategy:

The dominant target market for Just For You Ltd is a regular stream of local residents.Personal and expedient customer service at a competitive price is key to maintainingthe local market share of this target market .

Market needs:

Throughout the last few years, the market for cupcakes and pastries has expanded. The need for cakes and pastries are high almost all throughout the year because cakesare part of celebration of events. This industry has grown to be a strong one withspecialty designs to adapt to any occasion. As seen from the charts above, the marketneed is rising day by day.

Competition and buying pattern:

In the competitive market, there are many shops that have been in the business forthe last two decades and have a strong hold of the market.

There are many more new and established competitors in the market like Cooper s,Shumis Hot Cake, Swiss Bakery, Mr. Bakers Cake & Pastry , California FriedChicken ad Pastry Shop etc. These are all chain stores that have branches all overDhaka city and also in Chittagong and other districts.

Just Fo r You Ltds main competition is the branches of these renowned stores in theBanani area. The advantage that Just For You has is that it offers much higher quality products than the competitors. It also provides a unique dining atmosphere. Thebuying pattern of customers is mostly occasional. But the sales of pastries are similarround the year.


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Financial statements

Since the company started running this March, the income statement of only one-quarter of business activities was available.

Income statement 1st quarter

Revenue (10% increase per year) 2000000Less: Cost of goods soldCost of Raw Materials 600000Gross income 1400000Less: Selling and administration expensesRent 270000Utilities 90000Salary of staff 200000Salary of chefs 570000

Training cost 15000Depreciation on equipment 250000Depreciation on furniture and fixtures 25000Miscellaneous 1800Bank charges* 80500Interest on bank loan 341250Total selling and administration expenses 1843550

Net Income -443550

Fixed Assets Cost Dep. NBVEquipment 10000000 250000 9750000Furniture and fixtures 1000000 25000 975000

*Bank charge calculation:

Loan processing fee 7000015% VAT 10500

Total bank charge 80500


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Project

In the short period of time after its inception the company has been able to create aloyal customer base and has received many positive reviews about the quality of theirfoods. In light of this success, the company is deciding to open an outlet. However, itwill undertake this venture only if it is profitable.

Location: Baily Road

Nature of the project: The outlet will be opened in a popular area where foodaficionados gather to experience new and quality food. The food will not be producedin that outlet. Food from the main shop will be transported to the outlet via a delivery van every day, several times if required.

Project life: The project has a life of 10 years. The company will reconsider the

investment after 10 years.

Companys required rate of return: The expected market return is 5.845%(approx.) and the risk free rate is 5.00% (approx.). Sourcehttp://www.stockbangladesh.com

The individual beta coefficient of the company is 1.20. The company is assuming thatits portfolio is 20% more volatile than the market.

After adding all of these components we can get our required rate of return as 6.014%.

Corporate tax rate: 27.5%
http://www.stockbangladesh.com/http://www.stockbangladesh.com/http://www.stockbangladesh.com/


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Cost of the project

Since the company will just be delivering the food to the outlet, the variation of coststo this project are rather limited in number.

Deposit for rent Tk. 1500000

Rent (monthly) Tk. 60000

Cost of raw materials 40%

Cost of van Tk. 1000000

Van running cost and repairs (monthly) Tk. 20000

Salary of staff (monthly) Tk. 54000

Utilities (monthly) Tk. 25000

Furniture and fixtures Tk. 700000

Training cost Tk. 15000

Depreciation on van (yearly) Tk. 100000 (straight-line basis at 10%)

Depreciation on furniture and fixtures (yearly) Tk. 70000 (straight-line basis at 10%)

Miscellaneous Tk. 5000

The cost of raw materials is estimated to be 30% of the final selling price of each

product.Before starting the jobs the three employees who are supposed to manage the outletwill have to go a 2-3 week training session where they will learn how to properly manage the foods, how to efficiently and effectively serve the customers, etc. Since thecompany is new it is still not sure about the rate of employee turnover. It is assumedthat some employees will leave their job and the company will have to hire new ones,and so training costs are expected to incur in the 6 th year. The driver will not requireany additional training.

The costs which are going to be incurred every year are expected to increase at a rateof 10%.

(All the figures are approximate values.)


11/2010

Estimated returns

The company expects to capture a loyal customer base soon after opening the outletbecause of its outstanding product quality. It expects exponential increase in its salesin the following years.

The company expects Tk. 4094400 in sales in the 1 st year, which is expected to growat a rate of 10% every year after that as shown below.

Pro forma income statement

Year 1 Year 2 Year 3 Year 4Revenue (10% increase per year) 4094400 4503840 4954224 5449646.4Less: Cost of goods sold

Cost of Raw Materials 1637760 1801536 1981689.6 2179858.56Gross income 2456640 2702304 2972534.4 3269787.84Less: Selling and administrationexpensesRent 720000 792000 871200 958320Utilities 300000 330000 363000 399300Van running cost and repairs 240000 264000 290400 319440Salary of staff 648000 712800 784080 862488Training cost 15000 0 0 0Depreciation on van 100000 100000 100000 100000Depreciation on furniture and fixtures 70000 70000 70000 70000

Miscellaneous 5000 5000 5000 5000Net income before tax 358640 428504 488854.4 555239.84Tax (27.5%) 98626 117838.6 134434.96 152690.956Net income after tax 260014 310665.4 354419.44 402548.884


12/2011

Revenue (10% increase per year)Year 5 Year 6 Year 7 Year 8

Less: Cost of goods sold5994611.04 6594072.144 7253479.358 7978827

Cost of Raw Materials

Gross income2397844.416 2637628.858 2901391.743 3191531

Less: Selling and administrationexpenses

3596766.624 3956443.286 4352087.615 4787296

Rent

Utilities1054152 1159567.2 1275523.92 1403076

Van running cost and repairs439230 483153 531468.3 584615.1

Salary of staff 351384 386522.4 425174.64 467692.1

Training cost

948736.8 1043610.48 1147971.528 1262769

Depreciation on van0 25000 0 0

Depreciation on furniture and fixtures100000 100000 100000 100000

Miscellaneous70000 70000 70000 70000

Net income before tax5000 5000 5000 5000

Tax (27.5%)628263.824 683590.2064 796949.227 894144.1

Net income after tax172772.5516 187987.3068 219161.0374 245889.6

455491.2724 495602.8996 577788.1896 648254.5


13/2012

Revenue (10% increase per year)Year 9 Year 10

Less: Cost of goods sold8776710.02 9654381.026

Cost of Raw Materials

Gross income3510684.01 3861752.41

Less: Selling and administrationexpenses

5266026.01 5792628.616

Rent

Utilities1543383.94 1697722.338

Van running cost and repairs643076.643 707384.3073

Salary of staff 514461.314 565907.4458

Training cost

1389045.55 1527950.104

Depreciation on van0 0

Depreciation on furnitures and fixtures100000 100000

Miscellaneous70000 70000

Net income before tax5000 5000

Tax (27.5%)1001058.56 1118664.421

Net income after tax275291.105 307632.7158

725767.459 811031.7054


14/2013

Project end

Salvage value (estimated):

Van: With the yearly depreciation of Tk. 70000, the van will be depreciated to zero inits 10 year life. The estimated salvage value for selling the van after its lifetime iscalculated at 22% of its cost.

Salvage value of van (22% of 1000000) Tk. 220000

Furniture and fixtures: On a straight-line basis depreciation at 10%, the furnitureand fixtures will depreciate by Tk. 25000 per year. The estimated salvage value of thefurniture and fixtures after the projects 10 year life is calculated at 13% of their cost.

Salvage value of furniture and fixtures (13% of 700000) Tk. 91000


15/2014

Capital Budgeting

The following are calculated based on the expected returns from the new project.

Pro forma cash flow

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5OCF 0 430014 480665.4 524419.4 572548.9 625491.3

Net Working Capital -3000000 0 0 0 0 0Capital Spending -3200000 0 0 0 0 0Project Cash Flow -6200000 430014 430014 524419.4 572548.9 625491.3

Year 6 Year 7 Year 8 Year 9 Year 10

OCF 665602.9 747788.2 818254.5 895767.5 981031.7 Net Working Capital 0 0 0 0 3000000Capital Spending 0 0 0 0 225475Project Cash Flow 665602.9 747788.2 818254.5 895767.5 4206507

Net present value (NPV)

Year Project cash flow Divided by (1+r) n Result

1 430014 1.06014 4056202 430014 1.06014 427677.5

3 524419.4 1.06014 440138.34 572548.9 1.06014 453272.8

5 625491.3 1.06014 467094.9

6 665602.9 1.06014 468852.17 747788.2 1.06014 496862.3

8 818254.5 1.06014 512840.99 895767.5 1.06014 529573.6

10 4206507 1.06014 2345791

6547724

NPV = PV- IO = 6547724 - 6200000 = Tk. 3347724.


16/2015

Profitability index (PI)

PI = PV/IO = 6547724/6200000 = 1.056084

Internal rate of return (IRR)

IRR can be calculated by solving

PV = IO

IO = Tk. 6200000

Year Project cashflow

For r = 0.069,result



1 430014 402258.2 402634.8 402420.12 430014 420617.6 421405.7 420956.2

3 524419.4 429285 430491.9 429803.44 572548.9 438431.5 440075.9 439137.6

5 625491.3 448056.4 450158 448958.7

6 665602.9 446014.5 448526.1 447092.57 747788.2 468742.9 471823.8 470064.8

8 818254.5 479807.2 483413.1 4813549 895767.5 491355.6 495511.8 493138

10 4206507 2158463 2178758 2167164

NPV = 6183032 NPV = 6222799 NPV = 6200089

Therefore, IRR is 0.06857, or 6.857%.


17/2016

Decision

We measured the performance of the investments using the standards of NPV, IRRand PI. The different techniques used, however, have different implications.

NPV is the difference between the present value of cash inflows and the present valueof cash outflows. So a positive value means that the overall cash flow is positive. Sincethe NPV of this project is positive ( Tk. 3347724) it increase the overall value of theproject.

IRR is a measure of the rate of growth a project is expected to generate. Since thisvalue ( 6.857%) is greater than the required rate of return, investing in this project islikely to be profitable.

A ratio of 1.0 is logically the lowest acceptable measure on the PI. Any value lower

than 1.0 would indicate that the project's PV is less than the initial investment. Asvalues on the profitability index increase, so does the financial attractiveness of theproposed project. Since this project has a PI of 1.056084, the project appears to becost-effective.

Based on the figures above, the project appears to be acceptable. Just For You Ltd.should open the new outlet.


18/2017

Recommendations

This report explores the implementation feasibility of this new project that Just ForYou Ltd. is considering. Naturally, we must bear in mind the limitations the financialtools carry and the narrow scope of the information and data made available to us andhence, realize that this report runs the risk of imperfect analysis. However, Just ForYou Ltd. may go ahead with this project and expect to be rewarded with pleasingreturns.

Nonetheless, on the basis of the analysis we have undertaken and shown in thisreport, we recommend Just For You Ltd. to go forward with this project of opening upa new outlet in Baily Road for the next ten years.


19/2018

Appendix: A

-8000000

-6000000

-4000000

-2000000

0

2000000

4000000

6000000

0 2 4 6 8 10 12

Projected Cash Flow

Projected Cash Flow


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Appendix: B

0

10000002000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

10000000

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 10

P r o

j e c t e d

R e v e n u e

Project span

Projected revenue

Projected revenue

Capital Budgeting Report - Just For You Ltd.pdf

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