Clothes Production Line Evaluation for Happy Land Ecommerce Company
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HAPPY LAND ECOMMERCE COMPANY
CLOTHES PRODUCTION LINE EVALUATION
A Business Research Report on the project Appraisal techniques.
May, 2018
CLOTHES PRODUCTION LINE EVALUATION
A Business Research Report on the project Appraisal techniques.
May, 2018
Table of Contents
1.2 INTRODUCTION.....................................................................................................................3
1.3 Problem Statement.....................................................................................................................4
1.4 Research methodology...............................................................................................................4
1.5 Analytical Findings....................................................................................................................5
1.5.1 Clothes production segment Appraisal techniques.............................................................5
1.5.2 Discounted pay-back period...............................................................................................5
1.5.3 Internal Rate of Return (IRR).............................................................................................6
1.5.4 Profitability index...............................................................................................................6
1.5.5 Net-present value (NPV)....................................................................................................6
1.6 Incorporating Risk in Project Evaluation..................................................................................7
1.6.1 Sensitivity analysis- Pricing...............................................................................................7
1.6.2 Sensitivity analysis- Quantity.............................................................................................8
1.7 Capital Budgeting Models.....................................................................................................8
1.8 Recommendations to the company............................................................................................9
1.9 Implementation plan..............................................................................................................9
2.0 Conclusions..............................................................................................................................10
REFERENCES..............................................................................................................................11
2
1.2 INTRODUCTION.....................................................................................................................3
1.3 Problem Statement.....................................................................................................................4
1.4 Research methodology...............................................................................................................4
1.5 Analytical Findings....................................................................................................................5
1.5.1 Clothes production segment Appraisal techniques.............................................................5
1.5.2 Discounted pay-back period...............................................................................................5
1.5.3 Internal Rate of Return (IRR).............................................................................................6
1.5.4 Profitability index...............................................................................................................6
1.5.5 Net-present value (NPV)....................................................................................................6
1.6 Incorporating Risk in Project Evaluation..................................................................................7
1.6.1 Sensitivity analysis- Pricing...............................................................................................7
1.6.2 Sensitivity analysis- Quantity.............................................................................................8
1.7 Capital Budgeting Models.....................................................................................................8
1.8 Recommendations to the company............................................................................................9
1.9 Implementation plan..............................................................................................................9
2.0 Conclusions..............................................................................................................................10
REFERENCES..............................................................................................................................11
2
1.1 Executive summary
Happy land is a market leader ecommerce company with range of product segments. The
company has thrived well in its operations for the past 5 years enjoying a market niche due to its
quality and fairly priced products. The management team of happy land has satisfied the board of
directors and all the shareholders in the operational running of the company. The main product
segments produced by this firm include; Latest gadgets, books, toys, household items and
clothes. The business operations of happy land have expanded resulting in new markets. The
market share across the different geographical regions is currently 25% and it is expected to hit a
target of 40% in the next 2 years. The different products segments commands various geographic
regions such as urban, suburban, small town, and rural due to their preference by the customers.
The management of this company has proven records of excellence in corporate governance. The
stakeholder’s welfare has always been a priority in the company. Investors are paid timely their
dividends every financial year when profits are announced. This has improved the shareholders
morale which in turn advance the valuation of shares by ploughing back their profits to the
business in form retained earnings and share repurchases. Happy lands attract a huge pool of
applicant to work in the firm. Recruited employees get to improve productivity through training
and motivational intrinsic rewards by the management.
Business targets have been accomplished every period they are set. The vision of the firm being
to become a market leader in the ecommerce sector is the driving force towards its set goals. The
management applies a balance score card as a management tool to gauge the productivity of each
employee. However, being a market leader in ecommerce, there are many challenges inhibiting
its fast growth. These factors beyond the organizational discretion such as economic problems,
sociological factors, political factors and legal factors affects the business negatively. For
example, Economic Conditions leads to fluctuations in prices, changing currency values, low
consumer spending, inflation and changing interest rates. Cultural differences as a result of
traditions, religion, and family relations can create uncertainty when doing business in different
regions (Bensley, 2011). While these situations are not directly influenced by government,
Political risk is also affected by changes in governments because of elections or military action.
Companies often grow by offering more and different products . New flavors, different package
sizes, and varied brands can create business expansion (Bensley, 2011). Happy land enjoys a
3
Happy land is a market leader ecommerce company with range of product segments. The
company has thrived well in its operations for the past 5 years enjoying a market niche due to its
quality and fairly priced products. The management team of happy land has satisfied the board of
directors and all the shareholders in the operational running of the company. The main product
segments produced by this firm include; Latest gadgets, books, toys, household items and
clothes. The business operations of happy land have expanded resulting in new markets. The
market share across the different geographical regions is currently 25% and it is expected to hit a
target of 40% in the next 2 years. The different products segments commands various geographic
regions such as urban, suburban, small town, and rural due to their preference by the customers.
The management of this company has proven records of excellence in corporate governance. The
stakeholder’s welfare has always been a priority in the company. Investors are paid timely their
dividends every financial year when profits are announced. This has improved the shareholders
morale which in turn advance the valuation of shares by ploughing back their profits to the
business in form retained earnings and share repurchases. Happy lands attract a huge pool of
applicant to work in the firm. Recruited employees get to improve productivity through training
and motivational intrinsic rewards by the management.
Business targets have been accomplished every period they are set. The vision of the firm being
to become a market leader in the ecommerce sector is the driving force towards its set goals. The
management applies a balance score card as a management tool to gauge the productivity of each
employee. However, being a market leader in ecommerce, there are many challenges inhibiting
its fast growth. These factors beyond the organizational discretion such as economic problems,
sociological factors, political factors and legal factors affects the business negatively. For
example, Economic Conditions leads to fluctuations in prices, changing currency values, low
consumer spending, inflation and changing interest rates. Cultural differences as a result of
traditions, religion, and family relations can create uncertainty when doing business in different
regions (Bensley, 2011). While these situations are not directly influenced by government,
Political risk is also affected by changes in governments because of elections or military action.
Companies often grow by offering more and different products . New flavors, different package
sizes, and varied brands can create business expansion (Bensley, 2011). Happy land enjoys a
3
product line consisting of latest gadgets, books, toys, household items and clothes. Dependency
on one or two products can be risky, though a firm has to ascertain the profitability of each cost
unit Centre. If demand for a company’s main product declines, profits may disappear. Producing
and selling a variety of items can reduce risk. (Bensley, 2011)
1.2 INTRODUCTION
Businesses faces many Uncertainties in their operating environments which present challenges to
the management. These risks may be viewed from geographic, economic, social, and political
perspectives (Mayo, 2017). Competition being a threat to existing business, firm endeavor to be
innovative, efficient, responsible and forward thinking to increase their market shares.
Management of firms Organizations therefore, are faced with continual challenge to seek out and
evaluate capital decisions that will provide current profits and long-term growth. Managers make
decisions that they hope will improve the company’s future success.
Dataset clothes production line
Calculation of free cash flow
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Estimated sales (units) 92000 142000 108000 71000 62000
Selling price 687 700.74 714.75 729.05 743.63
Sales revenue 63,204,000.00$ 99,505,080.00$ 77,193,518.40$ 51,762,542.62$ 46,105,115.42$
Less: Variable cost per unit 325 331.50 338.13 344.89 351.79
Total variable cost 29,900,000.00$ 47,073,000.00$ 36,518,040.00$ 24,487,374.60$ 21,811,008.02$
Contribution 33,304,000.00$ 52,432,080.00$ 40,675,478.40$ 27,275,168.02$ 24,294,107.40$
Less: Fixed cost 7,200,000.00$ 7,200,000.00$ 7,200,000.00$ 7,200,000.00$ 7,200,000.00$
Depreciation 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$
Total fixed cost 13,414,285.71$ 13,414,285.71$ 13,414,285.71$ 13,414,285.71$ 13,414,285.71$
Net profit before tax 19,889,714.29$ 39,017,794.29$ 27,261,192.69$ 13,860,882.30$ 10,879,821.68$
Less: Tax 5,569,120.00$ 10,924,982.40$ 7,633,133.95$ 3,881,047.04$ 3,046,350.07$
Net profit after tax 14,320,594.29$ 28,092,811.89$ 19,628,058.73$ 9,979,835.26$ 7,833,471.61$
Add: Depreciation 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$
Free cash flow 20,534,880.00$ 34,307,097.60$ 25,842,344.45$ 16,194,120.97$ 14,047,757.33$
Initial investment expenses
Development of prototype SSHA (1,175,000.00)$
Marketing study expenses (650,000.00)$
Manufacturing equipment (45,200,000.00)$
Salvage value of equipment 9,500,000.00$
Working capital (11,376,720.00)$
Net cash flows (47,025,000.00)$ 9,158,160.00$ 34,307,097.60$ 25,842,344.45$ 16,194,120.97$ 23,547,757.33$
Discounting factor at 12% 1 0.8929 0.7972 0.7118 0.6355 0.5674
Present value of cash flows (47,025,000.00)$ 8,177,321.06$ 27,349,618.21$ 18,394,580.78$ 10,291,363.88$ 13,360,997.51$
Total net present value 30,548,881.43$
4
on one or two products can be risky, though a firm has to ascertain the profitability of each cost
unit Centre. If demand for a company’s main product declines, profits may disappear. Producing
and selling a variety of items can reduce risk. (Bensley, 2011)
1.2 INTRODUCTION
Businesses faces many Uncertainties in their operating environments which present challenges to
the management. These risks may be viewed from geographic, economic, social, and political
perspectives (Mayo, 2017). Competition being a threat to existing business, firm endeavor to be
innovative, efficient, responsible and forward thinking to increase their market shares.
Management of firms Organizations therefore, are faced with continual challenge to seek out and
evaluate capital decisions that will provide current profits and long-term growth. Managers make
decisions that they hope will improve the company’s future success.
Dataset clothes production line
Calculation of free cash flow
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Estimated sales (units) 92000 142000 108000 71000 62000
Selling price 687 700.74 714.75 729.05 743.63
Sales revenue 63,204,000.00$ 99,505,080.00$ 77,193,518.40$ 51,762,542.62$ 46,105,115.42$
Less: Variable cost per unit 325 331.50 338.13 344.89 351.79
Total variable cost 29,900,000.00$ 47,073,000.00$ 36,518,040.00$ 24,487,374.60$ 21,811,008.02$
Contribution 33,304,000.00$ 52,432,080.00$ 40,675,478.40$ 27,275,168.02$ 24,294,107.40$
Less: Fixed cost 7,200,000.00$ 7,200,000.00$ 7,200,000.00$ 7,200,000.00$ 7,200,000.00$
Depreciation 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$
Total fixed cost 13,414,285.71$ 13,414,285.71$ 13,414,285.71$ 13,414,285.71$ 13,414,285.71$
Net profit before tax 19,889,714.29$ 39,017,794.29$ 27,261,192.69$ 13,860,882.30$ 10,879,821.68$
Less: Tax 5,569,120.00$ 10,924,982.40$ 7,633,133.95$ 3,881,047.04$ 3,046,350.07$
Net profit after tax 14,320,594.29$ 28,092,811.89$ 19,628,058.73$ 9,979,835.26$ 7,833,471.61$
Add: Depreciation 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$ 6,214,285.71$
Free cash flow 20,534,880.00$ 34,307,097.60$ 25,842,344.45$ 16,194,120.97$ 14,047,757.33$
Initial investment expenses
Development of prototype SSHA (1,175,000.00)$
Marketing study expenses (650,000.00)$
Manufacturing equipment (45,200,000.00)$
Salvage value of equipment 9,500,000.00$
Working capital (11,376,720.00)$
Net cash flows (47,025,000.00)$ 9,158,160.00$ 34,307,097.60$ 25,842,344.45$ 16,194,120.97$ 23,547,757.33$
Discounting factor at 12% 1 0.8929 0.7972 0.7118 0.6355 0.5674
Present value of cash flows (47,025,000.00)$ 8,177,321.06$ 27,349,618.21$ 18,394,580.78$ 10,291,363.88$ 13,360,997.51$
Total net present value 30,548,881.43$
4
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