Evaluation of Financial Feasibility of Proposed Venture

Added on - 25 Mar 2021

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Evaluation of financial feasibility ofproposed venture1|P a g e
ContentsExecutive Summary.....................................................................................................................................3Main Report................................................................................................................................................4Break even Analysis.................................................................................................................................4Profit and loss statement for the 1styear of operations..........................................................................8Balance Sheet at the end of first year....................................................................................................12Monthly Cash flow for the first year of operation.................................................................................13Annual Cash Flow..................................................................................................................................16Amount of Cash the business would need to get started......................................................................18Sensitivity Analysis.................................................................................................................................19Calculation of maximum amount that could be offered as upfront fee................................................24Conclusions and recommendations.......................................................................................................26Critical Reflection......................................................................................................................................26References.................................................................................................................................................272|P a g e
Executive SummaryThis report conducts an evaluation of the proposed business opportunity of retailing of geodes that isavailable to Hattie. The evaluation has been done by performing various calculations such as breakevenanalysis, computation of profit/loss for the first year of business, preparation of balance sheet for thefirst year of business, monthly cash flow for the first year of operations. The report also showscalculation of Annual Cash flow, Maximum amount that can be offered as upfront fee, Calculation of NetPresent value of Cash Inflows and Sensitivity Analysis of the business opportunity. The results of thesecalculations and analysis of those results have led to the conclusion that Hattie should go ahead with theplan of online sale of geodes as it is highly profitable but should not accept the proposal of supply ofcabinets to Ian as it would not prove profitable to her.3|P a g e
Main ReportThis report will do an evaluation of the financial feasibility of the venture that Hattie intends to start.Various calculations have been performed so as to support in analysis of the business opportunity. SinceHattie would get the exclusive rights for dealing in geodes for a period of 6 years only, the business willbe existence for the aforesaid period of 6 years only.(All amounts are in GBP)Break even AnalysisBreakeven point is that point at which the revenue generated by the business is equal to the total costsincurred by the business. i.e., there is a situation of no profit, no loss. At the breakeven point, the netprofit earned by the business is equal to zero. Breakeven point shows the quantity of product thatshould be sold by the business so as to be able to cover its fixed costs as well as variable costs. It isimportant for the business to know its beak even point so as to ensure that the actual quantity or thenumber of units sold by it are not less than the breakeven point for the business. Breakeven point iscalculated by dividing fixed costs by contribution per unitIn the given case, the breakeven point will be calculated for 2 scenarios – (i) Online sale of geodes (ii)Sale of Cabinets (each equivalent to 1.5 kg of Geodes) to Hattie’s friend Ian.i.Online sale of geodesIn order to arrive at the breakeven point for online sales geodes, contribution per unit will required tobe calculated.Calculation of contribution for each kg of geodes4|P a g e
Calculation of contribution per unitWorkingAmount in $UAmount inPoundsSelling price per kg35Less: Variable costPurchase cost of each kg of geodes350*0.55192.54.23Freight cost of each kg of geodes2002004.39Credit card charges1.2% of Sales0.42Packaging and shipping5.5Total variable cost per unit14.54Contribution per unit20.46Fixed costs that are related to this proposed business includes monthly rent of shop, depreciation onequipment & website and the salaries of two part time students that would be required to run thegeode operation. The total fixed costs related to online sales of the business are given below:Monthly Rent300Salary of part time students1500Monthly Depreciation104.17Total1904.17Fixed CostsBreakeven point for scenario 1 (Monthly)= Fixed costs per month/ Contribution per kg of geodes= 1904.17/20.46= 93 kgCalculation of expected quantity for each month of the 6 year period of the businessCalculation of budgeted online sales for the business (in kg)MonthYear 1Year 2Year 3Year 4Year 5Year 61507507507507507502637507507507507503787507507507507504987507507507507505|P a g e
51227507507507507506153750750750750750719875075075075075082587507507507507509335750750750750750104367507507507507501156775075075075075012737750750750750750Total309390009000900090009000Assumptions for sales budget1.It is assumed that the online sales of geodes for the first year of operations would grow at the rateof 25 percent per month during the first 6 months and would grow at the rate of 30 percent permonth during the next 6 months.Conclusion:The beak even point for online sale of geodes through the website of business has been calculated to be88 kg. As per the above chart for budgeted online sales for business, the proposed business wouldachieve its breakeven point in the 4thmonth of the first year of its operations when the sales areexpected to be 98 kg. Thereafter, the sales of the business will continue to grow, and it will be able togenerate sales that are much higher than its breakeven point. Therefore, the business can easily achieveits breakeven point and the beak even analysis suggests that it is financially feasible to carry on thebusiness.(ii)Sale of cabinets (equivalent to 1.5 kg of Geodes) to customers.In order to calculate the breakeven point, contribution for each unit of cabinet will be required to becalculated.6|P a g e
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