Feasibility Analysis of New Venture Report 2022

RUNNING HEAD: - Financial analysis 1
Feasibility Analysis of New Venture
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Financial analysis 2
EXECUTIVE SUMMARY
With the ramified economic changes, every organization needs to implement the proper
strategies and financial planning to increase the overall return on capital employed. This report
has divulged the key aspects of the financial planning of the individual which could be used to
evaluate the best possible return associated with the different available investment options. The
purpose of this report is to advise Aunt Hattie on her new project of Geodes stones. This analysis
will help Aunt Hatti to identify which investment options would be more beneficial for her and
investment. Hattie is planning to invest her retirement amount of £45,000 in a venture of selling
show pieces made of stones. The manufacturer of the stone is ready to give selling license of the
decorative stones at an upfront fee for 6 years. The report has been prepared using management
accountancy tool of BEP analysis. In order to make sensitivity analysis, NPOV method of project
evaluation has been done and the analysis shows that the project is extremely profitable.
However, the BEP analysis and net present value of the investment options available for the
Aunt Hattie has been analyzed that and it has been found that she will be having good
profitability if she invests her capital in the proposed investment project.

Financial analysis 3
Table of Contents
EXECUTIVE SUMMARY................................................................................................. 2
Introduction................................................................................................................ 3
Break-Even Analysis................................................................................................... 3
Break-Even Chart.................................................................................................... 5
Break-Even Analysis of Aunt Hattie’s New Venture.................................................6
Weighted average selling price (WASP)...............................................................7
Variable costs....................................................................................................... 8
Weighted average variable cost...........................................................................9
Fixed costs........................................................................................................... 9
Initial investment.................................................................................................. 10
Weighted average contribution per unit............................................................11
BEP Analysis of the Project.................................................................................... 16
Sensitivity Analysis of Aunt Hattie in her new project of Geodes Stones.............17
Conclusion................................................................................................................ 22
References............................................................................................................... 23
Appendix.................................................................................................................. 25

Financial analysis 4
Introduction
This report reveals the investment analysis of the available investment option for Aunt
Hattie on her new project of Geodes stones. There are several financial analysis tools such as
capital budgeting, Break-even analysis method and profit and loss analysis method. In this
report, it has been given that if Aunt Hattie wants to take on her new project of Geodes stones
then firstly she has to assess the break-even point at which she will be having no profit and no
loss and after that she has to assess whether the accepted project is giving the higher return or net
present value. In the starting of this report, break-even analysis of the investment options have
been done. It is done to analysis the point at which Aunt Hattie in her new project of Geodes
Stones would have no profit and no loss. This point will help Aunt Hattie to identify the
undertaken of this new project would be beneficial for her or not in the particular given project.
Break-Even Analysis
Break-even analysis, also called cost-volume-profit (CVP) analysis, is a technique of
marginal costing used to analysis the behavior of costs, its impact on profitability of a company.
However, Aunt Hattie in her new project of Geodes Stones in her new project could easily
assess the point at which she could have no profit or no loss. This is the point at which
the project acceptor would be having no profit and no loss. At this point, company or investors
could be certain that they would be having no profit and no loss out of their investment
decisions. In this analysis, costs are categorized as variable costs or marginal costs, and fixed
costs. The basic reason of this categorization is that the two types of costs behave differently in
respect of volume of production. While marginal cost remains fixed per unit, unless suggested
otherwise, and it is positively and linearly correlated with volume of output. Thus this cost is
controllable cost as it is incurred only when production is made. Zero output means zero variable
cost. On the other hand, fixed costs behave in an opposite manner. Fixed costs are fixed for a
certain time period or up to a given level of capacity utilization. It is up to that time period or up
to a certain level of capacity whatever be the output, the business has to incur the given fixed
costs. As output increases the total fixed cost gets divided between more and more units, and the
fixed cost per unit falls. Break-even analysis makes forecast of future costs, sales, and profit at
different stages of output. It shows how much sales the business has to made in order to just

Financial analysis 5
break-even. It is very useful for new ventures, as the analysis gives a view to the entrepreneur
about how much costs it has to incur, and what quantity the business has to sell before the new
venture starts earning profit.
Sale is total cost plus profit. Thus sales = variable costs plus fixed costs plus profit. In
marginal costing technique, sales price and variable costs are constant per unit. As volume of
production and sales increase, total variable cost and total sales also increase in direct proportion.
Thus at each level of capacity utilization, there is a certain amount of sales and a certain amount
of variable cost. The difference between sales and variable cost is called contribution,
Contribution consist of fixed cost and profit. Hence contribution is the difference between sales
and variable cost, which is applied to the fixed cost. After fixed costs are met from the
contribution, whatever remains is profit. Thus when a firm earns zero profit or loss, fixed cost
becomes equal to the contribution. Thus sales – Variable costs = Contribution, and Contribution
– Fixed cost = Profit (loss). Therefore, it could be inferred that Aunt Hattie in her new project of
Geodes Stones firstly need to assess the cost and volume associated with the selected new project
then only she could determine the best investment option for her investment.
Break-even analysis shows the break-even points in terms of quantity produced and sold,
and in terms of sales value. Breakeven point is the point in sales, at which the business earns
neither profit nor loss. Beyond this point the firm would earn profit and below this point the firm
would incur loss (Yazdanfar, and Öhman, 2015).

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Break-Even Chart
This is the graphical presentation at which Aunt Hattie in her new project of Geodes
Stones would be having zero profit and zero loss. However, this graph reveals the total amount
of fixed cost, sales and variable costing (Zhu, 2014).
In the above diagram, output is measured along the ‘X’ axis and sales price, variable cost, and
fixed cost are measured along the ‘Y’ axis. The FC line starts from a positive intercept on the X
axis, as the firm has to incur the fixed costs respective of output. Hence the FC curve is
horizontal straight line parallel to the X axis. On the other hand, sales line starts from the origin,
as no output means zero sales (CHandREN., AHMAD, and ALI, 2017). Variable cost line also
starts from zero as the firm does not incur any variable cost when output is zero. Both sale and
VC line start from zero and are upward sloping straight-line. Superimposition of the VC above
the FC gives total cost (TC) line as shown above. The total cost line shows the total cost at
different levels of output (DeFusco, et al. 2015).
The sales line and the TC line intersect at the point called break-even point. At this point the
company sells ON units of output, and the sales value of ON units is OR. As at this point sale is
exactly equal to the total cost, the firm is selling just that volume which is just enough to recover
the total cost incurred. The region at the right of BEP is profit region, as any output in this region
would give profit as the sale line is above the TC line. Similarly, the region at the left of BEP is