Financial Management: Break Even Analysis, Profit and Loss Statement, Balance Sheet Analyses

This report provides an analysis of break even point, profit and loss statement, and balance sheet for a financial management case. It includes recommendations on which project to choose based on the analysis.

B09888
FINANCIAL
MANAGEMENT

Table of Contents
EXECUTIVE SUMMARY.............................................................................................................3
BREAK EVEN ANALYSIS:..........................................................................................................4
Profit and Loss Statement and Balance Sheet Analyses:.................................................................7
Monthly cash flow for the first year of operation..........................................................................12
Projected annual cash inflows for 5 years.....................................................................................13
Cash required by Isaac to start new venture:.................................................................................16
Sensitivity analyses of both projects:............................................................................................19
Upfront fee for the exclusive rights to Alpen Choc:......................................................................21
RISK FACTOR ANALYSIS:........................................................................................................22
CONCLUSION AND RECOMMENDATION............................................................................23
REFERENCES..............................................................................................................................24

EXECUTIVE SUMMARY
This report is based on various financial elements such as break even analysis, profit and
loss statement, balance sheet, monthly cash flow and annual cash flows. The case
presented shows that Issac has provided not complete information’s; thus for calculation
purpose data is assumed. The transaction is carried out between two countries; Canada
and Germany. Due to different currencies; foreign currency exchange rate for one
Canadian dollar (CAD) is taken as 0.64 € Euro, all the transactions will be carried out in
Canadian dollar; because Issac is the citizen of Canada and balance sheet and cost of
operations has to be calculated for him. Alpen Choc. is chocolate manufacturer company
situated in Germany. It is also assumed that foreign exchange rate will be constant
throughout the year and no discount is allowed on currency exchange even on bulk
purchase. Average selling price is assumed as CAD 160 per kg and there’s no sales tax
for any transactions. It is believed that all interests on borrowing are paid on time or
there’s no outstanding interest. Cash flow is discounted at rate of 7% per annum
(assumption) because inflation rate is between 5.19% to 8.15%, therefore interest paid on
borrowings are taken as discounted rate for cash flows; all other factors such as
environment change, increase in demand, competitors entry and fluctuation in inflation
rate are remain constant. Total average monthly sales are taken as 400 kg per year; it is
the average of average of starting month sale 50 kg and ending month 750 kg. Company
will order monthly stock at a time. Issac has two alternatives; either sale through internet
or his friend Jade. For calculating equity capital at Liability side; it is assumed that Isaac
would invest whole retirement amount into the business.

BREAK EVEN ANALYSIS:
Break-even Analysis (BEP): Break-even analysis shows a point of sale where company
attain the situation of no loss no gain; means it is a point where if company increases
sales, it will gain profit and moving below the point result in loss. In straightforward
words, the make back the initial investment point can be characterized as a point where
complete (costs) and all out deals (income) are equivalent (Brigham and Ehrhardt, 2013).
Break-even analysis shows the original investment point can be portrayed as a point
where there is no net benefit or deficit. The firm just earns back the original investment.
Issac has two alternatives which is either he can sale 4800 kg annual chocolates through
internet or 1200 boxes annually chocolate to his friend Jade.
Project 1
4800 kg Annually CAD CAD
Selling price per kg 160 768000
Less: Variable cost per
kg:
Packaging and Shipping 6
Purchases 113
Handling fee @ 1.2%
per sale 1.920 121 580416
Contribution per Kg 39 187584
Period cost (Fixed
Cost):
Total cost to sales
(annual) @ CAD
2,500/month
-
30000
Rent @ CAD
3,500/month
-
42000 72000 72000
Net Profit 115584
Working Note:
Handling fee per order (400 kg at a
time) =
400 kg × 160 × 1.2%
= 768
Per Kg Handling fee CAD 768/400 Kg = CAD

= 1.92/Kg
Purchases is converted into Canadian currency from euro which is CAD 113 per kg
Break even point (Units) =
Fixed cost/ Contribution per
unit
= CAD 72000/39 per Kg
= 1846
Approx. 1846 units
Break even point (CAD) = Breakeven point (units) × Sales
price per kg
= 1846 × 160 per kg
= 295360
CAD 295360
Interpretation: On the basis of above calculation; it can be interrelated that
Isaac is facing total net annual gain of approximate CAD 295360. Because it’s total
annual net sales is more above than the break-even point of 1846 kg and its total
breakeven sales is below CAD 74,880. If Isaac manages to increase its sales above break-
even point then it will be rewarded for every extra per kg sale. For handling charges per
order calculation; size of every order is taken as 400 kg per month, number of order per
year will be 12 (Brigham, 1996).
Project 2
1200 boxes annually CAD CAD
Selling Price per box 45 54000
Less: Variable Cost / box
Purchases 28
Boxes and Decorative cost/box 8 43200
Contribution cost /box 9 10800
Period cost (Fixed Cost):
Assistant Expenses Annually @ CAD
500/month 6000 6000
Net Earnings 4800

Working Note:
Total sales = 45 × 1200 =
CAD
54000
Total Variable cost = 8 × 1200
=
CAD
44400
Purchase price is divided by to get per box
rate
Break even point (Units) =
Fixed cost/ Contribution per
unit
= CAD 6000/9 per Kg
= 667
Approx. 667 boxes
Break even point (CAD) = Breakeven point (units) × Sales
price per kg
= 667 × 45 per box
= 30015
CAD 30015
Interpretation: Isaac will attain the point of no gain no loss if he sale 667 boxes in a year;
in value this can be achieve he generates total sales of CAD 30015 Canadian dollars in a
year. He’s income statement through marginal costing method shows that; Isaac is
generating annual revenue of around CAD 38400 Canadian dollars. With every increase in
break-even point will generate more revenue (Ehrhardt and Brigham, 2011).
Which project should be chosen:
After matching both project 1 and 2; it is recommended that in long run, Isaac should go
with project 1 (selling through internet); because earnings from this project is almost
double of project 2. But if Isaac could carry both the projects at a time; it will not increase
the burden but average earning from both the project together will decreased (McMahon

and et.al. 1993). But taking into consideration about cost of starting the business; it was
found that in project 1, Isaac has to spend CAD 8,500 with website designer and he
already spent CAD 5,000 for market study; hence total cost of establishment is CAD
13,500. On the other hand, to acquire project 2 he just only require CAD 2,200 onetime
cost for purchase wrapping machine (Chandra, 2011). After analyzing risk factor it was
found that project 1 has only estimated sale of approximate 4800 kg for first year but
project 2 is giving guaranteed sale of 1200 boxes annually on immediate base. It cannot
be ignored that more risk results in more profit; but looking at return on investment
factor, project 1 obviously has less return than project 2. Assuming that Issac is 60 year
old and have less risk apatite; it is recommended that he should go with project 2.
Profit and Loss Statement and Balance Sheet Analyses:
Profit and Loss statement: Also known as Income statement; calculated by every
organization to know about its annual earnings from the business. The profit and loss
(P&L) statement is a budget report that outlines the incomes, expenses, and costs
acquired during a predefined period, normally a financial quarter or year. The P&L
articulation is synonymous with the salary explanation. These records give data about an
organization's capacity or powerlessness to produce benefit by expanding income,
diminishing expenses, or both. Some allude to the P&L articulation as an announcement
of benefit and misfortune, salary proclamation, explanation of tasks, explanation of
money related outcomes or pay, profit proclamation or cost proclamation (Schall and
Haley, 1979).
Balance sheet: It shows financial position of the company at the end of year. It works on
going on concept, means all the elements in balance sheet have their closing balance and
carried forwarded to next year until fully settled by firm. A balance sheet is an
announcement of the budgetary situation of a business that rundowns the benefits,
liabilities, and proprietor's value at a specific point in time. As it were, the accounting
report delineates your business' total assets (Brealey, 2001).

The asset report may likewise have subtleties from earlier years so you can do a
consecutive correlation of two back to back years. This information will assist you with
following your exhibition and will distinguish approaches to develop your accounts and
see where you have to improve (Jain, 1999).
Application of Income statement and Balance sheet for Isaac:
Isaac has options available; project 1 and project 2. Income statement for both the project
has done separately to see the impact of total net earnings on cash inflows from each
project separately. Also monthly rent is only charged to Project 1 individually; due more
stock. Other variable expenses are calculated on cost per unit basis for both projects
separately (McMenamin, 2002).
Project 1
Income statetement for the year ending
Particulars
CAD
(Dr.)
CAD
(Cr.)
Sales 768000
Less: Cost of Sales:
Purchases (113 × 4800) 542400
Packing & Shipping (6 × 4800) 28800
Freight Charges (22 × 4800) 105600
Less: Closing stock (400 × 160) 64000 612800
Gross Profit 155200
Less: Operating expenses
Salary (2500 × 12) 30000
Rent (3500 × 12) 72000 102000
Net Income before tax and interest 53200
Less: Interest@7% 5600
Net Income after interest befure tax 47600
Less: Tax @ 25% 11900
Net Income after interest and tax 35700

Working Note:
Freight charges per kg is given as €14/kg;
taking exchange value 1 CAD = 0.64 Euro
€14 × 1.52 = CAD 22 approximate
Closing stock is assumed to be 400 per month 400 kg × CAD 160/kg (sale price)
= CAD 64000
Annual interest rate is calculate on CAD 80000
borrowings @ 7%
Interpretation: In project 1 where the sales are done through internet; Isaac will receive
CAD 442500 at the end of year, which gives approximate 57% return on sales. It is huge
future returns but this Income statement has many hidden expenses which requires to be
deducted from net revenue; for instance selling and distribution charges are not there;
labor charges should also be included, cost of handling product at warehouse is missing
and lastly various day to day expenses such as; electricity payment, transportation cost,
petrol, internet recharge, salaries of other staff, monthly expenses to be paid to website
servers, etc. is emitted. Thus it still assumed that Uncle Isaac will get at least 20% return
which is also a good earnings for starting year (Cornett and Saunders, 2003).
Balance sheet:
Balance sheet as on year
Particulars CAD CAD
ASSETS
Fixed Assets:
Refrigerator 15500
Security Amount 10500 26000
Other Assets:
Miscellaneous Assets:
Website Design 8500
Market Analysis 5000 13500
Current Assets:
Prepaid Rent 3500
Prepaid Remitted credit card handling fee 768
Bank (balancing figure)
87193
2
87620
0

Total Assets
91570
0
EQUITY AND LIABILITIES
EQUITY :
Capital
80000
0
Add: Retained earnings 35700
83570
0
Non- Current Liability:
Loan from bank @7% 80000
Total Equity and Liabilities
91570
0
Working Note:
*Bank balance shows the net balancing figure between Liabilities and Assets.
Interpretation: Project 1 has very item to be shown on equity and liability side; because
all transactions are carried on cash, so there are payment pending to suppliers. It is a sole-
proprietor business; therefore no shares will be issued to investors. Still while running
operations it is estimated that some of the elements like outstanding rent, bank overdraft
and creditors may rise and add to liability side. The bank balance shown on assets side is
balancing figure of excess of total liabilities over total assets (Van Horne James, 2002).
This figure shows the amount left with owner after doing all transactions of selling and
buying. The reason behind huge amount left with Isaac is omission of various other long
term investments. Huge amount of cash in account shows inefficiency of firm in proper
utilization of fund. As Isaac has no need to take loan from outside but the theory of
capital structure does not allow any business to run only on equity. And taking loan
reduces the burden of taxes on the firm. Hence it is recommendable to take loan by Uncle
Isaac (Arnold, 2012).
Other Assets like investment on web design and market analyses are known as
preliminary expenses and should write-off over 5years or 10years from Income statement
every year. These expenses are incurred by owner while starting new business; as this is
non refundable cost; it need to be write-off over the years from income earned by

company and it is subject to get tax benefit and done before paying taxes by the company
(Besley and Brigham, 2008).
PROJECT 2
Income statement for the year ending
Particulars
CAD
(Dr.)
CAD
(Cr.)
Sales (1200 units) 54000
Less: Cost of Sales:
Purchases (28 × 1200) 33600
Boxes & decorative papers (8 × 1200) 9600
*Freight Charges (22 × 300) 6600
Less: Closing stock (100 × 45) 4500 45300
Gross Profit 8700
Less: Operating expenses
Salary (500 × 12) 6000
6000
Net Income before tax and interest 2700
Less: Interest@7% 5600
Net Income after interest befure tax 2900
Working Note:
Freight charges is available at per kg; and project 2 deals in boxes, so 1 box carries
250gm chocolate; likewise 4 boxes will carry 1 kg chocolates and similarly 1200 boxes
will become 300 kg chocolates.
Interpretation: For project 2 only income statement analysis has done; because in balance
sheet all items are similar. Income statement or profit and loss statement shows net
earnings of CAD 23025 during the year. Warehouse rent is omitted due to less carrying
capacity of only 300kg during a year. Isaac is able to sale 1200 boxes during the year;
hence total selling price is CAD 54000; freight paid is calculated on per kg cost bases.
The net profit margin of Project 2 is approximately 42.63% which is less than project 1;

the reason is fewer sales as it only able to supply 300 kg to Jade annually (Fabozzi and
Peterson, 2003).
Monthly cash flow for the first year of operation
Project 1:
This project is receiving uneven cash flows during the year, starting month sale is 50 kg
per month but at the end of the year it will increase to 750 kg per month, so as an average
there will be 400 kg chocolates sale per month. Calculation of monthly rough cash
inflows at 50 kg per month:
Sale 50 × 160 = CAD 8000
Less: total variable cost @ 6 per kg 6 × 160 = CAD 960
Less: Monthly rent 3500 * 3/4 CAD 2625
Less: Monthly salary CAD 2500
Earning for month CAD 1915
The minimum earning from project 1 is CAD 1915 per month, unexpected costs such as
loss due to damage of chocolates and low demand are kept constant. Rent is shared
among two projects according total quantity ordered together. Hence project one’s share
will be 3/4th (Madura, 2020).
Project 2
This project has regular cash flows which is 100 boxes per month for two years. It will
also support Isaac in meeting with irregular cash received from project 1. One box carries
only 250 gm chocolates; which is different standard of unit of sale. If needed it should be
converted into kg for an ease in collaborative income statement. As both the projects are
different, it is suggested that business should calculate cash inflows from each project
separately. This will help Isaac in knowing which project is doing well and which one
not. If not possible to make different Income statement due to tax liability; then company
should adopt a tool which can calculate cash flows on share basis and the purpose of this
calculation should be limited for analyses only (Banerjee, 2012). The monthly cash
inflows of project 2 are done below:

Sale 100 × 45 = CAD 4500
Less: total variable cost @ 8 per box 100 × 8 = CAD 800
Less: Monthly rent as per share 3500/4 = CAD 875
Less: Monthly salary CAD 500
Earning for month CAD 2325
The regular monthly cash inflows from project 2 are around CAD 2325 per month; which
is more than Project 1 at initial stage. But later, it is estimated by marketing team that sale
will increase in the last month.
Projected annual cash inflows for 5 years
Annual cash inflows for each project have been projected of 5 years by increasing it by
5% every year. Project 2; has fixed sales for two years, it is assumed that Jade has
expanded its contract for 5 years. Besides its constant sale of 1200 boxes yearly; it is
assumed that product price will increase by 5% every year and thus increases sales
revenue by same percentage. Annual cash flows of Project 1 are mentioned below:
Project 1
Annual Cash Inflows CAD
Profit after tax 35700
Depreciation on refrigerator@10% 1550
Preliminary expenses written
off@20% 2700
Recovery of current Assets NA
Cash inflow from operations: 39950
Year
Initial
Investmen
t 43768
Cumulative
cash
inflows
Discounte
d @ 10%
Discounte
d cash
flows NPV
1 39950 39950 0.90 35955 79723
2 41948 81898 0.81 33977 45746
3 44045 125942 0.73 32109 13637
4 46247 172189 0.66 30343 16706
5 48559 220749 0.59 28674 45380

Interpretation: On the basis of net present value of all five year cash inflows; it can be
stated that Project is showing positive net present value in 5th year. Hence Isaac needs to
carry operations for atleast five years to get positive net present value. A positive net
present worth shows that the anticipated profit produced by a venture or speculation -
right now surpasses the foreseen costs, likewise right now. It is accepted that a
speculation with a positive NPV will be productive, and a venture with a negative NPV
will bring about a total deficit (Titman, Keown and Martin, 2011). This idea is the reason
for the Net Present Value Rule, which directs that lone ventures with positive NPV
qualities ought to be considered. Cash in the present is worth more than a similar sum
later on because of swelling and to profit from elective speculations that could be made
during the interceding time. As it were, a dollar earned later on won't be worth as much as
one earned in the present. The markdown rate component of the NPV recipe is an
approach to represent this. Preliminary expenses are the costs incurred by business at the
time of startup; these costs need to be written off over the years. Here it is assumed that
these costs need to be written off over the 5 years (Baker and Powell, 2009).
Annual cash inflows for project 2 are given below:
Project 2
Annual Cash Inflows CAD
Profit after tax 2700
Depreciation on wrapping
mac@10% 220
Preliminary expenses written
off@20% NA
Recovery of current Assets NA
Cash inflow from operations: 2920
Year
Initial
Investmen
t 12700
Cumulative
cash
inflows
Discounte
d @ 10%
Discounte
d cash
flows NPV
1 2920 2920 0.90 2628 10072
2 3066 5986 0.81 2483 7589
3 3219 9205 0.73 2347 5242
4 3380 12586 0.66 2218 3024
5 3549 16135 0.59 2096 928

Interpretation: Here the report shows negative net present value of around CAD 928.
Initial investment amount is total borrowings taken from bank for further investment
purposes. All cash inflows are discounted at 10% which is average of past five year’s
inflation rate. This project is based on contract for two years; where regular sale of 100
boxes is fixed but still 5% increase in sales over the year is done; due to increase in the
price of product and all other cost taken constant. A financial specialist may be eager to
hold up a year to win an extra 5%, yet that may not be worthy for all speculators. Right
now, 5% is the rebate rate which will fluctuate contingent upon the speculator. In the
event that a speculator realized they could procure 8% from a moderately protected
venture throughout the following year, they would not delay installment for 5%. Right
now, speculator's rebate rate is 8% (Bryant, 1987).
An organization may decide the markdown rate utilizing the normal return of
different ventures with a comparative degree of hazard or the expense of getting cash
expected to back the task. For instance, an organization may maintain a strategic distance
from an undertaking that is relied upon to return 10% every year on the off chance that it
costs 12% to back the task or an elective venture is required to return 14% every year
(Gapenski and Pink, 2007).
Basis of methodology:
A similar philosophy has been received for working out money outpourings and inflows
for rest of the tasks. The net money receipts have been turned out based on distinction
between money outpouring and money inflow during the working long periods of the
unit. Based on the above system for working out expense of capital, money inflow and
money surge; the limited income procedures are utilized to discover the budgetary
suitability of the undertakings.
Financial Viability Analyses:
Financial viability alludes to an associations capacity to produce adequate pay to meet
working installments, obligation responsibilities and, where material, to permit
development while keeping up administration levels.

Financial viability is critical in any business since settling on monetarily feasible
choices can decide if your business is effective or not. Ensuring something is monetarily
practical basically intends to guarantee it's gainful and you can manage the cost of it
(Cole, 2004).
Thus after financial viability analyses of Project 1 and Project 2 separately; it is
recommended that Isaac should choose project 1, but if looking at risk factor; this project
consists of lots of fluctuating sales and carries high risk. On the other hand looking at the
risk factor of Project 2; it was found that it is providing immediate cash inflow and carries
stable revenue and less risk. Hence, both project together are financially viable and
creates balancing portfolio for Isaac.
Cash required by Isaac to start new venture:
All cash requirement for both projects are explained on the basis of step by step
application. Before starting any new business; it is good to do proper market analyses
from genuine sources to get authenticate report. The cost on these analyses is estimated
around 1% of total investment. Now after market analyses, the next step for starting new
venture is to register itself according to Canadian government law. Therefore, business
requires around CAD 3500 as registration fee.
After successfully registering new venture; Issac will get business license, registered
from government. Additional to this it also required patent rights for its business idea to
get competitive advantage in the market; hence Isaac requires investing CAD 10,000 for
intellectual property rights. This right includes patents, copyright, industrial design rights,
trademarks, plant variety rights, and product design rights and jurisdictions trade secrets.
At the next level it requires space to store product, refrigerator for providing cold
storage to chocolates and space either rented or owned also requires. Some of the other
expenses which required by Isaac are:
Technological Expenses: It includes cost of website, information systems, accounting and
payroll software’s. At the initial level, it is assumed that Uncle Isaac don’t need to
acquire expensive accounting and payroll software’s, as this can be outsourced from

outside to experts available in the market by paying small amount of CAD 2000 per
month. Other requirements like website and servers need to be acquired by Uncle and the
cost of website host name varies according to preference, it is assumed that average cost
paid by Uncle Isaac for catchy website name will be cost around CAD 10500 and for
server, it is preferred to go with cloud storage at initial stage. This will cost CAD 3600
per month for taking premium highly secured servers. Isaac also needs to purchase latest
system for recording daily transactions which will cost around CAD 3350.
Employee: Uncle Issac also needs to hire workers and manager to handle them. So
minimum labor required by Uncle Isaac will be 10 and each worker costs CAD 1500 per
month. Additional to this the cost of manager, handling these 10 labors will be approx.
CAD 3000 per month. At starting point no extra income needs to be invested on
accountant but it needs legal personal for approval of its annual statement and for legal
advisory, so this job can be outsourced in just CAD 1250 per month. It also required
hiring vendors for delivering its product to customer; the estimated commission is
approx. CAD 8 per order.
Equipment and supplies: Equipments like wrapping machine and two vans costing CAD
25000 required for supply of product.
Advertising and Promotion: Without promotion and advertising no customers going to
reach to website; so it’s necessary to outsource digital and field marketing job for CAD
15000 as an annual fee for complete marketing campaign, later Isaac can hire a team.
Working capital requirement: Working capital, otherwise called net working capital
(NWC), is the distinction between an organization's present resources, for example,
money, records of sales (clients' unpaid bills) and inventories of crude materials and
completed products, and its present liabilities, for example, creditor liabilities. Net
working capital is a proportion of an organization's liquidity and alludes to the contrast
between working current resources and working current liabilities. Much of the time
these estimations are the equivalent and are gotten from organization money in addition
to debt claims in addition to inventories, less records payable and less collected costs.

Working capital is a proportion of an organization's liquidity, operational proficiency
and its transient money related wellbeing. In the event that an organization has
considerable positive working capital, at that point it ought to can possibly contribute and
develop. On the off chance that an organization's present resources don't surpass its
present liabilities, at that point it might experience difficulty developing or taking care of
lenders, or even fail. Have some additional cash put in a safe spot for any neglected or
startling costs. Most organizations fall flat since they do not have the money to manage
startling issues during the business season.
The startup costs for a sole ownership contrast from the startup costs for an association
or company. Some extra costs an association may acquire incorporate the legitimate
expense of drafting an organization understanding and state enlistment fees. Different
costs that may apply more to a company incorporate charges for documenting articles of
consolidation, ordinances, and terms of unique stock authentications. Propelling another
business can be animating; in any case, becoming involved with the fervor and ignoring
the subtleties can prompt disappointment. The assumed working capital requirement on
the basis of nature of operations is 40% of sales revenue.
Hence on the basis of assumptions done above the overall funds required by Uncle Isaac
to start a new venture are:
CAD
Market research @ 1% 80000
Registration 3500
Patent or Intellectual
property 10000
Rent (security deposit) 10500
Refrigerator 15500
Wrapping machine 2200
Web design 8500
Market study 5000
Software maintenance 2000
Website portal 10500
Data Security 3600
Transaction software 3350
Labor (10 × 1500) 15000
Manager salary 3000
Rent 3500
Advising personnel 1250

Vendors 400
Van 25000
Advertising and promotion 15000
Working capital @40% 328800
Total cost 546600
Thus above estimated list shows all the expenses of starting business; including monthly
and yearly premiums. At present Uncle Isaac has CAD 80000 of his retirement and CAD
80000 of borrowing. So he doesn’t need any additional capital to start this new venture.
This overall cost is rough estimation done by taking consideration of new ventures which
recently started in Canada.
Sensitivity analyses of both projects:
An affectability examination decides how various estimations of an autonomous variable
influence a specific ward variable under a given series of expectations. At the end of the
day, affectability examinations concentrate how different wellsprings of vulnerability in a
numerical model add to the model's general vulnerability. This strategy is utilized inside
explicit limits that rely upon at least one info factors. This analysis also known as what if
analyses.
Method use for current project:
To do sensitivity analyses of project 1 and project 2; three factors taken into consideration
viz. net earnings, total revenue and overall costs. The basic parameters for doing analyses
for both project is increase in sales by 5%, 10%, 15% and 20%; while other factors like
cost of sales and taxes are kept constant. In second parameter; other factors are constant
only cost of sales is increased by 5%, 10%, 15% and 20% for both the projects.
Sensitivity analysis of project 1:
This analysis based on criteria “What will be return rate on sales, if sales increased by
5%, 10%, 15% and 20%”:
Actual 5% 10% 15% 20%
Sales 768000 806400 844800 883200 921600

Less: Cost of
Sales 172400 172400 172400 172400 172400
EBIT 595600 634000 672400 710800 749200
6% 13% 19% 26%
Interpretation: Increase in sales by 5%, 10%, 15% and 20% affects EBIT differently; for
instance when sales increased by 5%, net earnings increased by 6% and when sales
increased by 20%, EBIT shows 26% increment.
Here instead of sales; cost of sales is increased by 5%, 10%, 15% and 20% to the effect
on percentage decrease in earnings before interest and taxes.
Actual 5% 10% 15% 20%
Sales 768000 768000 768000 768000 768000
Less: Cost of
Sales 172400 181020 189640 198260 206880
EBIT 595600 586980 578360 569740 561120
-1% -3% -4% -6%
Interpretation: The situation is changed here, now cost of sales is increased by 5%, 10%,
15% and 20% on the place of net revenue. The effect shows different results and low
sensitivity as compared to sales. Total percentage decrease in net earnings is -1%, -3%, -
4% and -6% respectively. Instead of increase in cost of sales; Isaac manage to get positive
earnings which shows that he can still allow overall cost to increase by 20%.
Sensitivity analysis of project 2:
This analysis based on criteria “What will be return rate on sales, if sales increased by
5%, 10%, 15% and 20%”:
Actual 5% 10% 15% 20%
Sales 54000 56700 59400 62100 64800
Less: Cost of
Sales 17700 17700 17700 17700 17700
EBIT 36300 39000 41700 44400 47100
7% 15% 22% 30%
Interpretation: Project 2 sensitivity analysis shows that earnings before interest and tax is
increased by 7%, 15%, 22% and 30%; when sales increased by 5%, 10%, 15% and 20%.

Again instead of sales; cost of sales is increased by 5%, 10%, 15% and 20% to the effect
on percentage decrease in earnings before interest and taxes.
Actual 5% 10% 15% 20%
Sales 54000 54000 54000 54000 54000
Less: Cost of
Sales 17700 18585 19470 20355 21240
EBIT 36300 35415 34530 33645 32760
-2% -5% -7% -10%
Interpretation: Here as like project 1; percentage of decrease in earnings before interest
and tax shows less sensitivity as compared to sales. This project also manages to show
positive cash inflows even after increase in cost of sales.
Comparing both projects:
After comparing both projects it was analyzed that project 2 shows more sensitivity than
project 1 both in the case of increase in sale and cost. As first project shows 26% in net
earnings when sales increased by 20%, but on the other hand second project showed 30%
increase in profit with 20% in sales revenue. And other criteria where cost of sales was
increased by 5%, 10%, 15% and 20%; project 2 shows more sensitivity than first project.
Upfront fee for the exclusive rights to Alpen Choc:
A charge paid before a decent is created or a help is performed. The forthright expense is
commonly a bit of the complete charge that the purchaser must compensation. For
instance, one may commission a craftsman to paint a picture and pay a 20% forthright
expense, paying the rest of the representation is done. It is additionally called a
development expense. Overall it’s an advance payment or token paid by Buyer Company
to supplier as a security amount. It is assurance amount paid to seller as a promise that he
will purchase product. It is usually done when both buyer and supplier are located at
different countries and don’t have any guarantee between them.

How much to be paid as an upfront fee, so that Isaac will attain the situation of no profit
no loss; even if he don’t want to carry on venture:
First order consists of 60 kg and 25 kg (100 boxes) chocolate, total 85 kg chocolates sale
estimation is done for first month. So it is recommended that Uncle should order goods
for first month and then study market response whether getting positive demand or
neglect by buyers. If getting positive response then he should only give payment of two
months sales value only, so that he can cover it within year. Therefore it is suggested that
Uncle Isaac should give total amount of CAD 9605 (85 × 113) for Upfront fee.
RISK FACTOR ANALYSIS:
All business decisions based on risk factors analysis; hence whether to accept or reject
project should be decided on various risk elements and the cause of particular risk on
owner or investor. Undertaking hazard investigation, similar to all hazard examinations,
must be actualized utilizing a reviewed approach; that is, the extension and approach of
the examination must be made to fit the necessities of the venture dependent on the task
size, the information accessibility, and different prerequisites of the undertaking group.
Isaac has to build up a precise subjective venture chance investigation strategy called the
Risk Factor Analysis (RFA) technique as a valuable apparatus for ahead of schedule,
preconception chance examinations, a middle level methodology for medium-size
undertakings, or as an essential to a progressively quantitative task hazard investigation.
This paper presents the calculated underpinnings of the RFA strategy, depicts the means
engaged with playing out the examination, and presents a few instances of RFA
applications and results.
It can be said that project having more fluctuating sales are expose to more risks and
constant cash flow projects avoid risk. But it cannot be ignored the fact that more risk
aptitude results in more profit and future growth. So Issac should build a portfolio by
which it can fulfill the loss with less risk investment.

CONCLUSION AND RECOMMENDATION
On the basis of whole project study, it is clearly recommended that Uncle Isaac should
make initiative to reduce its cost or increase its sales revenue to get profit. But at the same
time only project 1 provides an opportunity to increase sales revenue because other
project has fixed sales contract. Hence to increase sales revenue, Isaac requires
promotions, advertisement, market study and active on social media which obviously
cannot do by him alone and requires third party or his own staff. This will again increases
the operating expenses; therefore it will take more than 2 years to achieve good net
earnings per year. Risk factor is also plays an important role in deciding whether project
should taken hand or away from new venture. Uncle Isaac is 60 Years old and only left
with his retirement reward of about CAD 800000; any loss face by him is not recoverable
for long period of time. So it is suggested that he should accept the Alpen Choc proposal
but after certain bargain and strong contract related to currency exchange value, purchase
price, purchase on credit and lead generation facilities. At this stage, it is strongly
recommended that he should not take much risk and do proper market analysis before
starting new venture and also try to start business with mix of both capital and debt
financing.

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