Evaluating Investment Viability for Beauty and Beholder

This assignment involves a detailed evaluation of Beauty and Beholder's proposed expansion into Asian and South American markets. The analysis considers three primary financial methods: Internal Rate of Return (IRR), Net Present Value (NPV), and Payback Period. It provides an overview of potential financing options such as fixed or variable interest rates, cost management across production units, and other operational challenges like labor costs and political risks in new regions. The assignment also explores marketing strategies, distribution methods, target market identification, and segmentation tactics for these markets. Additionally, it accounts for the social-political factors that could impact operations and highlights the need to design products suited for these new segments. Ultimately, this assessment aims to advise on the project's viability by considering positive cash flows and using IRR as a key evaluative tool due to its consideration of time value of money across the investment's lifecycle.

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Executive summary
Before making a decision on which investment project to implement, it is important to
analyze the projects statistically. It is also important to determine the sources of
capital before designing an investment plan for a company. The sources of capital for
Beauty and the Beholder include bank loans, SBA loans and venture capitalism. The
investment analysis methods used in this assessment shows that the project is viable
but the most suitable method that should be used in the internal rate of return. This is
because the method considers time value of money and uses the cash flow throughout
the life-cycle of the project.

Table of Contents
Introduction.................................................................................4
Q1. Sources of finances...............................................................4
Q2. Decision to invest.................................................................5
Questions asked.........................................................................10
Conclusion.................................................................................10
References.................................................................................11

Introduction
This paper evaluates and analyzes the various sources of funding available to Beauty
and Beholder Plc and the viability of the investment opportunity. There are various
long term sources of funding that are available to companies for investment and they
include: Angel equity funding, bank loans ,SBA loans ,venture capitalism as well as
Local and state economic development organizations (DeFusco, McLeavey, Pinto&
Runkle, 2007). The viability of the investment is also conducted using IRR, payback
period and Net Present Value method. A recommendation is made depending on the
analysis. The questions that need to be asked in order to assess the investment are also
listed in the paper.
Q1. Sources of finances
There are various sources of long term funding that Beauty and Beholder Plc can
consider seeking their sources of funds to finance their expansion. The following are
some of the most suitable sources of funding that the company can consider:
First option is bank loan. Bank loans are one of the best sources of finance of
investments. Bank loans provide all asset needs including working capital, equipment,
and real estate funding. The bank charges an interest rate for their loans and they vary
depending on various factors such as terms of payment and the prevailing market
rates. One of the advantages of loans is that they are flexible since you can pay off the
loan earlier and reduce additional costs related to interests. The disadvantage with
loans is that the interest rates are so high hence costing the company a lot of money

through interest rates payed. The other suitable source of funding is the SBA loans
which are sponsored by the federal government (Warren, Reeve & Duchac, 2018). It
guarantees the lender against the portion of any loss incurred by the loan. Another
advantage of this funding method is that the interest rate for bigger loans is lower and
hence suitable for this type of funding. Venture capitalism is another funding method
suitable for this kind of business. Its advantage is that it provides adequate funding
and its servicing is quite flexible. The disadvantages include loss of equity stake and
loss of decision making ability.
Q2. Decision to invest
Payback period method
Payback Period=Initial investment/cash flow per period
Year 1 cash flow
Sales revenue=750,000×2.5=1,875,000
Spending
Materials=30%×2.5×750,000=562,500

Labor=25%×2.5×750,000=468,750
Other costs=5%×2.5×750,000=93,750
Administrative costs=15%×750,000=112,500
Total expenditure=562,500+468,750+93,750+112,500=1,237,500
Net cash flow year 1=1,875,000-1,237,500=₤637,500
Year 2 cash flow:
Growth in sales in Asia=25%×375,000=93,750
Second year sales volumes=468,750
Asia revenue=468,750×2.5=1,171,875
South American
Growth in sales in SA= 10%×375,000=37,500
New sales volumes=412,500
Total unit sales=468,750+412,500= 881,250
Inflows for year 2=881,250×2.5=1,584,375
Expenditure
Material=25%×2.5×881,250=550,781.25
Labor=25%×468,750=117,180=351,570
Other=5%×2.5×881,250=110,156.25

Total expenditure=1,012,507.5
Net cash flow for year 2=1,584,375-1,012,507.5=₤571,867.5
Cash flow for year 3
Revenues
Asia
Unit sales=468,750×1.25=585,938
South America Unit sales=412,500×1.1=453,750
Total unit sales=1,039,688
Sales revenue for year 3= 1,039,688×2.5=₤1,918,595
Expenditure
Materials= 0.2×2.5×1,918,595=959,298
Labor=0.75×351,570=263,678
Other0.05×2.5×1,039,688=129,961
Total expense=1,352,937
Net cash flow=1,918,595-1,352,937=₤565,658
Year 4
Income
Asia
Unit sales=585,938×1.25=732,423

South America
Unit sales=453,750×1.1=499,125
Total unit sales=1,231,548
Income=1,231,548×2.5=3,078,873
Expenses
Materials=0.15×2.5×1,231,548=461831
Labor=0.75×263,678=197,759
Other=0.05×2.25×1,231,548=138,549
Total expenses=798,139
Cash flow=3,078,873-798,139=2,280,734
Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash
Flow Year 3
Cumulative cash flow= 637,500+571,868+565,658+2,280,734=₤4,055,760
PP=The payback period is 3 years
Calculating NPV
NPV(p)=CF(0)+CF(1)/(1+I)t+CF(2)/(1+I)t+CF(3)/(1+I)t+CF(4)/(1+I)t

NPV=(5,000,000)+637,500/(1.35)1+571,868/(1.35)2+565,658/(1.35)3+1,968,781/
(1.35)4
NPV=-,4,362,500+772,022+1,527,277+7,973,563=5,910,362
The NPV of the project is = 5.910,362
Internal Rate of return
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
Where P0, P1, . . . Pn equals the cash flows in periods 1, 2, . . . n, respectively; and
IRR equals the project's internal rate of return.
IRR= -(5,000,000)+(-4,362,500)/(1+0.035)+571,868/(1.035)2+565,658/(1.035)3+
1,968,781/(1.053)5=
IRR= 27.8% which is the rate at which the investment recoups the initial capital
outlay and makes profit during its lifetime.
From the analysis of the project by Beauty and beholder, I can advise that the
company should go ahead with the project. This is because the project begins
generating positive cash flows in the third year of operation. The best method that

should be used in analyzing this investment is the internal rate of return method
(IRR). This is because, the method puts into consideration the time value of money
and it considers cash flow for the entire life cycle of the project (Guerard, n.d.).
Questions asked
Is the interest rate fixed or is it variable?
Are the fixed cost recognized only in the first year of operations?
Does the cost of cost of labor vary depending on the units produced?
What are the social-political problems that may be experienced by the company in
both Asia and South America?
Will the company design new products for the new market segment?
What are the costs of marketing the business in the new markets?
What means of distribution will be used in the Asian market?
What is the target market for the products?
What methods of market segmentation will be used?
What are the additional costs that the business will incur in the new market for the
product?
Conclusion
The assessment considers the investment project of Beauty and Beholder and analyzes
the project based on the three methods namely, IRR and payback period. The sources

of finance for the investment are also determined and the recommendation on the
viability of the project is given.
References
DeFusco, R. A., McLeavey, D. W., Pinto, J. E., & Runkle, D. E. (2007). Quantitative
Investment Analysis. Hoboken: Wiley.
Guerard, J. J. B. (n.d.). Introduction to Financial Forecasting in Investment Analysis
[recurso electrónico].
Warren, C. S., Reeve, J. M., & Duchac, J. E. (2018). Accounting.