University Financial Management 1: Investment Proposal Analysis Report

This report provides a comprehensive financial analysis of an investment proposal for a gourmet chocolate retail business. It includes an executive summary, introduction, and detailed assumptions. The analysis encompasses break-even analysis, projecting both internet sales and chocolate box sales, and presents a profit and loss statement and balance sheet for the first year of operations. The report also includes monthly cash flow projections, an annual cash flow statement, and a discussion of initial investments. Furthermore, it incorporates financial analysis, sensitivity analysis, and non-financial factors to be considered. The report concludes with reflections, conclusions, and recommendations regarding the investment proposal, assessing its viability and potential profitability based on the provided financial data and assumptions. The analysis includes key financial tools to make recommendations on whether to accept or reject the investment proposal.

Financial Management
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Contents
Introduction..................................................................................................................................................................................................................4
Assumptions and estimates used in the evaluation of the desired investment proposal..............................................................................................5
Break even analysis......................................................................................................................................................................................................7
Profit and Loss and balance sheet for year one of investment.....................................................................................................................................9
Monthly cash flow of the business for the first year of operations............................................................................................................................10
Annual cash flow statement.......................................................................................................................................................................................11
Initial Investments required........................................................................................................................................................................................12
Financial analysis of the venture................................................................................................................................................................................13
Sensitivity analysis.....................................................................................................................................................................................................15
Non- Financial factors to be considered in evaluation of investment proposal.........................................................................................................17
Value of exclusive rights for purchase of chocolates.................................................................................................................................................18
Critical reflection on the analysis...............................................................................................................................................................................19
Conclusions and recommendations............................................................................................................................................................................20
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Executive summary
The following discussion is on an investment proposal and analysis on the same which will help take decision regarding the acceptance and
rejection of the said proposal. The analysis includes implementation of various financial tools such as profitability and capital budgeting which
has assisted in coming to an appropriate conclusion on the acceptance of the investment proposal.
Concepts relating to various aspects of accounting have been practically implemented in order to arrive at appropriate conclusions. All necessary
explanations and assumptions taken have also been mentioned clearly for better understanding.
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Introduction
In order to evaluate an investment proposal, it is necessary that all sufficient data be collected and arranged. This data is then used to understand
the possible outcomes if the investment is proceeded with.
To understand the outcomes of the new venture for Benjamin, using the financial data so collected. The data has been used to understand the
investments made cash flows in the venture, profitability and other important issues relating to investment appraisal.
There are various costing and accounting tools which can be used to evaluate an investment proposal. Using few of such concepts in order to
determine the profitability and possibility of undertaking the desired proposal for investment in retailing of gourmet chocolates. The following
analysis contains profitability analysis, cash flow analysis and implementation of few of the capital budgeting decisions which has assisted in
taking the correct decision.
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Assumptions and estimates used in the evaluation of the desired investment proposal
While evaluating s proposal based on financial information, seeing that there is a lot of information required which might not be easily available.
In such cases to various approximations based on assumptions and market trend are made so that the analysis can be smoothly conducted.
Few of such assumptions and estimates have also been made in the following analysis, which has been listed below:
- Assumed that out of 1.7 million NOK, only 700,000 NOK has been invested in the business. This indicates that that the capital invested is
1200000 NOK.
- The purchase of chocolates from Sprindt and Lungi (S&L) are made in foreign currency, Swiss Franc, whereas the home currency is
Norwegian Krone. In order to evaluate the purchase price needed to convert the foreign currency into home currency using the exchange
rates which exist at the time of transaction. Since, this rate cannot be determined beforehand assuming the rate of 8.42 NOK per CHF for
evaluation of the proposal for the next five years.
- The courier cost incurred for transport of the chocolate have been also converted using the same exchange rate.
- Any transaction costs which would be incurred necessary for the above transaction have been totally ignored.
- All the assets purchased and invested in have been assumed to have no salvage value and have been depreciated fully over the period of five
years.
- The sale units for each month in the year one have been based on approximation increase in units sold In order to achieve the desired level of
420 kg.
- Assuming that the expenditure made on research for market study is a no- deductible expense for tax purposes and hence has not been
written off.
- Any factors influencing the economy such as inflation have not been taken into consideration to evaluate this proposal
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- The required rate of return in order to evaluate the investment decision has been taken as 3% which is the return earned on extra re-invested
cash. Also, the surplus cash generated if any has not been assumed to have been reinvested, they are assumed to have been used in the
business.
Therefore, these are few assumptions and estimates which have been made in order to evaluate the decision of invest in the new venture.
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Break even analysis
A break-even point is the point at which the costs incurred are equal to the revenues such that the investor is neither at a profit nor at a loss.
Break even analysis is a very important costing tool which helps the management set goals such that all the costs being incurred can be earned
and also any revenues earned beyond that point will contribute to the profits of the company (Atkinson 2012).
Having calculated the break even for the said proposal of Benjamin which will helps understand the minimum level of units which are required
to ®be sold each year every year in order to recover the initial invested amount along with annual fixed costs.
The breakeven point for sales has been separately calculated for internet sales and chocolate boxes separately.
In order to calculate the breakeven point there is required to calculate the contribution per unit and fixed costs, which have been provided
separately for both the segments:
Particulars Internet Sales Chocolate Boxes
Sales Price 750 220
Less:
– Purchase price of
Chocolates 437 109
– Courier Cost 80 20
– Packaging expense 50 -
– Credit card charges 9 -
– Decorative Boxes - 40
Contribution 174 51
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Fixed Cost
– Rent 86,400 -
– Employee Expenses 160,000 -
– Assistant's Salary - 50,400
– Depreciation 26,000 3,000
Total Fixed Cost 272,400 53,400
Also, contribution is calculated by subtracting the variable cost from the sales price per unit (Berry 2009).
The following is to be taken note of for the above contribution calculation:
- Courier expenses are incurred in connection with purchase of chocolates and hence are variable cost for both the internet sales and the
chocolate boxes.
- Packaging and credit card charges are incurred only in connection with internet sales and hence are variable cost for internet sales only
- The expenses on decorative boxes are only related to sale of chocolate boxes and hence are only a part of variable cost of chocolate boxes.
- The depreciation for both the segments has been calculated as per the assets belonging to each segment. For internet sales there are the assets
of 130000 NOK and for that of chocolate boxes are 15000NOK, which provides with the depreciation of 26000 NOK and 3000 NOK
respectively.
The breakeven point is calculated by dividing the total fixed cost by contribution per unit (Boyd 2013). Using this data results in the following:
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Particulars Internet Sales Chocolate Boxes
Contribution 174 51
Total Fixed Cost 272,400 53,400
Break Even Point
(units) 1,567 1,051
Therefore the break even sales unit for internet sales is 1567 Kg of chocolates and that for chocolate boxes are 1051 boxes.
Any sales made above the stated breakeven level the business will earn profits. The above levels indicate the minimum level of sales to be
achieved in order to avoid incurring of losses.
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Profit and Loss and balance sheet for year one of investment
Following is the projected profit statement along with the balance sheet of the business of the first year of operations:
Statement of Profit and Loss
Particulars Amount
Revenues- Internet Sales 1,965,000
Revenues- Chocolate Boxes 264,000
Less:
– Purchase price of Chocolates -1,405,617
– Courier Cost -258,486
– Packaging expense -261,916
– Rent -86,400
– Credit card charges -24,563
– Employee Expenses -160,000
– Assistant's Salary -50,400
– Depreciation -29,000
– Decorative Boxes -48,000
Profit Before taxes -95,381
– Taxes (35%) 33,383
Profit after tax -61,998
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The business will not earn sufficient profits in the first year of its being in operation. The reason being low units sold. The research made before
the initiation of the operations show that the business is expected to sell only 50 kilograms of chocolates in the first month of its operation, which
gradually increases to 420 kilograms of chocolates per month from year 2. Since the business is new and requires time to build up a reputation,
the first year of the business has not been earning sufficient profits.
The projected balance sheet at the end of year one of the businesses has also been presented below:
Balance Sheet
Assets Amount Amount
Fixed assets
Refrigerator 55,000
Less: Depreciation 11,000 44,000
Website 75,000
Less: Depreciation 15,000 60,000
Wrapping Machine 15,000
Less: Depreciation 3,000 12,000
Current Assets
Deposit for rent 21,600
Rent paid in advance 7,200
Advance payment for purchases 205,168
Advance payment for Courier charges 37,729
Deferred expense-Research 50,000
Revenue receivable 311,063
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Cash 389,243
Total Assets 1,138,002
Liabilities
Capital
Capital 1,200,000
Add: Profit for the year -61,998 1,138,002
Total Liabilities 1,138,002
Calculation of Closing cash balance
Particulars Amount
Opening capital introduced 1,200,000
Adjustment for:
Cash flow for the year -535,277
Assets invested in -145,000
Deposit for rent -21,600
Payment made for purchases in advance -43,653
Courier charges paid for in advance -8,028
Rent paid in advance -7,200
Research expenses -50,000
Closing cash balance 389,243
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