1120D Finance Capital Budgeting Assignment Help

1120D Finance Capital Budgeting Assignment Help

1120D Finance Capital Budgeting Assignment Help

Summary of Business Plan

Market research and customer base

The Business Plan is to open a franchisee of cafeteria in Australia named as Coffee Alchemy, which is recently located in Sydney. Coffee Alchemy is planning to open a new cafe in Melbourne also, to expand the business and to capture larger market share. The marketing managers of the cafe carried out an in-depth market research in order to analyse the viability of its business plan. In accordance with the results of the Market Research the young people and teenagers have been identified as target customers for the cafe business and the business will focus on the youth and students of Melbourne.

1120D Finance Capital Budgeting Assignment Help

Growth Prospects

If the plan to open a cafe is successful, then it will be a booming business due to high demand of cafes in Melbourne assessed from the results of the market research and is therefore likely to have a high growth and investment potential. Alchemy will also be able to overcome the market competition with other cafeteria business because of its high brand image in Australia and the quality of products and services offered. Growth Prospects of the project can be seen from the earlier projects as it has the potential to capture a huge market in the cafeteria segment. Growth is there in this segment as it can grow from top to bottom. It has a wide scope and it is a growth segment because of its vast coverage. Pay- back period helps in growth of the project and defines the growth prospects of the project. If the project pay-back period is lesser then it is a viable project and if the pay-back period is more than the project is not viable and it does not have the growth prospects. Pay-back period influences the growth prospects of the project. It shall be calculated before the implementation of the project (Navarro, 2015).

Timeline

The following is the timeline for the market research and implementation of business plan by café Coffee Alchemy from lead to the opening date of the café:

implementation of business plan

Assets required and rate of depreciation

For opening the branch of cafeteria, the assets which will be required and their estimated cost of purchase is as follows:

Asset required

Estimated cost (in $)

Furniture

1200

Crockery

1500

Electrical Equipment

1100

Computer

1000

There will be depreciation on the assets so equipped in the cafeteria and depreciation rate will be 20% for all the assets so purchased and this rate will be same and average rate for all assets equipped in cafeteria. Depreciation rate will be similar for all the assets and it is taken as standard rate.

Cost and Expenses

Common costs relating to start-ups can be the cost relating to research of Market, Telephone charges, other charge relating to internet, costs as to signing of bond and connection of power, costs of insurance and other statutory requirement costs, cost as to salary of staff and wages, cost as to purchasing of furniture and fixtures, cost relating to legal advice and other accounting costs. Huge Investment is required for opening of the cafe and therefore the budgeted investment is estimated to be $250,000 with working capital requirement of $20,000 at the beginning of the project. Expenses also occur in opening and running of cafeteria and also related to day to day working of the cafeteria and other expenses also which can be classified below:

Salary of Owner/Manager

Rent/lease

Advertising

Delivery Expenses

Supplies(Stock in trade)

Telephone

Other utilities

Interest

Maintenance

Consumables

Other monthly costs

Expenses are to be added and then it will be calculated, it will be included in the total investment of the project as expenses also related to cafeteria. Calculation of expenses will be taken in calculation of the project as it the outflow of the cash White & Miles, 2015).

Capital Budget

Calculation of deprecation

Depreciation = (Investment – Salvage Value) / Useful life

                        = $(250,000 – 50,000) / 5 years

                        = $40,000

Calculation of Weighted Average Cost of Capital

An organisation has two major sources of capital i.e. equity and debt. According to Robinson, Weighted average cost of capital refers to the average rate of return of company to compensate all the investors of company. It also considers the tax rate applicable on company as interest paid on debt is tax deductible (Robinson & Burnett, 2016).       

Formula WACC = rD (1- Tc)*(D / V) + rE *(E / V)

Where rd= rate of return on debt, Tc= Tax rate applicable, re= rate of return on equity funds, D= total debt sources, V= total value of funds, E= total equity funds

Assumed figures total funds= $250,000, equity funds= $150,000, debt funds= $100,000, rate of return on equity funds=15%, rate of return on debt funds= 10%, Tax rate applicable= 30%.

WACC= 10 % (1-30%)*(100000/250000) + 15 % (150000/250000)

= 11.8%

Calculation of NPV

 

2015

2016

2017

2018

2019

2020

Net cash flow before tax

-270000

50,000

60,000

70,000

75,000

55,000

Less: Tax

 

0

3000

6000

9000

12000

Add: Depreciation

 

40,000

40,000

40,000

40,000

40,000

Working capital recovery after tax

 

 

 

 

 

6,000

Recovery of salvage value after tax

 

 

 

 

 

15,000

Net cash flow after tax

-270000

90000

97,000

1,04,000

1,06,000

1,04,000

Present value factor @11.8%

1

0.900

0.810

0.729

0.656

0.591

Present Value of cash flow

-270000

81022

78614

75879

69624

61497

Net Present Value

96638

 

 

 

 

 

Internal Rate of Return (IRR)

24%

 

 

 

 

 

Calculation of Tax

 

2016

2017

2018

2019

2020

Net cash flow before tax

50,000

60,000

70,000

80,000

90,000

Less: Investment Allowance

50000

50000

50000

50000

50000

Taxable cash flow

0

10,000

20,000

30,000

40,000

Tax @30%

0

3000

6000

9000

12000

Analysis of Results

As per Lakew (2014) salvage value is the value which is inflow of cash, when the asset is sold after using it in the venture and amount or value so received after selling the asset after deduction of depreciation. Salvage value is inflow of cash. Discount rate will be the rate as rate of return on a project and it is net present value of project. It is rate which can be used to calculate the Net present value of the project and present value of project. Discounted rate method is used to calculate the actual amount of investment which is to be done for running a cafeteria in the current currency and present value of money is known. Revenue generation is one which is inflow of cash and sales in cafeteria which has increased market share of cafeteria business in Melbourne. It is inflow of cash and used in calculation of Net Present value of project management.

From the calculation of Net Present Value of the project related to the business plan of the café, it can be observed that the project has a positive NPV. The project with positive NPV indicates that the project has the potential to generate profits from the business during the life of the project (Lakew & Rao, 2014). Also the IRR is higher than the cost of capital of 11.8%. Thus the project is viable and Coffee Alchemy shall open the café in Melbourne.

References

Kiznyte, J., Welker, M. & Dechange, A., 2016, “Applying Project Management Methods to the Creation of a Start-up Business Plan: The Case of Blendlee”.

Lakew, D.M. & Rao, D.P., 2014, “IMPACT OF CAPITAL BUDGETING SOPHISTICATION ON FIRMS’PERFORMANCE: EVIDENCE FROM ETHIOPIA. ZENITH”, International Journal of Multidisciplinary Research 4(12), pp.95-109.

Navarro. F, 2015, “Business plan: A preliminary approach to an unknown genre”, Iberia, 30, pp.129-154.

Robinson, C.J. & Burnett, J.R., 2016, “Financial ManagementPractices: An Exploratory Study of Capital Budgeting Techniques in the Caribbean Region”.

White, J.B. & Miles, M.P., 2015, “A Proposed Capital Budgeting Technique for Liquidity Constrained Small Businesses”, Journal of Small Business Strategy, 1(2), pp.36-46