Financial Analysis

Assumption Use in the Financial Plan

FIRST TWELVE MONTH CASHFLOW RESULT

HOW MUCH SHOULD NORMAN PAY FOR THE EXCLUSIVE RIGHT?

FORECASTED CASHFLOW FOR THE NEXT FIVE-Year

CASH FLOW WITH A LOAN AT 8% PER ANNUM

SENSITIVITY ANALYSIS

THE SALES PRICE AND kg SALES GRADUALLY INCREASE AT 5%

THE SALES PRICE PER kg INCREASE AT 10% BUT THE UNIT SALES REMAIN AT 5%.

Investment Value Using At Discounted Rate 5%

Best Financial Plan and Option

Assumption Use In The Financial Plan

It is further assumed that price will increase gradually at the rate of 8% per annum and sales will increase at 7% per annum.

For the purpose of analysis, both the sales price and Kg sales will gradually increase at 5%.

Another scenario will be that the sales price per Kg increase at 10% but the unit sales remain at 5%.

Best-case scenario assumption, Norman did not exercise his plan to borrow \$100,000 at 8% per annum. We will look into what is the cash flow outlook if Norman did not exercise this option.

5. Norman believes that he could borrow up to \$100,000 at 8% per annum. As an additional assumption, if Norman takes \$100,000 loan, Norman will pay this loan for the first five years of the company operation. We will look into what is the cash flow outlook if Norman exercises this option.

6. We also assume that Norman will exercise the option to hire an assistant for \$1,000 per month from the beginning of his online operation.

7. We also assume Norman will pay all payable tax in the year precedent to the year of tax payable.

8. We also assume that charges such as rental will remain constant throughout the period.

9. Norman plans to order from Belgium every two weeks and intends to maintain a minimum stock of four weeks’ worth of sales to ensure that he will be able to supply a suitable range of products to customers.

10. Exchange rate between Euros to U.S. dollar will remain at \$1.355.

FIRST TWELVE MONTH CASHFLOW RESULT

The forecast cash flow for the first twelve month showed Norman can bring excess cash in after paying the tax.

HOW MUCH SHOULD NORMAN PAY FOR THE EXCLUSIVE RIGHT?

Based on these considerations

1. To maintain the maximum cash flow available to bring to the second year of operation and

2. after taking into consideration the amount of cash flow generated during the first year,

We suggest the amount of right payment to BelgChoc should be between \$100,000 and \$400,000. For the rest of the case study we assume Norman pays \$100,000.

If Norman decides to pay \$100,000 the excess cash for second year operation will be \$309,073 but if he decides to pay \$400,000 the excess cash for second year will drop to \$9,073.

FORECASTED CASHFLOW FOR THE NEXT FIVE-Year

It is further assumed that price will increase gradually at the rate of 8% per annum and sales will increase at 7% per annum. Based on this additional assumption final cash flow balance will be \$330,000 per year after tax cash flow value.

CASH FLOW WITH A LOAN AT 8% PER ANNUM

CASH FLOW WITH A LOAN AT 8% PER ANNUM (Contd..)

As an additional assumption, if Norman takes \$100,000 loan, Norman will pay this loan for the first five years of the company operation. Based on the above forecast, yearly cash flow balance will gradually decrease for the first five years. Cash flow balance is expected to increase after the fifth year of operation.

SENSITIVITY ANALYSIS

Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or system (numerical or otherwise) can be apportioned to different sources of uncertainty in its inputs [Saltelli, 2008]. Saltelli also pointed out that sensitivity is a related practice in uncertainty analysis, which has a greater focus on uncertainty quantification and propagation of uncertainty. Ideally, uncertainty and sensitivity analysis should be run in tandem.

We will look at the sensitivity analysis on sales and demand effect to the cash flow outcome based on the following factors

1. For the purpose of analysis, both the sales price and kg sales will gradually increase at 5%.

2. Another scenario will be that the sales price per kg increases at 10% but the unit sales remain at 5%.

THE SALES PRICE AND kg SALES GRADUALLY INCREASE AT 5%

If both sales price and demand remain 5% per annum, the cash flow balance will slowly decrease towards the fifth year of operation. This is the result of a constant rate in administrative expenses but the gradual increase in cost of sales. As a result the cash flow shrinks toward the fifth year of operation.

THE SALES PRICE PER kg INCREASE AT 10% BUT THE UNIT SALES REMAIN AT 5%.

If both sales price and demand remain 5% per annum, the cash flow balance will slowly decrease towards the fifth year of operation. This is the result of a constant rate in administrative expenses but the gradual increase in cost of sales. As a result the cash flow shrinks towards the fifth year of operation.

CONCLUSION

Investment Value Using At Discounted Rate 5%

Based on the discounted cash flow of 5% annually using present value factor, the value of this investment is \$1.4 million.

Best Financial Plan and Option

Based on the analysis provided through sensitivity analysis and possible option scenario (in this case, if Norman exercises the option to take loan or not), we can conclude the best possible financial plan will be:

1. Best-case scenario assumption, Norman did not exercise his plan to borrow \$100,000 at 8% per annum.

2. It is further assumed that price will increase gradually at the rate of 8% per annum and sales will increase at 7% per annum. While Norman can increase the price gradually at 10%, it is doubtful that Norman can retain demand at 5% per annum.

Bibliography

Saltelli, A., Ratto, M., Andres, T., Campolongo, F., Cariboni, J., Gatelli, D. Saisana, M., and Tarantola, S., 2008, Global Sensitivity Analysis.The Primer, John Wiley & Sons.

Sensitivity analysis. (2014). Retrieved Janaury30, 2014, from http://en.wikipedia.org/wiki/Sensitivity_analysis

Sheet1

â‚¬ Exchange Rate \$

A Europe Retail Price 40 1.355 54

Discount Given To Norman 0.45

Final Price To Norman 22 1.355 30

B Demand Per Month (Kg) 600

Cost Per Month 24,000 1.355 32,520

C Demand For A Year (Kg) 7,200 7,200

Cost Per Year 288,000 1.355-390,240

D Selling Price Per Kg 75

Revenue Per Month 45,000

Revenue Per Year 540,000

E Packaging and Shipping Cost (Kg) 8

Estimated Per Month 4,800

Estimated Per Year 57,600

G Air Freight 10 1.355 14

Estimated Per Month 8,130

Estimated Per Year 97,560

H Credit Card Charge (%) 1%

Estimated Per Month 450

Estimated Per Year 5,400

I Sales to luxurygifts.com Per Month (kg)

Estimated Per Month (Kg) 200

Estimated Per Year (Kg) 2,400

Price Per Kg 60

Revenue Per month 12,000

Revenue Per Year 144,000

Special Packaging Cost Per Kg 12

Cost Per month 2,400

Cost Per year 28,800

Credit Card Charge Per month 120

Credit Card Charge Per year 1,440

J Recurring Expenditure Monthly Yearly

Rent 300 3,600

Owner Salary 5,000 60,000

Assistant Salary 1,000 12,000

K Marginal Tax Rate 30%

L Interest Rate 8%

M After Tax Discount Rate 5%

N Owner Capital 400,000

Sheet2

Sheet3

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