BUS400 Scrub Daddy Product Financial Management Project 1) The attached includes the project example we discussed in the class. Study the example and get familiar with the excel calculations.
2) Use the excel template to work out the financial forecast for your own business idea.
For business idea:
If you have a idea, you are encouraged to work out financial idea.
You can also use the business idea from other class for our project.
Or, you can pick up a start up company from a newly listed company for forecasting.
Submit your work in a word document with no more than 5 pages.
Briefly explain the idea and source of profit.
Explain the assumptions for your business forecast.
Use the template to forecast the valuation cash flow generated by the business.
Calculate the NPV, IRR, and payback period for your business.
6) Prepare a PPT file for class presentation.
You can use your idea. Both service and product should work. Or you can borrow ideas from some start ups or tv programs like Shark Tank. The focus of this project is to translate the business idea into financial planning and forecasting.
use scrub daddy product The Local Café: New Project Analysis
Richard Borgman and Kirk Ramsay
Kirk Ramsay was a serial entrepreneur. Another way to characterize him was as a small
businessman who enjoyed new challenges and new adventures. After earning his business
degree at the state university, Kirk built several successful businesses. He designed and built
homes, owned several rental properties, and ran a property management business, and
continued to follow his musical passion by playing lead guitar in a successful local “cover” band.
In the small city in New England where he lived, he saw a need for a local no-frills, good food,
breakfast and lunch eatery located downtown, where the national chains did not locate. He had
found his next potential project—which he planned to call “The Local Café.” And he had found
the empty storefront in which to put the restaurant. The landlord had urged Kirk to make his
decision in a few days, because he claimed to have another interested party. To make the
decision, Kirk would calculate NPV, IRR, and payback period.
The restaurant was part of a clearly defined life plan. His children were now grown; Kirk and his
wife hoped to work about ten years more to solidify their retirement, and in ten years move to
a warmer climate, hopefully fully retired or, if necessary, semi-retired. So if opened, Kirk
expected to own and operate the restaurant for about 10 years. After establishing it as a
successful business, he planned to sell the restaurant as part of his plan to move at least part of
the year to a warmer climate.
The space Kirk had found was about 3,000 square feet, enough for a kitchen and ten tables. The
monthly rent was $600, leased “triple net,” meaning that the renter was responsible for all
other costs, including utilities. He anticipated other building-related costs of $300/month for
insurance and $500/month for utilities (water, sewer, gas, trash removal). He believed these
costs would increase at least with inflation, which he assumed to be about 4 percent per year.
To prepare the space, which had not previously been a restaurant, Kirk anticipated the
following costs: stove, $1,600; double fryer, $800; sinks, $700; preparation tables, $1,500; pots
and pans, utensils, glasses, and dishes, $1,500; 10 tables and 40 chairs, $2,000 in total. The
costs to renovate the space (plumbing, electric, carpentry, and signage) would be $10,000. All
these costs were subject to depreciation. Kirk assumed a 6-year straight line depreciable life.
For the first year, Kirk assumed the following revenues. The average breakfast patron would
spend about $7.50. He assumed that with a 40-person capacity, there would be about 30
people per sitting, and about two “turns” per day. The average lunch patron would spend about
$11.50. There would be 30 people per sitting, and about three “turns” per day. The restaurant
would close in the early afternoon and would not serve dinner. The plan would be for the
restaurant to be open 5 days a week (260 days per year).
To control costs, the restaurant would not have an extensive menu, serving standard breakfast
fare (eggs and bacon and the like) and having rotating specials for lunch plus a standard menu.
Kirk anticipated “consumables and perishables” costs to be about 60 percent of revenues.
Other non-labor costs would be about 3 percent of revenues.
There would be three cooks working three overlapping 8 hour shifts, making $11 an hour. There
would be two servers working two overlapping 8 hour shifts, making $4 per hour (plus tips).
Finally, there would be a manager who normally operated a register as well, making $12 per
hour for a daily 8 hour shift.
Over the following years, Kirk expected revenues to increase at least with inflation (as before,
assumed to be about 4 percent per year). Costs would remain at the current percentage of
revenues. Net working capital (NWC) was assumed to be 5 percent of revenues in the upcoming
year (for example, NWC at t = 1 equals 5 percent of t = 2 revenues). The change in net working
capital was calculated as NWC in the current year minus NWC in the previous year (thus change
in NWC for t = 1 is NWC (t = 1) minus NWC (t = 0).
Kirk faced a 35 percent tax rate. He could borrow from a local bank at 9 percent. The loan
would have five-year amortizing, monthly payments, and no prepayment penalty. The loan was
secured by the equipment and, as was usual, required a personal guarantee by Ramsay.
He estimated his cost of equity and financing weights using data from a sample of 84 publicly
traded restaurant firms compiled by Answath Damodaran
(http://pages.stern.nyu.edu/~adamodar/). These firms had an average unlevered beta
(unlevered means the beta if there was no debt in their capital structure) of 0.69, an average
debt-to-equity (D/E) ratio of 0.2757
He knew that he could calculate a levered beta using the following simplified Hamada equation:
BetaLevered = BetaUn-levered * (1+(1-T) * (D/E))
Ramsay assumed that his mixture of debt and equity financing (D/E) would be close to the
industry average.
Ramsay also realized that on average for small business like his, there are about 10% risk
premium in addition to the industry average
Radd = 10%
Cost of Equity = Re = RLevered + Radd
where MRP is the market risk premium, gRF is the risk-free rate, and beta in this case is the total
beta. He planned to calculate his project weighted average cost of capital (WACC) as,
WACC = weRe + wdRd(1 − T)
where “w” are the weights of equity and debt, respectively, and “g” refers to the costs of equity
and debt, respectively. T is the tax rate.
In ten years, when Kirk expected to sell the restaurant to fund his retirement, he knew the
value would depend on cash flow. To be conservative, he valued the sale in ten years as a nogrowth perpetuity; that is, the firm would be worth the present value of a perpetual series of
constant cash flows (based on t = 10 cash flow). Also, to be conservative, he assumed that the
sale would be fully taxable.
Kirk wanted a payback within three years, assuming a risk-free rate of 3.04 percent and an
equity risk premium of 5 percent.
Questions to answer with your spreadsheet analysis:
I have worked out an excel template for your analysis. However, all the results are hardcoded numbers. You need to figure out the excel formula to replicate my analysis. Such an
exercise also can serve as a template for your other work in project analysis.
Once you have created a spreadsheet to analyze the project, you should be able to study other
scenarios. Here are some of the changes you need to make
a.
b.
c.
d.
e.
Reduce the lunch price from 11.5 to 11.
Inflation is scaled down from 4% to 3%.
Tax rate is scaled down from 35% to 30%.
Average S&P500 risk premium is adjusted from 5% to 5.5%.
Cost of debt adjusted from 9% to 8%.
Please include the above changes into your Excel worksheet and update the calculations. With
the updated calculations, please answer the following questions.
1. What is Ramsay’s cost of capital to use in the analysis?
2. Calculate the expected sale price of the restaurant at the end of year 10 (that is, at t =
10).
3. Calculate the project’s NPV, IRR, and payback period. Based on these calculations,
should Ramsay go ahead with the project?
4. Is the payback criteria a good indicator for the project?
Appendix 8.1 Industry-Specific Values for Unlevered Beta and Unsystematic Risk Adjustment
Factor
Examples with Capital Budgeting Criteria
Year
net cash flow
0.00
-100,000.00
1
30,000.00
2
30,000.00
3
30,000.00
4
30,000.00
cumulative cash flow
pay back period
-100,000.00
-70,000.00
—
-40,000.00
—
-10,000.00
—
20,000.00
3.33
cost of capital
Present value of future cash flows
Initial Investment
Net present value
Internal Rate of Returns
Payback period
0.15
124,812.59
-100,000.00
24,812.59
22.93%
3.33
Purchase answer to see full
attachment
Why Work with Us
Top Quality and Well-Researched Papers
We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.
Professional and Experienced Academic Writers
We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.
Free Unlimited Revisions
If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.
Prompt Delivery and 100% Money-Back-Guarantee
All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.
Original & Confidential
We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.
24/7 Customer Support
Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
Our Services
No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.
Essays
No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.
Admissions
Admission Essays & Business Writing Help
An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.
Reviews
Editing Support
Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.
Reviews
Revision Support
If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.