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Question:
Profit and Loss Projection Provide at least 1 year projection of unit sales, price and revenues. State assumptions in terms of size of market, growth, and market share target. Describe product, product mix, and gross margin targets. b. Cost Projection Provide at least 1 year projection of unit cost of sales, preferably with breakdown by raw material and labor. Cash Flow and IRR Provide at least 1 year cash flow projection based on the capital expenditure, revenue and cash projections. Compute IRR assuming exit at end of 5 years.
Introduction:

Initial investment Required to be made in the project is \$550,000 of which \$350,000 would be invested in the long-term assets and equipment’s needed to get the coffee café started.

It is estimated that the main costs in the production of coffee would be materials involved. The direct materials involved in production is as follows:

1. Milk – 20%
2. Coffee & Sugar – 10%.

It is estimated that the company would be able to sell 4 different types of coffee products (all priced in the range of  \$4.00 - \$5.00) and the products are as follows:

1. Cappuccino
2. Espressocoffee
3. Macchiato
4. Caffe Latte

The estimated sales volume is expected to be 10,000 each for each variety in a year and would accrue equally each month. Materials would be purchased on credit with 1-month lag. Salaries would be paid in the beginning of next month and other operating expenses would also be paid by the end of the same operational month. The sales volume is expected to grow by 1% in each month in the year 1 of the operations.  (Blythe, 2005)

The expected costs to be incurred in the next 5- year period is as follows:

 Estimated Costs 1 2 3 4 5 6 7 8 9 10 11 12 Units Expected to be sold 3,333 3,367 3,400 3,434 3,469 3,503 3,538 3,574 3,610 3,646 3,682 3,719 ( 4 varieties) Materials cost 4500 4545 4590 4636 4682 4729 4776 4824 4872 4921 4970.8 5020.508 labour cost Employees salary 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 Mangers salary 833 833 833 833 833 833 833 833 833 833 833 833 Hired space 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 Total Direct costs 8500 8545 8590 8636 8682 8729 8776 8824 8872 8921 8970 9020.508 other costs: (one time investments) Human resources investment 7,000 Equipment’s and other infrastructure 100,000 Value chain expense 150,000 Investment plan 50,000 Legal department expenses 25,000 Tender filling cost 100,000 Licensing costs 50,000 Project cost escalation 25,000 \$507,000

As can be inferred from the above projections the initial investments required to be made by the company’s owners is to invest \$507,000. The same can be arranged in the form of capital contribution, partly through a short-term business loan or form family and friends with a very low rate of interest to begin with. As the cash inflows in the coming years are expected to be sizable the loans can be repaid by the company gradually in the next 4-5 years. the same would be discerned through the cash flow projections (Brearly, 2012).

In the first year of operations the company is expected to spend approximately \$102,000 on direct expenses including the variable material costs and foxed labour costs.

Assumptions:

1. The sales volume are expected to grow by 1% each month.
2. The salaries of the staff would be expected to increase by 10% each year.
3. Mangers salary would grow by 10% each year as well.
4. Rent expenses is expected to increase by 5% in the next 4 years.
5. Disposable materials costs would rise in direct proportion to sales.
Profit and Loss Projections

Selling Price of coffee unit = \$4.00

However, the Cappuccino and Coffee latte would be estimated to be sold at \$5. The cost would be estimated to remain the same (30%) for these varieties as well (Buchholtz, 2011).

Cost of production per unit of coffee = \$1.20 (30% of \$4.00)

Cost of production per unit of coffee (\$5 SP) = \$1.50 (30% of \$5.00)

Assumptions of costs and operating costs:

1. Disposable material used would cost \$5,000 in year 1 and the same would accrue equally in each month.
2. The cost of electricity used in the café is expected to be \$12,500 in the year 1 and the same would be expected to remain constant throughout.
3. Depreciation charges would be 20% of the Equipment per year.
4. License costs would be amortized over a period of 20 years.

The Projection of Profit and loss is as follows:

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 Profit and Loss statement (12 months ) 1 2 3 4 5 6 7 8 9 10 11 12 Units Expected to be sold 3,333 3,367 3,400 3,434 3,469 3,503 3,538 3,574 3,610 3,646 3,682 3,719 Revenue Estimated 15,000 15,150 15,302 15,455 15,609 15,765 15,923 16,082 16,243 16,405 16,569 16,735 less: Direct cost of production Materials cost 4,500 4,545 4,590 4,636 4,683 4,730 4,777 4,825 4,873 4,922 4,971 5,021 Labour costs: Employees salary 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 1,083 Mangers salary 833 833 833 833 833 833 833 833 833 833 833 833 Total Direct costs 6,417 6,462 6,507 6,553 6,599 6,646 6,694 6,741 6,790 6,838 6,887 6,937 Contribution 8,583 8,688 8,794 8,901 9,010 9,119 9,229 9,341 9,453 9,567 9,682 9,798 less: Fixed costs Hired space 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 2,083 Electricity charges 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 disposable materials costs 417 417 417 417 417 417 417 417 417 417 417 417 Depreciation 1,667 1,667 1,667 1,667 1,667 1,667 1,667 1,667 1,667 1,667 1,667 1,667 Amortization of License costs 208 208 208 208 208 208 208 208 208 208 208 208 Total operating costs 5,417 5,417 5,417 5,417 5,417 5,417 5,417 5,417 5,417 5,417 5,417 5,417 Operating Profit 3,167 3,272 3,378 3,485 3,593 3,702 3,813 3,924 4,037 4,150 4,265 4,381

In the first month of operations the Revenue would be estimated to be \$15,000 and after recovering the costs operating profit would be \$3,167. This would amount to 21.11%. the profit % would be decent considering the business operation in first year. In the second year, Revenue would be estimated to be \$15,150 and after recovering the costs operating profit would be \$ 3,272. This would amount to

25.42%. In the third month of operations the profits would increase to reach \$3,378 and by the month of December the operating profits would be expected to reach \$4,381  (Damodaran, 2014). overall profit margin for the 1st year of operations would be as follows:

 Total Revenue \$190,238 Total OP margin \$45,166 Net Margin 23.7%

A net margin of 23.7% in the first full year of operation won’t be bad considering higher operational capacities can be achieved in the coming years.

Cash flow Budget

The company is expected to invest an amount of \$550,000 in the business in the beginning of the year 1. All the sales would be made for cash and salary and other expenses would be payable in the same year itself. The cash flow situation of the company is expected to be as follows at the end each of the 5 years of operations.

 year 1 year 2 year 3 year 4 year 5 Cash Budget for the Café Balance b/d 0 110,666 194,008 295,615 418,486 capital introduced 550,000 cash sales 190,238 218,773 251,589 289,328 332,727 Total Cash receipts 740,238 329,439 445,597 584,942 751,213 less: Salary expenses of employees 13,000 14,300 15,730 17,303 19,033 Managerial salary 10,000 11,000 12,100 13,310 14,641 payments for materials 57,071 65,632 75,477 86,798 99,818 Hired space 25,000 26,250 27,563 28,941 30,388 Electricity charges 12,500 12,500 12,500 12,500 12,500 disposable materials costs 5,000 5,750 6,613 7,604 8,745 Human resources investment 7,000 Equipment’s and other infrastructure 100,000 Value chain expense 150,000 Investment plan 50,000 Legal department expenses 25,000 Tender filling cost 100,000 Licensing costs 50,000 Project cost escalation 25,000 Total cash expenses 629,571 135,432 149,982 166,456 185,125 cash balance 110,666 194,008 295,615 418,486 566,088

From the above cash flow budget it is apparent that the business would be able to generate enough cash resources in 2-3 years to have a realistic chance of expending the business.

Cash Flows and IRR

The cash flows from the Café business would be expected to be as follows:

 Computation of Cash flows: Year 0 year 1 year 2 year 3 year 4 year 5 Initial Investment -350,000 Revenue 190,238 218,773 251,589 289,328 332,727 less: Direct costs 80,071 90,932 103,307 117,411 133,492 Contribution 110,166 127,841 148,282 171,916 199,234 less: Fixed costs Hired space 25,000 26,250 27,563 28,941 30,388 Electricity charges 12,500 12,500 12,500 12,500 12,500 disposable materials costs 5,000 5,750 6,613 7,604 8,745 Depreciation 20,000 20,000 20,000 20,000 20,000 Amortization of License costs 2,500 2,500 2,500 2,500 2,500 Total 65,000 67,000 69,175 71,545 74,133 Operating Profit 45,166 60,841 79,107 100,371 125,102 Add: Depreciation 20,000 20,000 20,000 20,000 20,000 Amortization costs 2,500 2,500 2,500 2,500 2,500 Salvage value 0 Net cash flows -350,000 67,666 83,341 101,607 122,871 147,602
Computation of the NPV and IRR

The NPV or net present value of the project is estimated at a discount rate of 7%.

 Year 0 year 1 year 2 year 3 year 4 year 5 Initial Investment -350,000 Revenue 190,238 218,773 251,589 289,328 332,727 less: Direct costs 80,071 90,932 103,307 117,411 133,492 Contribution 110,166 127,841 148,282 171,916 199,234 less: Fixed costs Hired space 25,000 26,250 27,563 28,941 30,388 Electricity charges 12,500 12,500 12,500 12,500 12,500 disposable materials costs 5,000 5,750 6,613 7,604 8,745 Depreciation 20,000 20,000 20,000 20,000 20,000 Amortization of License costs 2,500 2,500 2,500 2,500 2,500 Total 65,000 67,000 69,175 71,545 74,133 Operating Profit 45,166 60,841 79,107 100,371 125,102 Add: Depreciation 20,000 20,000 20,000 20,000 20,000 Amortization costs 2,500 2,500 2,500 2,500 2,500 Salvage value 0 Net cash flows -350,000 67,666 83,341 101,607 122,871 147,602 PVF @ 7% 1.000 0.935 0.873 0.816 0.763 0.713 PV -350,000 63,240 72,793 82,942 93,738 105,238 NPV 67,951 IRR 13.11%

As can be seen form the above estimations the NPV of the café business cashflow projections are expected to be positive at \$67,951. this effectively shows that the business if invested upon would be able to increase the market value of the business in addition to the amount invested and be profitable. The hurdle rate for the café business is 7% and discounted at the hurdle rate the present value of the cash inflows would be greater than the present value of the cash outflows. The IRR is also estimated to be 13.11% which is larger than the projects hurdle rate and this indicates the fact that the project must be invested upon (Weygandt, 2014).

Competitive Strategies Available

The café business would be successful in the long term if the management is able to follow a determined approach under which it has to follow three main strategies:

1. Keep selling quality products at comparatively lower prices than the market.
2. Don’t compromise in the quality – even when the margin is lower and there is pressure to improve it. keep using the best quality inputs and draw the crowd.
3. the other important thing would be to keep innovating and enriching the product mix and improve the products by taking quality inputs form the consumers.

These are the smart strategies which the management must follow without fail in the long term to attract a huge no of buyers and retain the most of them on the back of a robust product mix combined with very competitive pricing (Kothari, 2013).

Risk and opportunities Involved

Risks involved

Risk is perceived to be high because high growth in the coffee market and also presence of a large no of coffee vendors  in New Zealand, there are several new businesses which are entering into coffee business with innovative ideas. However the demand for coffee continues to be robust and grow sizably and the same attracts a decent new operations every year. It is evaluated that if businessman fails to deliver new coffee business as per the demand and need of clients then other rivals will grab all the potential clients from the market. However if the new café is able to meet the quality demanded with a affordable pricing then the business has the possibility of succeeding financially in the face of higher competition (Wood, 2005).

Opportunities

More and more people are consuming coffee and new varieties of coffee are in demand. Particularly younger generation has a new found craving for new delicacies such as cappuccino, latte etc.. And as the market demand is growing at a CAGR of 10% or more the time is ripe for the café to open and start operating (Cross, 2011).

Conclusion

The café business would be estimated to be profitable and add significant level of cash flows to the business. As can be seen from the above calculations the net present value of the business is expected to be a positive \$67,951.  and this means the investment in the business makes economic sense. Similarly, the IRR of the project is estimated to be 13.11% whereas the rate of discounting used by the company is 7%. Thus, the IRR being higher than the Rate of discounts – shall be recommended for acceptance by the management and capital investors. This shows the situation that while the company’s owner expects a return of 7% from the business the same actually is expected to be 13.11. thus, investing in the coffee café business makes business and economic sense.

References

Atrill, P., & Eddie, M. (2012). Accounting and Finance (5th ed.). LONDON: Prentice Hall Financial Times.

Blythe, J. &. (2005). Business to business marketing management: a global perspective. Mason: Cengage Learning .

Brearly, M. &. (2012). Corporate finance (9th ed.). Chicago: McGraw Hill Irwin.

Buchholtz, C. A. (2011). Business and society: Ethics and stakeholder management of organisational stakeholders. , 39-48. Business Horizons, 23(2), 39-48.

Cross, W. a. (2011). The Prentice Hall encyclopedia of model business plans. NewYork: The Prentice Hall.

Damodaran, A. (2014). Corporate Finance - Theory and Practice (2nd ed.). NewYork: Wiley Educaitonal Publishers.

Eugene Brigham & Michael Ehrhardt. (2010). corporate finance (13th ed ed.). Chicago: Mcgrawhill Irwin.

Kothari, C. R. (2013). Business Research Methods. Delhi: New Age Internaitonal Publishers.

Pascal Quiry, M. D. (2015). Corporate Finance - Theory and practice (8th ed.). Chicago: Wiley Publishers.

Rich, S. R. (1985). Business plans that win: lessons from the MIT Enterprise Forum. New York. : Harper & Row Publishers Inc. .

Walter, K. (2010). The Lords of Strategy. (1st ed.). Harvard Business Press.

Weygandt, J. (2014). Accounting for Business Decision Making (6th ed.). Chicago: John Wiley and Sons INC.

Wood, F. a. (2005). Business Accounting (10th ed.). HArlow-London : Pearson Education Ltd.

Cite This Work

My Assignment Help. (2021). Coffee Café Business Plan: Profit And Loss Projection, Cash Flow, And IRR. Retrieved from https://myassignmenthelp.com/free-samples/finc309-financial-modelling/human-resources-investment.html.

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