EURO SUN TANNING SALON INC. CASE STUDY

Saurabh PrithvijitHitesh goyalUdhai PartapSampreet

INTRODUCTION

EURO SUN TANNING SALON INC. Located in north end of London, Ontario,

population 350,000. Claro purchased it on march , 2002. Certified by international smart network. At Time saloon has five beds Three regular intensity units One high intensity unit One stand up unit

TANNING PROCESS

UV radiation used in this process are of shorter wavelength than visible to human eye.

UVA, UVB, UVC UVA penetrates most deeply into the skin

Human skin, the largest body organ, comprises of two major layers

The innermost dermis Thee outermost epidermis

CONT……

Cells created in innermost skin reached outermost skin in 28 day lifetime.

5% skin cells are Melanocyte, the amount of melanin they produce naturally is genetically determined, leading to different tones.

UVB produces Melanocytes at the base of thee epidermis. The radiation cause Melanocytes to produce more melanin.

UVA exposure oxidizes and darkens the skin providing the protection against the overexposure of UV rays.

PRODUCTS OFFERED

Retail products Australia gold products Swedish beauty products Sunglasses, toe rings Nail polish Lotions Upcoming esthetics business

COMPETITORS

London had over 2 salons Little territorial overlapMain contenders The cottage tanning co. Bronze shop, was located 5 km southwest on

Richmond street. Kokomo’s sun tanning and swimwear about 7

km southwest.(grater name recognition because of its two location in London; kokomo’s also sold swimwear in addition to typical tanning accessories)

CUSTOMERS

Target customer – lived or worked near the street

At the time of purchase in its database. Because euro sun was the only tanning salon in the customer were females typically between 18 to 65.

February to may is busiest time. Most people tanned seasonally or before

going away to a holiday to the south. Euro sun ‘s customer send about 20 to 30

min depending upon tanned bed they chose.

CONT…..

Cleanliness is important as many clients sweat on the bed while tanning/ or tanned nude.

Claro did his best to book clients efficiently so that they would not have to wait long in the reception area…….and so clients could get up appointment on thee bed of their choices as close possible to the time of their choice.

OPERATIONS

From October to may – 7 days a week for 72 hours

Four remaining months – 6 days a week for 62 hours

Salon ran at 85% capacity from October to may and about 55% during thee other months…

55% book appointment 2-7 days in advance 5% booked up to month in advance 30% called salon to book same day

appointment 10% are walk ins

PROCEDURE

For first time customers, thee entire process takes around 20-30 min.

Customer filled out the form and purchase the number of minutes or paid for single tan.

Customer are then sent to tan room and allowed to prepared for the tan.

10 min delay is standard so that customer can get ready.

Then tanning process starts

TANNING UNITS

Regular – It is booked for 30 minutes(tan time = 15-20 minutes)

High intensity – It is booked for 20 minutes(tan time=12 min)

Stand up bed high intensity unit - It is booked for 20 minutes(tan time=12 min)

OPTIONS FOR FUTURE

AFTER TANNING CONSULTANT INSPECTED THE facility, he suggested that claro either UPGRADE all the current traditional units or purchase new one

The stand up bed didn’t require any changes. Claro decide to do business with Uvalux

international Inc. for the supplies.

OPTION 1

A complete overhaul of the current beds which would cost around $18,000.

Prolonging their lives to 3 years and decreasing electricity costs by $200per month.

Current Operating cost of each bed Regular bed – $0.39 High intensity bed- 0.47 Stand unit-0.47

OPTION 2

To replace regular intensity unit in the salon.

Model 1 The first model in consideration is Sunstar 332 Cost =$10,000 Provide with 32 watt lamps in the bed One body cooling fan One foot cooling fan 48-month warranty from manufacturer. Replacing the lamp cost $1500 every year Operating cost $0.16

MODEL2

Sun vision eliteTM series Cost= $8000 32 100 watt light bulb and would cost the

same amount for replacement every year. 24 months warranty Cost of operating is $o.16 peer unit hour.

OPTION 3

For high intensity unit claro has only one option in mind

Star power 248 cost = $28,000 48 month warranty 4,000 charges every year for light bulb

replacement Operating cost $0.21

EXPECTED RATE OF RETURN

Assuming no debt and, as mentioned no equity stock the expected rate of return will be decided on inflation rate and investment risk.

As risk is very implicit in this case and will vary according to the different scenarios.

As of now we will try to evaluate the risk of these proposition qualitatively as no quantitative method is available

THE IMPLICIT RISK

Expected rate of return= risk free rate of return + risk premium

Risk free rate of return itself can be pegged against many securities such 30 day treasury bills or bond yield.

Rf = inflation rate + expected long term GDP growth of an economy.

Inflation rate for CANADA – 1.5% as of February 2013

Growth rate is around 1.8% Let Rf=3.3%

CAPACITY UTILIZATION

COST CALCULATION

ASSUMPTION FOR REVENUE CALCULATIONS

RISK PREMIUM INVESTMENT PROPOSAL “QAZ” RISK PM- 17%

Decrease the operating cost by $200

Insecurity in revenue generation

Incapable of fulfilling the quality needs

Low on competence front.

Less fixed cost Decrease of

operating cost Less repair and

maintenance cost

Complete overhaul cost of current beds = $18,000

It will prolonged the life to three years.

CONT…….

After proper consideration we have come to decision that this is not good proposal as risk is very high and the probability of future returns is very low.

As the competitors might move to new machinery and have first mover advantage in this stiff market.

The new machinery is more user friendly with more luxurious features.

RISK PREMIUM INVESTMENT PROPOSAL 1 RISK PM- 17%

Energy efficiency Less operating cost Higher quality More customer

satisfaction Comparatively less

fixed cost in this environment

Customer retention risk

Slowdown in the market

High unemployment rate

Under utilization of capacity

Fixed cost 58,000

4 year warranty, fixed operating charges $1,500*3+$4,000 annually

CONT……..

After contemplating all the points, this comes out to be very good investment proposal as the new machinery will reduce cost and will enhance customer satisfaction

So we will assign somewhat lower risk premium to this proposal

RISK pre – 17%

RISK PREMIUM INVESTMENT PROPOSAL 2 RISK PM- 20%

Energy efficiency Less operating cost Higher quality More customer

satisfaction Comparatively less

fixed cost in this environment

More capacity Future prospects

Much of the capacity under utilized

High cost initially

Fixed cost 76,000

4 year warranty, fixed operating charges $1,500*2+$4,000*2 annually + construction cost of $1800

CONT……

This proposal is good but risk is high as the capacity is highly underutilized

Risk premium =20%

INVESTMENT PROPOSAL 1 AND INVESTMENT PROPOSAL 2 IS SELECTED FOR QUANTITATIVE ANALYSIS

INVESTMENT PROPOSAL 1

NEW COLLECTION OF TRADTIONAL SYLE UNITS

3 REGULAR INTENSITY

1 HIGH INTENSITY IN PEAK SEASON THE UTILIZATION IS 85% CAPCITY REQUIREMENTS FOR PEAK SEASON IS – 9790

HOURS

QUANTITATIVE RESULTS

CAH FLOW 1 - $230,275.18 2 - $232,577.93 3 - $234,903.71 4 - $237,252.75

NPV = $542,329.35

PAYBACK PERIOD – LESS THAN ONE YEAR

%AGE INCREASE IN PROFIT - $84,047.84

INVESTMENT PROPOSAL 2

REPLACE ALL THE MACHINES WITH 2 HIGH INTENSITY UNITS

2 REGULAR INTENSITY UNIT Capacity requirements for peak season is –

9790 hours Capacity after these installation- 11520

YEAR CASH FLOWS INS2 (RATE OF RETURN 23.30% )

1 $190,306.16 2 $192,209.22 3 $194,131.31 4 $196,072.63

NPV = $391,369.78 PAYBACK PERIOD – LESS THAN ONE YEAR

INCREASE IN PROFIT - $54,000 APPROX

COMPARISON

sun tanning.xlsx

1 2 3 40

50000

100000

150000

200000

250000

300000

350000

TOTAL HOURS IN YEAR*NUMBEER OF MACHINESOPERATING profit

INVESTMENT 2

INVESTMENT 1

85,55 90,70 100, 100$0.00

$50,000.00

$100,000.00

$150,000.00

$200,000.00

$250,000.00

OPERATING profit

OPERATING profit

COMPARISON BETWEEN CASH FLOWS OF INS1&INS2

1 2 3 4$0.00

$50,000.00

$100,000.00

$150,000.00

$200,000.00

$250,000.00

CASH FLOWS INS2YEARCAH FLOW INS2

CONCLUSION

INVESTMENT PROPOSAL 1 IS SELECTED ON THE GROUNDS OF QUALITATIVE AND QUANTITATIVE ANALYSIS

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