project financial plan

Name : K.Povenesan Student ID : 1191543

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Name: Povenesan Krishnan Muthi Student ID No: 1191543Course Name: Master of Project Management Subject Name: Project and Innovation Finance and AccountingAssignment number: 4Due Date: 7th September’2009Lecturer Data Stamp (Office Use Only)

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Signed: K.Povenesan Date: 6th Sept’2009

WORD COUNT: 2095 words

Name : K.Povenesan Student ID : 1191543 PIFA Assignment 4

1. Executive Summary

Marrow Choices (here after will be known as MC) is a young and promising that is rapidly expanding its

business locally. Marrow Choices is the answer to an increasing demand from market on differentiated

healthy and nutritious breads and cakes. Our target market wants:

Neighborhood businesses in City of Singapore

Great bread, cakes and cookies at a competitive price

A healthy and diet supplement for daily consumptions

The objectives of this report is two fold. Firstly, an longitudinal analysis of MC to better understand the

project alternatives in the context of food & beverage industry it operates.

This report is prepared to obtain supplemental financing is required to prepare the selected site,

purchase equipment, and cover expenses during the first year of operation. This financing will allow MC to

successfully open and maintain operations. The large initial capital investment will allow MC to provide its

customers with an inviting atmosphere and quality products. Successful operation in year one will provide

MC with a customer base that will allow it to be self sufficient in year two onwards.

Even with our conservative sales forecast, we will maintain a positive cash flow from 3 rd year onwards,

repay the loan in 4 years, and have a positive net worth over by year three. It is been projected that net

profits will increase 20% over the next three years. With SWOT analysis and define the way to drive the

business. It is planned to reach our breakeven point within two year from launch and to earn double

revenue within five years.

Secondly, brief estimates of projected cash flow of MC’s continued expansion plans are highlighted with

Discounted Cash Flow Analysis.

Thirdly, strategic issues facing by MC’s proposed projects being tabled in details.

To this end, a financial overview of proposed projects is conducted to outline its financial performance

are highlighted with proposed solutions an recommendations.

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Table of Contents

1. Executive Summary.......................................................................................................................................1

2. Introduction....................................................................................................................................................3

3. Project Alternatives........................................................................................................................................4

4. Capital Structure............................................................................................................................................5

5. Capital Budgeting & Benefits of the project...................................................................................................7

6. Analysis of the Project Investment...............................................................................................................11

7. Risk Evaluation............................................................................................................................................16

8. Recommendations & Conclusion.................................................................................................................17

9. References...................................................................................................................................................18

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2. Introduction

The proposed three project alternatives present an investment opportunity in setting up a Bakery &

Confectionery. Major products in this case would be bread, cakes, cookies, snacks, biscuits, sweets and

general items. In order to attract a cross section of Singapore population, a combination of 3 outlets being

proposed, one in posh area and another in universities while last one in industrial are with sales to other

bakeries. This combination can however, vary according to the final site selection and amount of investment

being incurred by individual investor.

Although for this particular project study only Bakery & Confectionery items along with general items

are included, however, production unit covering cookies, brownies, tea, coffee and allied items is not

incorporated in this report. The reason being that bread production unit in it is a complete unit and requires

a heavy investment. Almost all the bakers & confectioners purchase these items from specialized

manufacturing units.

Initial capacity of MC is calculated on the basis of total expected sales of items. Maximum sales are

expected during festival seasons and international events. However, in order to calculate average yearly

sales, potential revenue is estimated by using potential demand estimates. It is expected that annual

increase in sales would be 15%. Although due diligence is carried out in estimating these numbers, the final

outcome will vary depending on the selection of location, pricing, product mix and the marketing strategies.

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Alternatives / Project Description Location

A Setting up bakery and confectionery and sales outlet at Singapore Integrated Resort Marina Bay

B Setting up bakery and confectionery and sales outlet at National University of Singapore campuses.

Kent Ridge Rd, Bukit Timah Rd, Outram

Rd

C Setting up bakery and confectionery factory with distribution centre to all others retailer and hypermarkets (like Giant, Carrefour, NTUC and etc.)

Sengkang Industrial area


3. Project Alternatives

Table 1: Proposed 3 alternatives Bakery & Confectionery business for investment

Table above describes the proposals for MC to venture into the market. Some of the key factors that

have been measured before coming out with these proposals include:

Products range selection and introduction of sitting areas

Quality and Innovation in products and sales strategy

Selection of location

Pricing strategy

Understanding of target customers, alternative availability (product differentiation)

Hygienic condition

A. With Singapore Integrated Resort opening in 2010, which is expected to pull a crowd of 2-3

million visitors per year to the resort, opening an outlet will give an option for visitors from

overseas and locals to enjoy delicacies of Asian breads over here. Tying in to hotels for

contracts for delivery of bakery items tend to be lucrative as well.

B. With intake of 4,000 student per year to NUS and existing students around 29,000, its an highly

populated area ideal for bakery business. For healthy lifestyle, students are seeking for higher

standard of food quality. Value for money and choice and exposure to new bread both have

resulted in demand for diversity in terms of food varieties and uses. It’ll be cafeteria based

outlets for students to relax to music and books while they enjoy the delicacies.

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C. A factory in Sengkang area, where there is no any bakery & confectionery factory yet to be

established in East Singapore. This would be opportunity for a medium competition and proper

positioning of the brand name, as one has to open factories in vicinity of competitors. This will

be a direct marketing of the brand name for the best quality and the best competitive price. With

supplies contract with SIA, NTUC, Carrefour and Giant, it gives steady sales revenue

throughout the years.

4. Capital Structure

The total investment capital for Project A: S$ 2.5M, Project B: S$ 1.5 M, Project C: S$ 3.4M which

made up of the purchase of machinery, new molds, factory/space, contingencies in improving the new outlet

and net working capital.

Capital Investment Alternatives

A ('000) B ('000) C ('000) Purchase of Machinery 800 800 1,500 Purchase of Space / Factory 1,000 – 1,200 Net Working Capital 600 600 600 Contigencies 100 100 100

Total 2,500 1,500 3,400

Table 2 : Total investment capital for all 3 alternatives

The way the new projects proposed to be financed is 50% debt and 50% equity. It’s been proposed

to seek loan from DBS bank which is offering a loan at Commercial Variable rate (CVR) 4.5% + 0.75%.

The remaining 50% will be financed by issuing stocks to the public. Even the company is running at

slight margin profit, it is forecasted that with this new projects, the company will gain more profit.

Although the financial impact is minimal compared to the group huge assets, this project has the

potentials to increase the firm’s value by bringing in more income and improve the quality of the bread &

pastry through R&D.

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The cost of equity should be calculated using the Capital-Asset-Pricing Model (CAPM)

Rj = RF + (Rβ M – RF) = 4.69 + 0.88 (9.01) = 12.6188%

Assuming, Risk free rate, RF = 4.69 %

Company’s Beta , β 0.88

Market portfolio premium, Where RM = 13.7 %

Cost of Debt = BLR + 0.75%

= 5.25%

Corporate Tax = 17%

WACC = D (1 - T) * Rd + E * Re

D + E

D + E

Assumptions

Re = cost of equity Rd = cost of debt E = market value of the firm's equity

D = market value of the firm's debt T = corporate tax rate @ 17%

Weighted average cost of capital (Project A)

WACC = 1785000*(1 - 17%) * 5.25% + 1785000 * 12.62%

3570000

3570000

= 8.5%

Weighted average cost of capital (Project B) WACC = 1234000*(1 - 17%) * 5.25% + 1234000 * 12.62%

2468000

2468000

= 8.5%

Weighted average cost of capital (Project C) WACC = 2467000*(1 - 17%) * 5.25% + 2467000 * 12.62%

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5. Capital Budgeting & Benefits of the project

To make decision on selecting the suitable project alternatives plan as described in the previous section, we

have to have a careful look at the projected cash flows in project assessment. This projected cash flow will be used for

the investment decision rules; the payback period, IRR, NPV and etc.

Tables below shows the projected initial investment cash flow and yearly sales and expense figures from

operating activities of MC investment plan (3 alternatives). This investment plan has estimated life of 5 years.

Cash Flow CF0 CF1 CF2 CF3 CF4 CF5

Cash In-Flow

Sales Revenue – 2,080,500 2,392,575 2,751,461 3,164,180 3,638,808

Cash Out-Flow

Cost of Sales – 1,314,000 1,511,100 1,633,499 1,765,813 1,908,843 Depreciation – 160,000 160,000 160,000 160,000 160,000 Administration Expenses – 100,000 100,000 100,000 100,000 100,000 Advertising & Promotions – 200,000 100,000 100,000 50,000 50,000 Research & Development – 100,000 100,000 0 0 0 Selling & Distribution Expenses – 10,000 10,000 10,000 10,000 10,000 Sub-total of Cash out-flow – 1,884,000 1,981,100 2,003,499 2,085,813 2,228,843

Profit Before Tax – 196,500 411,475 747,962 1,078,368 1,409,964 Taxation – 33,405 69,951 127,154 183,323 239,694 Profit After Tax – 163,095 341,524 620,809 895,045 1,170,270 Depreciation – 300,000 300,000 300,000 300,000 300,000 Net Cash Flow from Operation 0 463,095 641,524 920,809 1,195,045 1,470,270

Investment Cash Flow

Purchase of Machinery 800,000 – – – – – Purchase of Space / Factory 1,000,000 – – – – – Net Working Capital 600,000 – – – – 600,000 Contigencies 100,000 – – – – –

Net Cash Flow from Investment 2,500,000 0 0 0 0 600,000

Net Cash Flow from Project -2,500,000 463,095 641,524 920,809 1,195,045 2,070,270 Table 4: Projected Cash Flow Analysis for Project A

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Project A: The first year sales are assumed that the number of delicacies to be sold per day is 2000. Sales are expected to rise with the assumption of 15% growth per year.

The average price per bread/delicacies is S$2.85 which is 58% mark up of the average cost per bread.

The cost of sales is for first year and second year are total number of breads sold multiply by the average cost per bread which is S$1.3M and S$1.5M respectively. The cost of sales is expected to fall 6% in third year onwards with the assumption of the reduction in food spoilage.

The initial investment in fixed assets is S$800,000 and because it will be worthless in five years, assumptions made that it loses value at the rate S$160,000 [(800,000/5)] each year. Straight-line depreciation used to get the depreciation cost.

The reduction in cost of sales from year 3 onwards, reduction of 50% in advertisement & promotion expense and discontinue of R&D at year 3 resulting in the increase of profit before-tax cash.

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Cash In-Flow Sales Revenue – 1,613,300 1,855,295 2,133,589 2,453,628 2,821,672

Cash Out-Flow Cost of Sales – 1,116,900 1,284,435 1,388,474 1,500,941 1,622,517 Depreciation – 160,000 160,000 160,000 160,000 160,000 Administration Expenses – 100,000 100,000 100,000 100,000 100,000 Advertising & Promotions – 100,000 50,000 50,000 50,000 50,000 Research & Development – 100,000 100,000 0 0 0 Selling & Distribution Expenses – 15,000 15,000 15,000 15,000 15,000 Sub-total of Cash out-flow – 1,591,900 1,709,435 1,713,474 1,825,941 1,947,517

Profit Before Tax – 21,400 145,860 420,115 627,687 874,155 Taxation – 3,638 24,796 71,420 106,707 148,606 Profit After Tax – 17,762 121,064 348,695 520,980 725,549 Depreciation – 300,000 300,000 300,000 300,000 300,000 Net Cash Flow from Operation 0 317,762 421,064 648,695 820,980 1,025,549


Purchase of Machinery 800,000 – – – – – Purchase of Space / Factory – – – – – – Net Working Capital 600,000 – – – – 600,000 Contigencies 100,000 – – – – –


Net Cash Flow from Project -1,500,000 317,762 421,064 648,695 820,980 1,625,549

Table 5: Projected Cash Flow Analysis for Project B

Project B: The first year sales are assumed that the number of delicacies to be sold per day is 1700. Sales are expected to rise with the assumption of 15% growth per year.



The initial investment in fixed assets is S$800,000 and because it will be worthless in five years, assumptions made that it loses value at the rate S$160,000 [(800,000/5)] each year. Straight-line depreciation used to get the depreciation cost.

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Cash In-Flow

Sales Revenue – 2,102,400 2,417,760 2,780,424 3,197,488 3,677,111

Cash Out-Flow

Cost of Sales – 1,576,800 1,813,320 1,960,199 2,118,975 2,290,612 Depreciation – 300,000 300,000 300,000 300,000 300,000 Administration Expenses – 100,000 100,000 100,000 100,000 100,000 Advertising & Promotions – 200,000 100,000 100,000 50,000 50,000 Research & Development – 100,000 100,000 0 0 0 Selling & Distribution Expenses – 40,000 40,000 40,000 40,000 40,000 Sub-total of Cash out-flow – 2,316,800 2,453,320 2,500,199 2,608,975 2,780,612

Profit Before Tax – -214,400 -35,560 280,225 588,513 896,499 Taxation – -36,448 -6,045 47,638 100,047 152,405 Profit After Tax – -177,952 -29,515 232,587 488,465 744,094 Depreciation – 440,000 440,000 440,000 440,000 440,000 Net Cash Flow from Operation 0 262,048 410,485 672,587 928,465 1,184,094


Purchase of Machinery 1,500,000 – – – – – Purchase of Space / Factory 1,200,000 – – – – – Net Working Capital 600,000 – – – – 600,000 Contigencies 100,000 – – – – –


Net Cash Flow from Project -3,400,000 262,048 410,485 672,587 928,465 1,784,094 Table 6: Projected Cash Flow Analysis for Project C

Project C: The first year sales are assumed that the number of delicacies to be sold per day is 1700. Sales are expected to rise with the assumption of 15% growth per year.


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The initial investment in fixed assets is S$1,500,000 and because it will be worthless in five years, assumptions made that it loses value at the rate S$300,000 [(1,500,000/5)] each year. Straight-line depreciation used to get the depreciation cost.


6. Analysis of the Project Investment

Five approaches being adopted for evaluating the capital budgeting decision of the projects. The decision to

accept or reject a capital budgeting project depends on an analysis of the cash flow generated by the project and its

cost. They are as follows:

a. Payback Period

Year Yearly Projected Cash Flow Accumulated Projected Cash Flow

S$ S$

Alte

rnati

ve A

0 -2,500,000 -2,500,000

1 463,095 -2,036,905

2 641,524 -1,395,381

3 920,809 -474,572

4 1,195,045 720,473

5 2,070,270 2,790,743

Payback Period (years): = 3 + (474572/1195045)

3.40

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S$ S$

Alte

rnati

ve B

0 -1,500,000 -1,500,000

1 317,762 -1,182,238

2 421,064 -761,174

3 648,695 -112,479

4 820,980 708,501

5 1,625,549 2,334,050

Payback Period (years): = 3+ (112479/820980)

3.14


S$ S$

Alte

rnati

ve C

0 -3,400,000 -3,400,000

1 262,048 -3,137,952

2 410,485 -2,727,467

3 672,587 -2,054,880

4 928,465 -1,126,415

5 1,784,094 657,679


4.63

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b. Discounted Payback Period

Year Yearly Projected Cash Flow Discounted Cash Flow 8.5%

Accumulated Projected Cash Flow

S$ S$ S$

Alte

rnati

ve A

0 -2,500,000 -2,500,000 -2,500,000

1 463,095 426,816 -2,073,184

2 641,524 544,946 -1,528,238

3 920,809 720,908 -607,430

4 1,195,045 862,314 587,616

5 2,070,270 1,376,824 2,657,886


3.70



S$ S$ S$

Alte

rnati

ve B

0 -1,500,000 -1,500,000 -1,500,000

1 317,762 292,868 -1,207,132

2 421,064 357,675 -849,457

3 648,695 507,869 -341,588

4 820,980 592,398 250,810

5 1,625,549 1,081,064 1,331,874

Payback Period (years):

= 3 + (341588/592398)

3.58

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S$ S$ S$

Alte

rnati

ve C

0 -3,400,000 -3,400,000 -3,400,000

1 262,048 241,519 -3,158,481

2 410,485 348,689 -2,809,792

3 672,587 526,574 -2,283,219

4 928,465 669,957 -1,613,262

5 1,784,094 1,186,504 -426,758

Payback Period (years):

= 4 + (356380/1502601)

5.36


c. Net Present Value (NPV)

Alt. Net Present Value (NPV) CF 0 CF 1 CF 2 CF 3 CF 4 CF 5

Discount factor @ 8.5% 1.00 0.92 0.85 0.78 0.72 0.67

A Present Value -2,500,000 426,816 544,946 720,908 862,314 1,376,824

Net Present Value 1,431,808

B Present Value -1,500,000 292,868 357,675 507,869 592,398 1,081,064

Net Present Value 1,331,874

C Present Value -3,400,000 241,519 348,689 526,574 669,957 1,186,504

Net Present Value -426,758

d. Profitability Index (PI)

PI = PV of cash flows subsequent to initial investment Initial Investment

ALTE

RNAT

IVES

A PI =

5,290,743 2,500,000 2.12

B PI =

3,834,050 1,500,000 2.56

C PI =

4,057,679 3,400,000 1.19

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e. Internal Rate of Return (IRR)

Proj

ect A

Year Cashflows 0 -2,500,000 1 463,095 2 641,524 3 920,809 4 1,195,045 5 2,070,270

IRR 23.78%

Proj

ect B

Year Cashflows 0 -1,500,000 1 317,762 2 421,064 3 648,695 4 820,980 5 1,625,549

IRR 30.37%

Proj

ect C

Year Cashflows 0 -3,400,000 1 262,048 2 410,485 3 672,587 4 928,465 5 1,784,094

IRR 4.71%

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7. Risk Evaluation

Before making any investment decision, it is advisable to evaluate the associated risk factors by taking into consideration of certain key elements. Based on risk evaluation done on each project, alternative A represents a moderate level risk for better option ahead of other projects. With proper mitigation activities, we could keep the risk at bay for successfulness of the project.

Table 7: Risk Evaluation for each project

No Identified Risk

PROJECT A PROJECT B PROJECT C

P I RISK P I RISK P I RISK

1 Competition with existing Bakery & Confectionery in the target place.

4 3 12 3 2 6 2 2 4

2

Demand potential: Location of facility that have a target group to cover the proposed production of this business

2 2 4 3 3 9 4 3 12

3 Inflation 3 3 9 3 3 9 3 3 9

4 Easy imitation of its products & business strategies by competitors

4 3 12 4 4 16 3 3 9

5 Equipment performance (e.g: machinery failures,oven not heating to temperature, mold malfunction)

2 2 4 2 2 4 3 3 9

6 Cost over-run 4 3 12 4 4 16 4 4 16

7 Sponsor commitment 4 4 16 4 4 16 4 4 16

8 Management & Labor Performance 3 3 9 3 3 9 4 3 12

9 Payment Risk 1 1 1 1 1 1 3 3 9

10 Interest Rates 3 3 9 3 3 9 3 3 9

11 Force Majeure 3 3 9 3 3 9 3 3 9

97

104

114

Level of Risk

Moderate

High

High

P=Probability 1 = Very Low

I=Impact 2 = Low

Risk = P x I 3 = Moderate

4 = High

5 = Very High

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8. Recommendations & Conclusion

Project Investment Analysis Project A Project B Project C Preferable

Project Payback Period 3.40 3.14 4.63 Project B 1

Discounted Payback Period 3.70 3.58 5.36 Project B 2

Net Present Value ( NPV) 1,431,808 1,331,874 -426,758 Project A 3

Internal Rate of Return (IRR) 23.78% 30.37% 4.71% Project A 4

Profitability Index 2.12 2.56 1.19 Project B 5 WACC 8.50%

1 Assuming the payback period required is 4 years. 2 Assuming the payback period required is 4 years.

3 Choose Highest

4 > than WACC due to lower IRR but Higher NPV

5 Choose Highest

In the analysis to choose the best project amongst the 3 proposal, the above mentioned ratios and

computations have been taken into account. The above summary outlines the figures attributed to each of the

analysis methods and the preferred project by its applications. As noted, project C is not feasible amongst the

three projects in all the areas of analysis leaving the option to both A and B. Recommendation of project based

on analysis below;

Payback period/Discounted Payback Period: It is assumed the company would require to recover it’s

investment and capital within the first 4 years.

NPV: NPV represents the value that is added on in the implementation of the project. Therefore in this

case Project C is not applicable as it is yielding a negative value. However between A and B, Project A

would be considered the most feasible project as it is yielding a higher value to the company.

IRR: The IRR is computed in order to determine the profitability of the projects in the proposal.

Therefore the choice would be between project A and B. However we will not be able to choose project

B (holding the highest IRR) as a feasible project between the 2. This is due to the fact that the IRR is

not a suitable analysis to be used to rate mutually exclusive projects but in a single project and it

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feasibility. Therefore although the highest IRR is project B the more feasible project that would increase

shareholders wealth is the Project A.

PI : The rule of thumb in the project selection is that if the PI > 1 then we will accept the project. All the

projects are feasible.

Therefore in conclusion the most feasible project will be PROJECT A as it fulfills most of the criteria and is

able to expand the shareholders value within the company.

9. References

1. Atrill, Mclaney, Harvey & Jenner - Accounting an introduction 3 edition, Chapter 11. Cited on 21, 23, 25, 27 & 28 July 2009.

2. Ross, Westerfield & Jaffe and Jordan. Modern Financial Management: International Student Edition (8th ed ).New York: Mc-Graw-Hill

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project financial plan

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