Business Model
The following graph shows the company’s performance in terms of earning revenue and the profit.
During the first two years, the company will incur a loss which will come down to its minimum by the end of second year. The loss will be pretty much as above $98,000 approximately but with the growth in revenue, it will come doen to just ocer $2,000 by the end of the second year. From the third year onwards, company will be earning solid returns with the profit for the fifth year amounting to approximately $93,000.
Break even analysis
The break even analysis shows how the company will be able to cover all its expenses by the third year and start earning profits. As the revenue grows beyond the break even in the third year, the company will be earning solid profit figures thereon. The revenue will keep growing since the inception and the profitability will grow with similar prospects from the third year onwards hence, company would be earning strong return on investment.
IRR
The internal rate (IRR) of return for the project is around 29% which shows the positive feasibility for carrying out the project. Generally, speaking the higher the IRR for a project is, the more favorable it is and the more growth prospects it has.
NPV
Another feasibility measure for a project is net present value calculation; a project should be accepted once it has a positive net present value for the future cash flows for the business. For our company, the net present value comes to be $77,074 for the first five years of operations and therefore, this performance measure also comes out to be favorable from the feasibility perspective of the business.
Payback period
The payback period is going to be around 3 years and 6 months. As the company will start earning positive net cash flows from the second year onward, the company will be able to recover the initial investment in 3 years and 6 months of operations ($9402, $73910 and $65588 in year 2, 3 and 4 respectively).
Projected Balance Sheet
According to the projected balance sheet for the business over the first five years, the company maintains growing net assets for the business and the company keeps investing in capital expenditure and the value of the leasehold and equipment increases every year with the initial capital outlay of $118,700 and reaches up to $143,200 by the fifth year after additions, and the company maintains solid cash position. Therefore, a growing position of net assets every year is a healthy indication from the perspective of overall financial position and standing for the company.
Capital Structure
On the other hand the external borrowings in the form of debt are also declining over the year as shown in the following illustration:
This declining trend in the external borrowings for the company determines how much self sufficient the company is growing over the years with becoming less reliant on debt source for financing the business activities as the company is able to payback all the debt by the end of the five years period. The interest cost is also reduced accordingly with the falling debt balance and as a result, the costs for the business are also reduced and therefore, healthy profitability prospects for the company. As a result, the company’s business risk is minimized and owner’s confidence in the business boosts.
Cash flow position
The company maintains a standard cash balance at every year end that is approximately around $30,000. While the company has solid cash inflows it also maintains a healthy dividend payout along with ensuring sufficient investment in capital expenditure every year that would ensure that the company is strategically progressing along with paying sufficient return to the stock holders of the company in the form of dividend pay outs. The cash inflow is also utilized towards paying back the debt payments that include both, the interest and repayment. All in all, the company maintains strong cash flow position as it is able to maintain a constant positive cash balance which is very important during the initial start up period of the business and thus reduced any accompanies risks for the business.
Sensitivity Analysis
In case of the fall in daily price by $5
If we assume that the daily for the Children World per child falls down by $5, there will be a comprehensive change in the company performance measures such as cash flow, IRR and NPV etc. There will be a decline in the value of annual cash flows. As a result there will be overall a negative cash flow balance for the company for the 5 years period amounting to $29,054.The IRR assuming the new figures will be equivalent to adverse value of -5%. The NPV assuming the same interest rate and the new cash flow figures will now come up to be a negative balance of $(126,642), showing that the project will not be feasible after the decline in price by $5 per child as the IRR is way too low and the NPV is negative for the first five years.
In order to mitigate the impact of this decline in price, we will have to come up with plans to increase the number of customers so that the effect of fall in price is offset as a result of the increase in the revenue due to more customers. There can also be other options such as cutting down costs as necessary i.e. finding other alternative for financing which offers a reduced interest or finance cost to business to improve the business cash flows.
In case of the fall in children by 5 per year
If we assume that the number of children visiting Children World falls by “5” children every year, there will be a noticeable change in the company’s performance over the initial 5 years period. The net cash flow for the 5 years period will reduce down to as low as $11,534 only. As a result of the reduced cash flows, the IRR will fall down to adverse -6% which is unfavorable compared to debt cost. On the other hand, the NPV of the cash flows from the project in the first five years will come to be negative amounting to $(143603).
In case the lease rental increases by $50,000 annually
Another possibility that we can consider is the increase the lease rental by $50,000 annually for the Children World. Following this change, the figure for net cash flow in the first five years will come up to be $109,354. Following this, the IRR will fall down to a very low figure of just 3% which is not a very viable figure for decision making purpose when compared to the cost of debt to business. The NPV will also face unfavorable impact and will come out to be a negative figure of $(81,308).
The preventive measure that can be taken here is making a contract with the lease provider on entering into an agreement that the lease rental will remain constant for the next 5 years so that there is no unfavorable impact on the overall business performance due to any unexpected increase in the rental making the project less feasible. On the other hand there can be other cost cutting policies to set off this increase without impacting the overall cash flows i.e. reducing payroll expenses and cutting down extra staff etc.
Long term development
In the long term, the company aims at growing its sales constantly through the increasing customer base every year by 10-20 customers every year and by improving infrastructure constantly so as to stay ahead of its competitors thus being able to charge premium prices for the best facility available in town. We plan at attaining a turnover of $2.5 million within the first 10 years of operations and also opening two more facilities within the prescribed time period. Once the company is able to attain competitive advantage, the annual growth rate will be around 20% and we will turn out to be a strong name in our industry of operations.
Exit plan
In case the business is unable to attain the specified growth according to plan and feasibility, the management has come up with various exit plans that would be decided according to the then circumstances and market conditions.
Sale under acquisition
The set up can be handed over in sale to any other business group in the same industry or from a different industry looking forward to diversify, through an open market offer. The buying company will have the financial reserves to afford the initial losses and in return they will be getting an already operational business that they can further modify and improve as par their own specifications.
Business disposal
Another option would be to dispose off all the company assets including capital assets and they funds generated would be utilized in settling down the liabilities of the business it would owe at that time. Any surplus funds will be distributed among the company shareholders in accordance with their respective share in the company ownership.
Merger
Merger can be another option here. A specific shareholding can be sold so that the business can be run and managed under partnership. This can give the current owners financial and operational support.
