The firm has to make an initial investment of purchasing new office equipment and computer to be able to develop apps for both phones and android. Assuming that the asset purchased will not depreciate over the next two years, the company is expected to make any purchase of additional assets. Since over the next two years there is no additional investment, the cash in hand and cash equivalent increases in the third year. Since the capital raised by the owner of the business is enough to meet the expense of the firm, the long term debt is expected to decrease for the following year. However, on the third year, the debt increases to meet fund required to meet increasing expenses, marketing, maintaining and developing apps.
Pro forma statement of cash flow for Precious moment
The cash in hand and cash equivalent are expected to increase over the next two years due to increase in account receivable and reduction of cash flow from investing activities.
Pro forma income statement
Year 1
Year 2
Year 3
sales
HK$ 425,000
HK$ 500,000
HK$ 700,000
Cost of goods sold
HK$ 65,000
HK$ 105,000
HK$ 250,000
Operating income
HK$ 360,000
HK$ 395,000
HK$ 450,000
HK$ 155,000
HK$ 170,000
HK$ 195,000
-marketing
HK$ 90,000
HK$ 95,000
HK$ 110,000
Total expenses
HK$ 245,000
HK$ 265,000
HK$ 305,000
Earnings before interest and taxes
HK$ 115,000
HK$ 130,000
HK$ 145,000
Net income
HK$ 130,000
HK$ 265,000
HK$ 305,000
Explanations
A pro forma statement can be defined as one that is sensitive to the assumptions regarding the future, and its accuracy always depends on the reasonable assumptions made. The financial projections were based on the sales year by year in a period of thirty six moths i.e., equivalent to three years. The sale of the app developments products increased year after year. This was attributed to the advertisements that were made in marketing. Many individuals became familiar with the app developments and had to buy the products thus boosting the sales of the company. The financial projection shows that the company will indicate a success.
Break even analysis
Fixed costs
Variable costs
Selling price
Explanation
Sales volumes calculation is used to cover the costs. When the sales are low, the company has increased chances of lacking profits but a higher volume of sales will generate profits. The break even analysis concentrates on the relationship between the fixed cost, the variable cost and the selling price. The fixed costs are analyzed as short term while the variable costs relate to the production units. The sum of all variable costs and the units sold gives the total production costs.
Return on investment
Investment
HK$ 790,000
Annual return
HK$ 130,000
ROI
16.5%
The investment of the business needed HK$ 790,000. The figures indicate that the business could generate HK$ 130,000 per annum and therefore the return on investment will be 16.5%. The expected returns indicate that the company will run at a profit if it materializes. A business investment which has higher ROI is the best choice and decision for the company.
ROI = gains- investment/investment costs
References
Ross, Stephen; Waster field, Randolph W. (2008). Corporate Finance. The McGraw-Hill. p. 64
Meigs, Walter B. and Robert F. Financial Accounting, 4th ed. (McGraw-Hill Book Company, 2001) pp. 187-188
