Face Care Limited - Case Study Example

? Face Care Limited Business Plan and Face Care Limited Business Plan The objective of this business plan is to describe the aspects of the company such as the mission, vision, core values, plan of operations, and product description. The business plan describes the available sources of capital, investment appraisal techniques, risks associated with capital project evaluation, forecasted cash flows, and sensitivity of the net present value to changes in cost of capital. Company Background Face Care Limited is a company that aims to provide excellent quality men's skin care products. This company will be established after assessing both local and cross-border market. The current skin care producers concentrate mainly on women, where most skin care products are manufactured to cater for women. The primary target market for Face Care Limited constitutes the increasing number of high-profile men who desire to improve their looks and be presentable (Cadogan, 2009). Face Care Limited seeks to target working class men since young professional men make up 59% of the young profession; these people prefer high quality skincare products; this is a great opportunity that the company needs to be tapped. Mission Statement The mission of Face Care Limited is to become the premier provider of oily skin solutions to men. Face Care limited is dedicated to provision of a solution to men whose skins produce a lot of oil due to active oil glands. The products are aimed at regulating and controlling the production of sebum. Vision Face Care Limited’s vision is to be the international leader in the provision of high quality skincare products. Core Values The company’s key values are customer satisfaction, honesty, accountability, and reliability in its operations. The firm will focus on promoting likeability of skin care products among potential customers to increase the market size. This is because customers will buy large quantities of the products if they achieve high utility after using them. Customer satisfaction will be achieved through offering affordable prices and substantial quantity of products. Honesty is a key virtue in any organization, and Face Care Limited aims to create a transparent relationship with both the internal and external environment such as workers and clients. In the event of the Face Care Limited receiving complains concerning any harm caused by the company’s products, the management will be accountable and responsible to bear the consequences (Das, 2010). The initial solution to the problem of defectiveness will involve immediate recall of skin care products from all shelves and stores. Constant delivery of high quality products in the market will make the firm reliable in identifying new market opportunities, and meeting customer needs effectively. Plan of Operations The operational plan comprises of several elements that the company intend to implement in its production in order to achieve the objectives of firm. Proper assessment of vital components such as sales channels, value proposition, key resources, cost structure, revenue streams, key partners, and key operational activities will enable Face Care Limited to widen its market size (Vale, 2006). Capital raised from promotions of the products will act as the revenue stream for the company; this is through our sales channels, for instance, Face Care intends to use its own website for promotional purposes (Cadogan, 2009). A successful business should target customer segments that have working class men models equipped with the skills of marketing. The promoters have developed a Business Model Canvas for Face Care Limited. This is an action plan that the company intend to use once it becomes operational; it will assist the management in dealing with any possible future challenges. The Business Model Canvas consists of solutions on how Face Care Limited will manage its activities to reach out to clients (Douglas & O'Reilly, 2011). It consists of solutions on the emerging challenges in the skin care products industry. Product Description Face Care Limited plans to introduce to the market the Bioorganic Mask as the primary product. The Bioorganic Mask has highly purified absorbent and mineral rich volcanic deposits, and it is set to be unique from those already existing in the market. This is because it has excellent purifying and detoxifying properties for cleansing blocked pores to expose well-refined pores that nourish the skin. The production quantity will increase as the commodity gains popularity in the market through its reputation and customer base (Gollier, 2009). Face Care Limited will focus on the value proposition since the company aims at targeting men with reputation, high integrity, and crystal youths. The packaging decisions are vital for any product that seeks to win customer’s loyalty (Shukla, Kumar & Anu, 2013). Sources of Funds for the Business Borrowing from a Bank The management of Face Care Limited plans to borrow $100,000 from the bank. The company has the collateral and signatories required as guarantors for Face Care Limited to access the loan. The bank has the required liquidity to avail the $100,000 loan required as the starting capital for the business. Face Care Limited has offered to accept the loan at 12% interest per annum. Leased Property Face Care Limited will raise additional capital through using leased property. The company will lease land and buildings costing $390,000 from Property and Merchants Limited. The company is ready to lease the property to Face Care Limited, and initial agreements have been made. Leasing is beneficial because it will provide 100 percent financing, no security or collateral is required, it preserves credit lines, conserves the working capital of the company and increases the purchasing power of the company (Osterwalder, Pigneur & Clark, 2010). Face Care plans to invest the capital from bank loan of $100,000 and the leased property worth $390,000 for ten years. The expected annual cashflows from investment are estimated to be $100,000 for the first five years and $50,000 yearly for the next five years. The company’s required rate of return is 10%. Investment Appraisal Techniques The selected investment appraisal techniques for this business include the net present method, internal rate of return method, and profitability index method. These three methods are classified as the modern methods of capital budgeting. Net present value is the difference between the present value of future cash inflows and the present value of future outflows of a project (Whelan & Meaden, 2012). Face Care Limited has chosen to use net present value as one of investment appraisal techniques because it considers time value of money, does not contract the shareholders’ wealth maximizing goal, and utilises all the cash flows of a project as opposed to traditional valuation techniques. Despite giving conflicting results with other techniques of investment valuation, the net present is reliable and easy to calculate. Internal rate of return method is the rate of return that equates the net present value of a project to zero (Whelan & Meaden, 2012). The company can use either trial and error method or linear interpolation to calculate the internal rate of return. Internal rate of return method gives exact results of the expected cash flows since it integrates the knowledge of net present value. Profitability index is the ration of present value of cash inflows at a required rate of return to the cost of investment (Tiffin, 2005). Profitability index is arrived at by diving present value of cash inflows by cost of investments. This technique is beneficial to Face Care Limited because it considers the time value of money, ranks projects in order of economic viability, gives unique decision criterion and considers all cash flows yielded by the project. Major Risks Associated with Capital Project Evaluation and Mitigation Measures The net present value, internal rate of return and profitability index techniques lead to arriving at similar decisions when applied to single, conventional and independent projects. Various types of projects and circumstances differences may cause ranking difficulties, leading to confusing and contacting results (Al-Ajmi, Al-Saleh & Hussain, 2011). These results can mislead the financial managers to accept economically unviable projects. The situations that could cause inconsistent of results arise under instances of capital rationing and mutually exclusive projects. Managing this risk will require financial managers selecting the projects that deliver the highest unit of inflows per unit of the constraint resource. Forecasted Cash flows and Net Present Value Year FV PVIF10% PV 0 (490,000) 1 (490,000) 1 100,000 0.9091 90,910 2 100,000 0.8264 82,640 3 100,000 0.7513 75,130 4 100,000 0.6830 68,300 5 100,000 0.6209 62,090 6 50,000 0.5645 28,225 7 50,000 0.5132 25,660 8 50,000 0.4665 32,325 9 50,000 0.4241 21,205 10 50,000 0.3855 19,275 Net present value 6,040 Sensitivity of the Net Present Value to Changes in Cost of Capital Let us consider the changes in net present value when cost of capital is changed to 8% and 12% respectively. The results are presented in the table below: Year FV PVIF10% PV PVIF8% PV PVIF12% PV 0 (490,000) 1 (490,000) 1 (490,000) 1 (490,000) 1 100,000 0.9091 90,910 0.9259 92,590 0.8929 89,290 2 100,000 0.8264 82,640 0.8573 85,730 0.7972 79,720 3 100,000 0.7513 75,130 0.7938 79,380 0.7118 71,180 4 100,000 0.6830 68,300 0.7350 73,500 0.6355 63,550 5 100,000 0.6209 62,090 0.6806 68,060 0.5674 56,740 6 50,000 0.5645 28,225 0.6302 31,510 0.5066 25,330 7 50,000 0.5132 25,660 0.5835 29,175 0.4523 22,660 8 50,000 0.4665 23,325 0.5403 27,015 0.4039 20,195 9 50,000 0.4241 21,205 0.5002 25,010 0.3606 18,030 10 50,000 0.3855 19,275 0.4632 23,160 0.3220 16,100 Net present value 6,040 45,130 (27,205) The table shows that when the rate of interest is reduced to 8%, net present value increases from $6,040 to $45,130; this is equivalent to 86.6% increase. When the rate of interest is adjusted to 12%, Net present value drops to -$27,205. The NPV decreases by 550.4%. The rates indicate that the net present value is highly sensitive to changes in cost of capital. Conclusion The business plan highlights the background of Face Care Limited and the financial sources of the initial capital. The company requires $490,000 to begin a manufacturing unit for men’s skin care products. The company has prepared projected cash flows for the first ten years of operation. Investment appraisal techniques that Face care Limited has selected include, net present method, internal rate of return method, and profitability index method. The net present value is highly sensitive to changes in the cost of capital. References Al-Ajmi, J., Al-Saleh, N., & Hussain, H. A., 2011. Investment appraisal practices: A comparative study of conventional and Islamic financial institutions. Advances in Accounting, Incorporating Advances in International, 27(1), 111-124. Cadogan, J. W., 2009. Marketing strategy. London: SAGE. Das, G. A., 2010. Ethics, business, and society: Managing responsibly. Thousand Oaks, Calif: Response Books. Douglas, M., & O'Reilly, J., 2011. Supply chain gain: Benchmarking success. Inbound Logistics, 31(2), 1-13 Gollier, C., 2009. Expected net present value, expected net future value, and the Ramsey rule. Mu?nchen: Univ., Center for Economic Studies. Osterwalder, A., Pigneur, Y., & Clark, T., 2010. Business model generation: A handbook for visionaries, game changers, and challengers. Hoboken, NJ: Wiley. Shukla, P., Kumar, A., & Anu, K. P. B. A., 2013. Impact of National Culture on Business Continuity Management System Implementation. International Journal of Risk and Contingency Management (ijrcm), 2(3), 23-36. Tiffin, R., 2005. Practical Techniques for Effective Project Investment Appraisal. London: Thorogood. Vale, S., 2006. The International comparability of Business Start-up Rates Final Report. Paris: OECD. Whelan, J., & Meaden, G., 2012. Business Architecture: A Practical Guide. 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