Investigation of a Business Development for a Centre Store in the Business - Essay Example

?Referred Project 2 Introduction The analysis in the sheet was based on financial data that the management of the business projected would be the cost of expanding the business to the Bristol store by renting the adjoining premises. The data involves projections on the cost of fittings and designing, in addition it also includes financial information on the expected income and the maximum income that the stall will be able to generate. In order to understand this report several terms that have been used in the report will be defined below Design costs: these are the costs that will be incurred in redesigning of the premises that will be rented in the expansion Fitting costs: these are the costs expected to be incurred in the installations and purchase of equipments of the premise Investment costs: this is the summation of total design costs and fitting costs Maximum income: this the highest possible earnings that can be earned from the newly rented premises Expected income: these are the actual earning that are expected to be generated from the new premises Build up factor: it is the percentage of the maximum possible income that the managers of the business hope to make in the first few years after start up Cost of sales: these are the expenses that incurred in order for the business make sales and may include cost of raw materials and transportation cost among other costs. Net cash flow: this is the difference between the total expenses and the total income that the business generated; it is the money that the business was left with after paying its expense (Day, 2012, p26). Discount factor: this is the rate at which the management of the business depreciates the capital goods in the premise; the depreciation rate is done on an annual nominal rate Present value of net cash flow: this is the cash flow of the business that has been adjusted for depreciation. The purpose of this report is to analyse the financial viability of expanding the business by renting additional floor space and setting up branded boutiques for brand name such as Maine and Gucci, Principles, Miss Selfridge, Warehouse, Timberland and Calvin Klein among others. Initial conclusion The net present value of the business expansion of Bristol stalls is 1, 399, 500 US dollars for the first three years after start up while the estimated cost of investments in terms of fitting and design total to 900, 000 US dollars. This shows that there is a difference of 499, 500 US dollars, this means that the business will have repaid the start up costs fully and made some significant profit margins despite not operating at the full capacity. According to calculations in the net cash flows that have not been adjusted for depreciation, the figures shows an upward trend which is encouraging as it shows the business will be able to increase its capacity to generate revenue if the trend continues. This will happen despite the increase in most of the other related costs apart from the miscellaneous costs, which are estimated to remain constant throughout the first three years after start up. Therefore, using the financial information generated by the cash flow, it is financially viable for the business to expand its operations by renting adjacent spaces in Bristol store. Sensitivity analysis One of the reasons that informed the above decision is the total costs that would be incurred in running the new business premises, these costs are relatively low as compared to the expected income that the new floor space will generate. The total expenses per quarter in the first year are 433, 375 US dollars, this is below the expected income of 540, 000 US dollars, subtracting these two figures one gets 106, 625 US dollars, which is the residue that remains after the basic expenses have been deducted. If the value of total costs was any figure above 540, 000 US dollars, then the business would have been left with a negative residue. For instance if the total costs were 600, 000 US dollars per quarter, then the residue would have been -60, 000 US dollars which indicate a loss. This would have meant that the business would have to pump extra cash in to the operations of the premises to keep it running or close down altogether. The situation is the same for the remaining quarters of the first year, in the second and third year, the trend will be the same and the only difference will be the expected income, which will rise, and in a similar case, the total costs. The second factor that has informed the decision to encourage the business to rent additional floor space is the discount factor; this is the rate at which the capital investments in the premises depreciate. The discount factor of the business is adjusted at a nominal rate of 10 per cent per annum, which translates to 2.5 per cent quarterly of the total cost of capital goods. This depreciation rate is set at 10, 250 US dollars per every quarter throughout the entire time. The fact that this rate has been set on a straight-line basis makes it easier for the firm to make profits in each quarter, in addition, the fluctuations in the quarterly takings will not affect the amount that is to be charged. The likelihood of a situation whereby the discount factor may cause the company not to be able to make any revenue is unlikely since the discount factor does not affect the sales or the costs; this is the case for all the quarters in the three years. The present value of the net cash flow, which is the net cash flow adjusted for the cost of capital is another factor in the cash flow that shows the expansion of the business will increase its revenue. The figures in the cash flow that show the present value of the net cash flow are increasing every year after the business invests in expansion to the Bristol store, this is expected to rise until the build up factor reaches 100 per cent. This means that despite the increase in costs that are occasioned by increase in the usage of floor space, the revenue generated from the marginal use of the floor space is more than the marginal cost that is associated with its usage. For instance, the present value of the net cash flow per quarter of the first year of operation is 96, 375 US dollars which increases to 136, 875 US dollars in the third year, this shows that the profitability of the investment is increasing therefore the venture can be considered financially viable. However if the case was that for the second and the third years the present value of the net cash flow per quarter was below 96,375 US dollars, then the financial viability of the expansion would be put in to question as it would show declining profitability of the business which in the long-run would become losses. A decline in the present value of the net cash flow per quarter would mean that it is not financially viable for the business to ahead with the expansion project. The likelihood of a scenario where the present value of the net cash flow per quarter declines is only likely if the management of the business puts unfavourable conditions for the people willing to participate in business activities in the new clothing stalls. The net present value for the three years also contribute to the decision of expanding the business since within three years the business would have recovered the initial cost of start up and would have made additional income. In order for the decision of abandoning the expansion project to be made, the net present value must have been a very small figure such that the recovery of the initial cost of set up would take a long time to be realised. However, the likelihood of that happening is minimal since the business will not be operating at full capacity in the first three years. Market intelligence/competition Competition is most likely to come from St Nicholas market and the Woolies indoor market Bristol. These two stores are the most known to have high quality clothes for the high-end consumers, they have a varied selection of designer clothes such as Gucci, Calvin Klein among others. An opportunity that can be capitalised in Bristol is that there is no store that stocks several designers’ clothes within the same building but in different stalls, therefore the business can capitalise on this. Final conclusion The cash flow that the business made in respect to expansion to the Bristol store combined with the market intelligence conducted on clothing market in Bristol, which showed that there are no markets that have several designers displaying their clothes within the same building makes the project of expansion financially viable and likely to attract good returns for the business. References DAY, A. L. (2012). Mastering cash flow and valuation modelling. New York, Pearson Financial Times/Prentice Hall. Read More