Financial viability of the venture using break-even, cash flow, and investment needs
Projected revenue for the venture:
|Customer Inputs||Year 1||Year 2||Year 3|
|Size of Target Market/Population||38000||39900||43890|
|Annual % growth in Target Market||5%||10%||15%|
|Number of expected customers per day (a)||150||215||260|
|Number of working days (b)||255||285||305|
|Projected number of customers visits / year (c=a*b)||38,250||61,275||79,300|
|Revenue||Year 1||Year 2||Year 3|
|Average spend per customer (d)||$30,000||$35,000||$40,000|
|Projected Revenue/Income (c*d)||$1,14,75,00,000||$2,14,46,25,000||$3,17,20,00,000|
Projected costs for the venture/Investment needs:
Start-up costs of the venture:
|Start Up Costs||Year 1||Year 2||Year 3|
|Administration Costs (stationary etc)||$15,000.00||$15,000.00||$15,000.00|
|Technology and Communications (laptop, pc, phone)||$1,00,000.00||$0||$0|
|Equipment and Uniform costs||$1,00,000.00||$20,000||$20,000|
|Projected Start Up Costs||$7,15,000.00||$1,35,000.00||$1,35,000.00|
Fixed costs of the venture:
|Fixed Cost Inputs||Year 1||Year 2||Year 3|
|Initial Costs (signage, tools, fit out, uniforms, furniture etc)||$7,15,000||$1,35,000||$1,35,000|
|Rent/Mortgage on premises||$25,00,000||$25,00,000||$25,00,000|
|Utilities (eg power, phones, water, gas, internet, rates etc)||$1,00,000||$1,00,000||$1,00,000|
|Licensing, royalties or commission (eg software)||$1,20,000||$1,20,000||$1,20,000|
|Accountant and legal fees||$2,00,000||$2,00,000||$2,00,000|
|Setting up the website||$5,00,000||$50,000||$50,000|
|Projected Fixed Costs||$42,55,000||$32,25,000||$32,25,000|
Variable costs of the venture:
|Variable Cost Inputs||Year 1||Year 2||Year 3|
|Costs of production||$ 76,50,00,000||$ 1,22,55,00,000||$ 1,58,60,00,000|
|Brochures and Menu etc.||$2,00,000||$2,10,000||$2,20,000|
|Advertising and marketing and social media||$10,00,000||$5,00,000||$4,00,000|
|Projected Variable Costs||$76,62,10,000||$1,22,62,21,000||$1,58,66,32,000|
Total costs of the venture:
Total costs of the venture for the year will include staff costs, fixed costs and variable costs.
|Year 1||Year 2||Year 3|
|Total Costs (Staff+Fixed+Variable Costs)||$97,24,30,000||$1,54,69,81,000||$2,09,31,17,000|
Based on the above projections, it can be stated that Start-up costs of this venture for first year will be $7, 15,000 as it will be needed for the firm to invest this amount in starting of the venture.
This amount will be needed for the firm to invest in administration, technology and communications, vehicle costs, building costs, equipment and uniform costs and contingency funds (Morris and Daley, 2017).
At the same time, venture will also bear the fixed costs and variable costs related to production, insurance, utilities, licensing, accountant and legal fees, website development and marketing. Total costs for this venture in first year will be $97,24,30,000 that will increase to $1,54,69,81,000 in second year and $2,09,31,17,000 in third year.
Cash flow analysis and break-even point:
|Cash flow Analysis (Profit/Loss)||Year 1||Year 2||Year 3|
|profit (loss) per annum (Revenue – Costs)||$17,50,70,000||$59,76,44,000||$1,07,88,83,000|
|Gross Profit Margin||15.26%||27.87%||34.01%|
|Cash flow cumulative (1-3 Year)|
|Fixed Costs (inc Staff Costs) per $ Revenue||$0.004||$0.15||$0.16|
|Variable Costs per $ Revenue||$0.67||$0.57||$0.50|
|Total Costs per $ Revenue||$0.85||$0.72||$0.66|
|Break Even (Revenue) Y1-Y3||$97,24,30,000||$1,54,69,81,000||$2,09,31,17,000|
|NPV (Discount Rate Assumed 15%)||$1,31,28,07,594|
Based on the above cash flow analysis, it can be determined that the venture will be profitable on investment. It is because the venture will be able to earn the profit from first year even the profit for the first year of starting business will be $17,50,70,000 with profit margin of 15.26% that will increase in second year to $59,76,44,000 with profit margin of 27.87% and in third year to $1,07,88,83,000 with profit margin of 34.01%.
It means there will be increasing cash flows for the new venture on investment. The firm will generate the high and increasing cash flows in each year of the business. The reason is obvious that there will be high demand of the new product Tesla. This demand will increase year by year that will enable the firm to increase its cash flows consistently (Barr and McClellan, 2018).
Breakeven point is calculated by dividing the fixed costs by profits. From this, it is identified that the breakeven point sales will be $97,24,30,000 that will be achieved first year of the business.
At this point, the firm’s profit will be zero as the firm will recover its all costs but will not be in profitable situation. At this point, the revenues and costs of the firm are equal. It shows the effectiveness of this venture for the investment because the firm will be able to recover its costs in first year of the business (Finkler et al., 2017).
Apart from this, Net present value is also determined to evaluate the feasibility of the investment in new venture. Net present value shows the difference between the present values of the future cash inflows and future cash outflows.
Based on this, it can be stated that whether the firm should invest in a project or not. If the amount of the net present value is higher and positive then the firm can invest in that project. It is because it shows that the investment project will be feasible for the investors to get the adequate returns in the investment (Häcker and Ernst, 2017).
In this project, the net present value is calculated $1,31,28,07,594 with the assumption of the 15% discount rate. This value is quite high for the business and also ensures the adequate returns for the investors in investment in the venture. Based on this financial feasibility analysis, it can be determined that this investment can be profitable for the investor as the investment can be done in this venture.
Barr, M.J. and McClellan, G.S., 2018. Budgets and financial management in higher education. John Wiley & Sons.
Finkler, S.A., Smith, D.L. and Calabrese, T.D., 2018. Financial management for public, health, and not-for-profit organizations. CQ Press.
Häcker, J. and Ernst, D., 2017. Investment Appraisal. In Financial Modeling (pp. 343-384). Palgrave Macmillan, London.
Morris, J.R. and Daley, J.P., 2017. Introduction to financial models for management and planning. Chapman and Hall/CRC.