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Nicaragua. We are confident that we will be appreciated as a new style of drink and refreshing for the market.
5.5 Substitutes
These can be chains such as McDonalds, Burger King, or Convenience Stores and Cafes.
Even though, we are not direct competitor for these places, we can acquire some customers.
5.6 Currency Risk
Nicaragua is a country that everything is labeled in dollars, but locals earn in their currency Córdoba, the actual currency exchange is C$22.00 per U$ 1 dollar. This can be an issue for customers, if they have to convert from dollar to Córdoba. This currency problem can extend to the importation of basic product from other countries.
5.7 Regulatory Changes
Political and Economic changes in the country will be always a constant menace; we have to be aware of new regulations, new permits or new fee adjustments in terms of importation.
6. Financial Projection 6.1 Variable Costs
Total Variable costs will depend on the volume of customers that the booth will receive in a fixed period. These costs are calculated based to the common market prices, taking in consideration the average cost of all the beverages in the menu, which are detailed below:
Drinks average cost is calculated based on our drink prices, which is going to be of US$ 1.04.
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rent, advertising and other costs.Table 10 Goodies Booth: Fixed Costs
Description 2012 2013 2014
Salary 13,616 13,616 13,616
Conventional and cellular telephone 240 240 240
Internet Service 480 480 480
Rent 18,000 18,000 18,000
Repairs and Mantenaince 1,200 1,200 1,200
Advertising and promotion 2,400 1,800 1,800
Finacial Expenses 2,638 2,638 2,638
Insurance 1,800 1,800 1,800
Training Expenses 2,000 1,200 1,200
Other Expenses 300 300 300
Total 42,674 41,274 41,274
THREE YEAR PROFORMA FIXED COST BY YEAR
The salaries are already established for 3 years in a row, but if the sales grow we’ll need more staff and we will adapt the salary basis and take out the GM and use that salary for hiring more staff.
The booth won’t have a high expense of cellular phone because it’s going to be a normal cell phone used by the general manager.
The Internet service is estimated based on local tariffs.
The Rent of the booth, which will be of US$1,500 per month, includes the water, electricity and security services. This will be our first concern because the rent is very high and it will be hard to pay during the first months.
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The Advertising expense will be high during the first year, because we are a new product and the advertisement has to be very intensive in order for the people to get to know us.
The Training expenses are also high because the GM will be train outside the country.
6.3 Initial Investment
The Initial Investment is the money a business owner needs to start up a company. It may include the business owner's own money, money borrowed from a variety of sources including family and friends or banks, or money raised from investors. This is not part of the final consumption, and will be used to generate profits. The Goodies booth will require the following assets:
The equipments needed to start the booth area are:
Wood or similar material to create the booth
Sink
Plastic glasses with colorful design and straws
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Table 11 Goodies Booth: Initial Investment
Furniture 1,000
Each booth will need US$15,000 for initial investment and working capital, which will be funded from these two sources:
1. Owner’s capital: US$5,000 to cover working capital and a percentage of the Initial Investment.
2. Bank Loan: US$10,000 with an Interest rate of 10% and for a term of 5 years
Table 12 Goodies Booth: Loan
Principal $10,000
Term in years 5 CLIENT: Goodies Booth
Nominal Interest 10% BANK: Local
Number of payments 5 LOAN Business
1 $1,637.97 $1,000.00 $2,637.97 $8,362.03 0.00
2 $1,801.77 $836.20 $2,637.97 $6,560.25 0.00
3 $1,981.95 $656.03 $2,637.97 $4,578.30 0.00
4 $2,180.14 $457.83 $2,637.97 $2,398.16 0.00
5 $2,398.16 $239.82 $2,637.97 $0.00 0.00
LOAN PRO FORMA.
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6.5 Break Even Analysis
In order to know the optimum volume of sells, where our booth can match the income with the costs and have no gain or loss, we have to calculate the equilibrium point, where fixed costs (FC) in the first year of operation are US$42,674 and US$41,274 for the following years, the average price (P) is $ 1.89 and variable cost (VC) is $ 1.04.
6.5.1 Unit Contribution Margin (CM)
Formula:
CM = P – VC
CM = 1.89 – 1.04 CM = US$0.85
CM ratio = CM / P CM ratio = 0.85 / 1.89 CM ratio = 45%
For every drink the booth sells, it will have US$0.85 in Contribution Margin, which will cover all the fixed cost incurred.
6.5.2 Break Even
I calculated two break even points because during the first year, The Goodies Booth will have higher advertising costs and higher training expenses than the other years of projections where the fixed cost is constant.
First Year of Operation:
Break even (in Sales) = FC = 42,674 = US$94, 887 CM ratio 45%
Break even (in Units) = FC = 42,674 = 50,205 Units P – VC 0.85
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Second and Third year:
Break even (in Sales) = FC = 41,274= US$ 91,774 CM ratio 45%
Break even (in Units) = FC = 41,274= 48,558 Units P – VC 0.85
During the first year of operation, The Goodies Booth will need to sell 50,205 units and 48,558 units during the following years to reach a breakeven point, in term of sales corresponding to US$94, 887 and US$ 91,774.
Table 13 Goodies Booth: Breakeven Analysis
Drinks Total Sales Units
Average price $1.89 $1.89
Average cost $1.04 $1.04
Profit Margin $0.85 $0.85
% Profit Margin 45% 45%
Fixed cost 1 year $42,674 $94,887.73 50,205 Fixed cost 2 - 3 years 41,274 $91,774.79 48,558
BREAK EVEN ANALYSIS
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TOTAL OF COST OF GOOD SOLD 62,805 114,304 138,484
GROSS PROFIT 51,386 93,522 113,305
OPERATING EXPENSES
Salary 13,616 13,616 13,616
Conventional and cellular telephone 240 240 240
Internet Service 480 480 480
Rent 18,000 18,000 18,000
Repairs and Mantenaince 1,200 1,200 1,200
Advertising and promotion 2,400 1,800 1,800
Finacial Expenses 2,638 2,638 2,638
Insurance 1,800 1,800 1,800
Training Expenses 2,000 1,200 1,200
Others Expenses 300 300 300
Depretiation 2,667 2,667 2,667
TOTAL OPERATING EXPENSES 45,341 43,941 43,941
INCOME BEFORE INTERETS AND TAXES 6,044 49,581 69,364
INTEREST EXPENSES 1,000 836 656
INCOME BEFORE TAXES 5,044 48,744 68,708
INCOME TAXES (30%) 1,513 14,623 20,612
NET INCOME 3,531 34,121 48,096
GOODIES BOOTH
INCOME STATEMENT PROJECTION ENDED OF DECEMBER 31 OF EACH YEAR
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6.7 Cash Flow and Net Present Value Analysis 6.7.1 Cash Flows
2011 2012 2013 2014
Beverage Revenues 0 114,190 207,826 251,789
Total cash Receipts 114,190 207,826 251,789
Cash Available from Financing
Owner Investment 5,000
Short Term Loan 10,000
Total From Financing 15,000
Total Cash Available 15,000 114,190 207,826 251,789
Cash disbursements Cost of good sold
Beverage 0 62,805 114,304 138,484
Cost of sell and administrative
Salary 0 13,616 13,616 13,616
Conventional and cellular telephone 0 240 240 240
Internet Service 0 480 480 480
Rent 0 18,000 18,000 18,000
Repairs and Mantenaince 0 1,200 1,200 1,200
Advertising and promotion 0 2,400 1,800 1,800
Finacial Expenses 0 2,638 2,638 2,638
Insurance 0 1,800 1,800 1,800
Training Expenses 0 2,000 1,200 1,200
Others Expenses 0 300 300 300
Total Cash Disbursements
Operating Expenses 0 105,479 155,579 179,758
Other Application on Cash
Funiture 1,000
Equipment 5,000
Others Equipment 1,000
License and Permit fees 3,000
Total Other Applications 10,000 0 0 0
Principal and Interest Payments
Principal 0 1,638 1,802 1,982
Interest 0 1,000 836 656
Total Principal and Interest expenses 0 2,638 2,638 2,638
Total Cash Disbursements 10,000 108,117 158,217 182,396
Ending Cash Position 5,000 6,073 49,609 69,393
Starting Cash Position 0 5,000 11,073 60,683
Accumulated Cash Flows 5,000 11,073 60,683 130,075
CASH FLOWS STATEMENT PROJECTION GOODIES BOOTH
ENDED OF DECEMBER 31 OF EACH YEAR
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6.7.2 Net Present Value Analysis
The Net Present Value is a measure to determine whether a prospective investment or project will be profitable or not.
NPV formula:
CFo = Initial Investment.
CFt = Cash Flows.
r = Discount Rate.
t = time
Table 14 Goodies Booth: Net Present Value and Discount Rate
YEAR 0 1 2 3
CASH FLOWS - 15,000 6,073 49,609 69,393
NPV $77,393.66
DISCOUNT RATE 16.69%
Based on the cash flow projections and calculating the NPV, it can be determined that this project will be profitable. The Goodies booth has a NPV of US$77,393.66 which indicates that the project is feasible and a Discount Rate of 16.67% which is already established by the Central Bank in Nicaragua.
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Period Initial Investment Payback Balance Cash Flow 0 15,000.00 15,000.00 0
1 8,926.81 6,073
6.8 Recovery Period of Investment (Payback)
The payback period refers to the period of time required for the return on an investment to
"repay" the sum of the original investment. The payback period that will take for the Goodies Booth to repay the Initial investment of US$15,000 is 1 year. According to this calculation is a good investment because I will get my initial investment at the 1st year, and I could start reinvesting or doing the other booths in the following years.
Table 15 Goodies Booth: Payback Balance
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