The topic for this particular paper revolves around the financial analysis and advice or breakdown provided to a chosen individual who is looking to invest in is business by borrowing a large sum of money (i.e. $100,000) at the interest rate of 8% per annum. The paper provides statistical analysis and summary.
Financial Analysis
Assumption Use in the Financial Plan
Additional Assumption in Sensitivity Analysis
FIRST TWELVE MONTH CASHFLOW RESULT
HOW MUCH SHOULD NORMAN PAY FOR THE EXCLUSIVE RIGHT?
FORECASTED CASHFLOW FOR THE NEXT FIVE-Year
CASH FLOW WITH A LOAN AT 8% PER ANNUM
SENSITIVITY ANALYSIS
THE SALES PRICE AND kg SALES GRADUALLY INCREASE AT 5%
THE SALES PRICE PER kg INCREASE AT 10% BUT THE UNIT SALES REMAIN AT 5%.
Investment Value Using At Discounted Rate 5%
Best Financial Plan and Option
Assumption Use In The Financial Plan
Additional Assumption in Sensitivity Analysis
It is further assumed that price will increase gradually at the rate of 8% per annum and sales will increase at 7% per annum.
For the purpose of analysis, both the sales price and Kg sales will gradually increase at 5%.
Another scenario will be that the sales price per Kg increase at 10% but the unit sales remain at 5%.
Best-case scenario assumption, Norman did not exercise his plan to borrow $100,000 at 8% per annum. We will look into what is the cash flow outlook if Norman did not exercise this option.
5. Norman believes that he could borrow up to $100,000 at 8% per annum. As an additional assumption, if Norman takes $100,000 loan, Norman will pay this loan for the first five years of the company operation. We will look into what is the cash flow outlook if Norman exercises this option.
6. We also assume that Norman will exercise the option to hire an assistant for $1,000 per month from the beginning of his online operation.
7. We also assume Norman will pay all payable tax in the year precedent to the year of tax payable.
8. We also assume that charges such as rental will remain constant throughout the period.
9. Norman plans to order from Belgium every two weeks and intends to maintain a minimum stock of four weeks' worth of sales to ensure that he will be able to supply a suitable range of products to customers.
10. Exchange rate between Euros to U.S. dollar will remain at $1.355.
FIRST TWELVE MONTH CASHFLOW RESULT
The forecast cash flow for the first twelve month showed Norman can bring excess cash in after paying the tax.
HOW MUCH SHOULD NORMAN PAY FOR THE EXCLUSIVE RIGHT?
Based on these considerations
1. To maintain the maximum cash flow available to bring to the second year of operation and
2. after taking into consideration the amount of cash flow generated during the first year,
We suggest the amount of right payment to BelgChoc should be between $100,000 and $400,000. For the rest of the case study we assume Norman pays $100,000.
If Norman decides to pay $100,000 the excess cash for second year operation will be $309,073 but if he decides to pay $400,000 the excess cash for second year will drop to $9,073.
FORECASTED CASHFLOW FOR THE NEXT FIVE-Year
It is further assumed that price will increase gradually at the rate of 8% per annum and sales will increase at 7% per annum. Based on this additional assumption final cash flow balance will be $330,000 per year after tax cash flow value.
CASH FLOW WITH A LOAN AT 8% PER ANNUM
CASH FLOW WITH A LOAN AT 8% PER ANNUM (Contd..)
As an additional assumption, if Norman takes $100,000 loan, Norman will pay this loan for the first five years of the company operation. Based on the above forecast, yearly cash flow balance will gradually decrease for the first five years. Cash flow balance is expected to increase after the fifth year of operation.
SENSITIVITY ANALYSIS
Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or system (numerical or otherwise) can be apportioned to different sources of uncertainty in its inputs [Saltelli, 2008]. Saltelli also pointed out that sensitivity is a related practice in uncertainty analysis, which has a greater focus on uncertainty quantification and propagation of uncertainty. Ideally, uncertainty and sensitivity analysis should be run in tandem.
We will look at the sensitivity analysis on sales and demand effect to the cash flow outcome based on the following factors
1. For the purpose of analysis, both the sales price and kg sales will gradually increase at 5%.
2. Another scenario will be that the sales price per kg increases at 10% but the unit sales remain at 5%.
THE SALES PRICE AND kg SALES GRADUALLY INCREASE AT 5%
If both sales price and demand remain 5% per annum, the cash flow balance will slowly decrease towards the fifth year of operation. This is the result of a constant rate in administrative expenses but the gradual increase in cost of sales. As a result the cash flow shrinks toward the fifth year of operation.
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