pak shoes manufacturing

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PAK SHOES MANUFACTURERS LTD

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Preparedfor

Mr Sadir Zaidi

Director

Faculty of Life Sciences Business Administration (FLSBM)

Prepared by

Mr Qaisar Hussain MBA (Life Sciences)

Mr Fahad Khan MBA (Life Sciences)

Mr Ali Tehseen MBA (Life Sciences)

Mr Usman Zia MBA (Life Sciences)

Mr Muhammad Rizwan MBA (Life Sciences)

Faculty of Life Sciences Business Administration

Date of Submission

June 8, 2009

University of Veterinary and Animal Sciences (UVAS) Lahore

23-Out Fall Road

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Lahore

June 8, 2009

Mr Sadir Zaidi

Director (FLSBM)

UVAS

23-Out Fall Road

Lahore

Dear Mr Zaidi

Thank you very much for giving us an opportunity to prepare a report on

PAK SHOE MANUFACTURERS LTD

And we discussed about the business in this report.

Preparing this project is a great learning experience for us, and we once again thank you forproviding us this opportunity.

Yours sincerely

(UVAS)

Mr Qaisar Hussain MBA (Life Sciences)

Mr Fahad Khan MBA (Life Sciences)

Mr Ali Tehseen MBA (Life Sciences)

Mr Usman Zia MBA (Life Sciences)

Mr Muhammad Rizwan MBA (Life Sciences)

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To our lovely parents

F.K

Q.H

M.R

U.Z

A.T

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First of all thank to whom who is most merciful and kind to all of his creations with out any

discrimination and who make us able to Prepare this project

In the end Special thanks to our parents and teachers specially Mr. ZAIDI(Our corporate finance

instructor) whom unlimited efforts are there in our personality

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TABLE OF CONTANTS

Contents

Contents ..................................................................................................................... 7

EXECUTIVE SUMMARY ................................................................................................. 8

KEYS TO SUCCESS ...................................................................................................... 9

COMPANY SUMMARY ................................................................................................. 10

PERFORMA INCOME STATEMENT .............................................................................. 13

OPERATING CASH FALLOW ....................................................................................... 15

NET PRESENT VALUE ................................................................................................ 16

PAY BACK PERIOD ..................................................................................................... 17

DISCOUNT PAY BACK ................................................................................................ 18

IRR ............................................................................................................................ 19

PROFITABILITY INDEX ............................................................................................... 20

SCENARIO ANALYSIS ................................................................................................. 21

SENSITIVITY ANALYSIS .............................................................................................. 22

BREAK EVEN ANALYSIS ............................................................................................. 24

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EXECUTIVE SUMMARY

Pakistan Shoe Manufacturers (PSM) is the only manufacturer and retailer at Jaranwalaroad. This particular area badly needs an upscale shoe store for everyone because thecurrent stores have an inadequate selection. Currently, people that need a special pairof shoes often must travel up to main city (Faisalabad) to find the right shoes.

PSM will sell its products on a retail store located at Jaranwala Road also by selling

different retailers of adjoining areas. PSM will have an unmatched, extensive selectionof different shoes. Generally, the size of PSM selection is cost prohibitive due to all thedifferent sizes that must be stocked per style. PSM has a unique business model thatallows this company to have an extensive selection at the cost of only stocking one sizeper style. This is accomplished through a special relationship with the retailers soPSM can deliver a customer's needed size within two days .

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KEYS TO SUCCESS

The key to success is to meet the demand for an upscale shoe store with a wideselection and focused customer attention.

1.2 Objectives

The objectives for the five years of operation include:

1. To create a product-based store company whose primary goal is to exceedcustomer's expectations.

2. To develop a start-up business, surviving off of its own cash flow.3.

1.3 Mission

PSM mission is to provide Jaranwala road and adjoining areas with an upscaleselection of shoes and outstanding customer service. We exist to attract and maintaincustomers. When we adhere to this maxim, everything else will fall into place. Ourservices will exceed the expectations of our customers.

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COMPANY SUMMARY

PSM is an upscale shoe company located in Jaranwala road. PSM will be able to offer awide selection because they will typically only have one size available per style. Thisone size is used as a demonstrative model. All other sizes are available within two days.

2.1 COMPANY OWNERSHIP

PSM is a partnership (Business) owned by:

2.2 START-UP SUMMARY

PSM will incur the following start-up costs:

Computer system with CD-RW, printer, Microsoft Office, QuickBooks Pro, andPOS software. POS terminal/cash register. Back office desk and chair. Front of store counter. Shelving racks. Display racks. Chairs, mirrors. Production Machine. Building.

PRODUCTS

PSM will sell upscale shoes. The general categories of shoes that will be sold are:

Sandals Stylish work shoes Dress shoes Stylish shoes

PSM will strive to have largest selection of shoes at Jaranwala Road. PSM willaccomplish this by having one size per style in stock as a demonstration model.Passion Soles will then order the style in the needed size and it will arrive within twodays.

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PRICE

The price of the PSM shoes will be economical so that a person with medium salary caneasily buy the PSM shoes because the company is providing good quality andfashionable shoes for the middle class people.

PROMOTION

PSM will promote its products

On cable TV adds.

By distributing pamphlets on different public places.

Visits to retailers of the adjoining areas.

PLACEMENT

PSM will sell its product

On Retail store at Jaranwala road.

To retailers of adjoining areas.

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MARKET ANALYSIS SUMMARY

PSM will be targeting two distinct groups -professional workers and housewives. Whileboth groups are interested in dress shoes, the professionals will also be looking forfashionable shoes they are able to wear with their business attire. The housewivesmight be looking for fashionable but more casual shoes.

MARKET SEGMENTATION

PSM is targeting two different population segments.

Professionals: these are full-time working professional people. They typicallyearn more than Rs250000k. They will purchase shoes for the workplace, as well asfor leisure time. Housewives: The household income of this group is Rs300000k.

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PERFORMA INCOME STATEMENT

Income Statement2010 2011 2012 2013 2014

Sale 2580000 3300000 5100000 6200000 7000000

CGS 600000767441.

9 1186047 1441860 1627907

G P 1980000 2532558 3913953 4758140 5372093EXPENSES

Marketing 200000 250000 300000 300000 100000

Renovation 250000 100000 140000 140000 140000

Wages 486000 486000 702000 702000 702000

Transportation 240000 240000 360000 400000 400000

Utilities 180000 200000 272000 290000 315000

DEPERCIATION

Building 300000 300000 300000 300000 300000

Machine A 160000 160000 160000 160000 160000

Machine B 0 0 300000 300000 300000

EBIT 164000796558.

1 1379953 2166140 2955093

Taxes 29520 143380.

5

248391.

6

389905.

1

531916.

7

Equipment sold 700000

Taxes 126000

Salvage Value 574000

Net Income 134480 653177.7

1131562 1776234 2997176

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OPERATING CASH FALLOW

OCF= Net Income + Depreciation

Year 1= 134480+460000

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Year 2= 653177.7+460000

Year 3= 1131562+760000

Year 4= 1776234+760000

Year 5= 2997176+760000

Years 0 1 2 3 4 5

OCF -3000000 594480 1113178 1891562 2536234 3757176

NET PRESENT VALUE

= - initial Value + Present Value of Future Cash Flows

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= -3000000 + ((594480/1.35) + (1113178/1.35^2) + (1891562/1.35^3)

+ (2536234/1.35^4) + (3757176/1.35^5))

= -3000000 + 3421443.7

NPV = 421443.7

PAY BACK PERIOD

Year 1 = -3000000 +594480= -2405520

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Year 2 = -2405520 + 1113178 = -1292342

Year 3 = -1292342 + 1891562 = 1292342/1891562

= 0.68

So the pay back period is 2.68 years

DISCOUNT PAY BACK

Year 1 = -3000000 + (594480/(1.35)) = -2559644.444

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Year 2 = -2559644.444 + ( 1113178/(1.35^2)) = -1948847.19

Year 3 = -1948847.19 + (1891562/(1.35^3)) = -1180036.74

Year 4 = -1180036.74 + (2536234/(1.35^4)) = -416457.26

Year 5 = -416457.26 + (3757176/(1.35^5)) = 416457.26/421443.72

=.99

So the Discounted pay back period is 4.99 years

IRR

=- initial value + PV of Future Cash Flow/ (1+IRR) ^t

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= -3000000 + (((594480/1.406) + (1113178/1.406^2) + (1891562/1.406^3)

+ (2536234/1.406^4) + (3757176/1.406^5))

So IRR is 40.60%

PROFITABILITY INDEX

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= PV of Future Cash Flow / initial Cost

= 3421443.7/3000000

SCENARIO ANALYSIS

Base Case Upper Lower

Best

Case

Worst

Case

Unit 10950 11498 10402 11498 10402

Price 320 336 304 336 304

variable cost 112 117.6 106.4 106.4 117.6

Fixed cost 736000 772800 699200 699200 772800

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initial cost 3000000

Required Return

Rate 35%

Change either Side 5%

Annuity Factor 2.219961423

Income

Statement

Base Case Best Case Worst Case

Sale 3504000 3863328 3162208

V.Cost 1226400 1223387.2 1223275.2

F.Cost 736000 699200 772800

Depreciation 700000 700000 700000

EBIT 841600 1240740.8 466132.8

TAX (18%) 151488 223333.34 83903.904

NET INCOME 690112 1017407.5 382228.9

OCF 1390112 1717407.5

108222

8.9

NPV 85995 812578 -597494

SENSITIVITY ANALYSIS

5% increase in unit

Case

Unit Price Per

Unit

Variable

Cost

Fixed Cost

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11498 320 112 736000

INCOME STATEMENT

SALE 3679360

V. Cost 1287776

F. COST 736000

Depreciation 460000

EBIT 1195584

Tax 215205

NET INCOME 980379

OPERATING CASH FALLOW

OCF= Net Income + Depreciation

= 980379 + 460000

= 1440379

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Net Present VALUE

NPV = -3000000 + (1-(1/1.35^5))/(.35)*1440379

= -3000000 +(2.219961423)(1440379)

= -3000000 + 3197585.814

= 197585.8

Percentage Change:

= Change in NPV / Change in Unit Sold

Change in NPV= 197585.8-85995 /85995

= 1.297463

Change in Unit Sold = 11498-10950/10950

= .050046

Percentage Change = 1.297463/0.050046

= 25.92558

Due to increase in one unit the NPV will increase to 25.92558

BREAK EVEN ANALYSIS

Cash Break Even Point

Q= (FC+OCF)/(P-V)

Q=(736000+0)/(320-112)

Q= 3538 Units

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Accounting Break Even Point

Q=(FC+D)/(P-V)

Q=(736000+460000)/(320-112)

Q= 5750 Units

Financial Break Even Point

Q= (FC+OCF)/(P-V)

Q= (736000+1390112)/(320-112)

Q= 10222Units

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