sfm final project
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INSTITUTE OF BUSINESS MANAGEMENT
STR TEGIC FIN NCI L M N GEMENT REPORT ON
F ST FOOD REST UR NT
SUBMITTED TO Sir Faisal Dhedhi
DATE OF SUBMISSION 9th
August 2014
GROUP MEMBERS
Asma Sikander
Shoaib Rizvi
Waleed Ahmed
Zohra Hanif
2014
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ACKNOWLEDGEMENT
This report is basically on launching a new business and checking its feasibility that whether
it would be profitable for us in both short run and long run. It has been prepared as a part of
the course of STRATEGIC FINANCIAL MANAGEMENT.
We would like to thank our Strategic Financial management faculty Mr. Faisal Dhedhi for
his guidance and help and by providing us the opportunity to work on this project and to let
us practically understand that how a new business can be launched by checking its feasibility
and detailed financial analysis.
This report has been very instrumental in applying the theoretical and numerical concepts
and learning the practical aspects of Strategic Financial Management.
Mr. Faisal Dhedhi demonstrated the real existence of the course, providing us with practical
examples of different companies and clarifying our concepts of how the actually business financial analysis is done.
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LETTER OF TRANSMITTAL
August 09, 2014
Mr. Faisal Dhedhi
Instructor of Strategic Financial Management
Institute Of Business Management
Karachi.
Respected Sir
Subject: Report On Fast food Restaurant Pre- Feasibi li ty F inancial Analysis
The group members prepared a report on launching a new business of fast food restaurant in
which a detailed financial analysis is made about whether the business would lead to a
success or failure both in the short run as well as in the long run.
Thank you for giving us the opportunity to prepare a report in which we had an idea of how
actually a new business is setup by analyzing it through different financial requirements.
Asma Sikander
Shoaib Rizwi
Waleed Ahmed
Zohra Hanif
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Table of Contents
EXECUTIVE SUMMARY ............................................................................................................ 5
INTRODUCTION .......................................................................................................................... 2
BRIEF ABOUT THE PROJECT ................................................................................................ 2
WINDOW OF OPPORTUNITY ................................................................................................ 2
INDUSTRY ANALSIS ............................................................................................................... 3
FUTURE OF THE INDUSTRY ..................................................................................................... 4
OUR BUSINESS DETAILED ANALYSIS ................................................................................... 4
SWOT ANALYSIS ........................................................................................................................ 6
COSTING ....................................................................................................................................... 7
PROJECT INVESTMENT ......................................................................................................... 7
PRODUCT MIX ......................................................................................................................... 8
MACHINERY AND EQUIPMENT ......................................................................................... 10
FURNITURE ............................................................................................................................ 10
LAND REQUIREMENT .......................................................................................................... 11
STAFFING ................................................................................................................................ 11
MISCELLANEOUS COST ...................................................................................................... 12
VARIABLE COST ....................................................................Error! Bookmark not defined.
FINANCIAL ANALYSIS ............................................................................................................ 13
ASSUMPTIONS ....................................................................................................................... 13
INCOME STATEMENT .......................................................................................................... 14
BALANCE SHEET................................................................................................................... 15
CASH FLOW STATEMENT ................................................................................................... 16
COMMON SIZING ANALYSIS.............................................................................................. 17
RATIO ANALYSIS .................................................................................................................. 18
DUPONT ANALYSIS .............................................................................................................. 18
CAPITAL BUDGETING .......................................................................................................... 19
OVERALL DECISION AND COMMENTS ............................................................................... 19
CONCLUSION ............................................................................................................................. 20
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1. EXECUTIVE SUMMARY
In this report our main aim to analyze our new business of fast food in which we will be
offering different variety of products. through our detailed financial analysis we have
made income statement, balance sheet, cash flow statements and capital budgeting
through which we would be analyzing that out business would be successful or not and is
it feasible enough for us to launch a business or not. All values are assumption based
realistically. Our target market would be youth as fast food is growing tremendously
these days and people want convenience due to hectic schedules of their lives. Other than
this a brief intro about the industry has been discussed in this report plus a detailed
financial analysis has been made and then in the end our conclusions and decision of
what we have done has been discussed.
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INSTITUTE OF BUSINESS MANAGEMENT | Pre-Feasibility Report (Fast Food Restaurant)
2. INTRODUCTION
In this report, we have basically launched a new business of fast food having variety of
food items offered to the consumers. This report is a pre-feasibility report which would
help us to give an idea about our business launch in terms of planning, setting up andoperating. It is a kind of decision making report that whether this business would be
feasible to open or not and will it be profitable in the long run or not.
3. BRIEF ABOUT THE PROJECT
These days fast food is increasing among youth especially and is almost served at all the
fast food restaurants. This industry is running in profitable terms and would increase to
grow in upcoming years. Food cooked in such restaurants is cooked in bulk beforehand
and kept warm and reheated to order. In Pakistan small individually owned fast food
restaurants have become common and are continuing to grow as well.
4. WINDOW OF OPPORTUNITY
As Fast food is one of the growing markets in Pakistan which changes according to the
lifestyle patterns of the target market as well as the population. These days’ consumers
want to have delicious and tempting food whenever they want to go to some restaurant.
As life is becoming hectic for almost each and every individual in Pakistan, people look
for convenience in terms of getting quick meals rather than spending whole day in
kitchen and preparing for it. Rate of growth in consumer expenditures on fast food is
growing throughout the whole country and is still in the process of growth because of
demand of convenience is rising. Therefore fast food restaurants act as a time saving
mechanism.
Even through observations, it is found that whenever any person is working he or she
wants something to eat along with it like if a person goes for shopping he would stop at a
place to have some fast food and other activities too. Hence growth of fast food has taken
place and still in process to grow.
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INSTITUTE OF BUSINESS MANAGEMENT | Pre-Feasibility Report (Fast Food Restaurant)
5. INDUSTRY ANALSIS
One of the reasons of fast food restaurants in Pakistan is growing because of its
innovation and there are even international franchises which have been opened up like
McDonalds, Burger King, Pizza Hut, Fat burger and other restaurants too. In local there
are Red Apple, Eaton, Hot and Spicy and others. The target market of international
franchises is mostly high income consumers whereas local restaurants target middle and
high level income consumers. Multinational franchises have modified their menus
according to the local tastes.
a) GROWTH OF FAST FOOD OUTLETS IN PAKISTAN
The number of outlets during the last one decade has increased tremendously
because of the demand for convenience and demand of fast food thus making it
accessible and affordable for consumers. Almost local restaurants do not havemuch sitting capacity as compared to international franchises because they are
small in size and most of them are located in malls, office buildings and so on.
b) CONSUMER CENTRIC
Fast food has become popular among the youth because of easy access,
affordability, convenience and now businesses have increased their delivery
services too at low cost. People these days are too much hygiene conscious too so
they want to go to such a restaurant which focuses on cleanliness plus they want
restaurants to provide them with fast and quick services. Therefore now a day’s businesses and restaurants are focusing on these issues through innovation and
how to control these kinds of problems.
c) POPOLATION GROTH
Pakistan is ranked 6th
in terms of total population as its total population at the end
of 2013 was 182,589,000 people, which represents an increase of 3,428,889
people compared to 2012. The male population is greater, with 93,572,561 men,
representing 51.24% of the total, compared to 88,570,033 or 48.50% women.
The growth rate in food consumption has also increased between the ages of 20-
29 years mostly which leads to greater income contribution to the overall income
and thus tends to increase in future as well.
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INSTITUTE OF BUSINESS MANAGEMENT | Pre-Feasibility Report (Fast Food Restaurant)
6.
FUTURE OF THE INDUSTRY
Day by day the economic situation of the country is becoming service oriented and is
focusing on how to meet the needs of the consumers by providing them satisfaction and
convenience facilities and those businesses who are able to do it are having strong sales
growth. With time the population growth is also increasing as mentioned above therefore
income levels are also raising along with difficult and rough and tough work schedules
due to which demand for convenience is also increasing. Fast food businesses therefore
are now moving towards accessibility factor.
Big and large restaurants who are working on full capacity are likely to capture a large part of the market offering other services as well like take away and delivery services. In
this way the demand will rise and the shape of fast food industry will likely to grow in
future.
7. OUR BUSINESS DETAILED ANALYSIS
a) LOCATION
We have planned to launch a new fast food business in Defence at Khayaban-e-Badar because on that road there is only one restaurant and that is Gloria jean’s
whereas in other parts of Defence like Khadda market there are many fast food
restaurants in which the competition would be high.
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b) TARGET MARKET
We would be targeting youth ages from 18-35 as this age bracket are mostly
likely to explore new places and are too much into socializing with friends and
others and are into building relationships.
c) SERVICE STYLE AND FOOD CONCEPT
As it is a fast food business we would be offering burgers, sandwiches, special
products like toasted cheese tomato sandwich, drinks and broast chicken. As
demand for fast food is increasing we tend to offer these products at the initial
phase and then with time we would be increasing our product mix with new and
different items.
d)
SOURCE OF FINANCING
Our source of financing would be 50 percent debt and 50 percent equity. We
would present our business plan to bank for loan to set up a business whereas 50
percent equity would be divided equally among each partner. As we are four
members we would equally invest the amount and then at the end of the year we
would divide the profit and loss equally.
e) LAUNCH STRATEGY
We would advertise our business through different billboards, TVCs, brochures inwhich our target market could become aware of our newly launched business.
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INSTITUTE OF BUSINESS MANAGEMENT | Pre-Feasibility Report (Fast Food Restaurant)
8. SWOT ANALYSIS
STRENGTHS WEAKNESSES
It would be cost advantage as its prices would be
comparatively a bit lower or similar to competitors
If a consumer likes our food than there are chances
that he would come again and in this way loyalty
would be built.
With time financial position would become a
strength
Our pricing would be economical that consumers
are willing to pay
We will train our staff in such a way that
consumers would be happy with the behavior and
service provided to them.
We would be consistent in our quality as there
won’t be any compromise in the quality factor
If any staff misbehaves with the staff
there are chances that consumers would
be disappointed and in this way we can
lose our customers
Because of debt there are chances of
risk and if we are unable to pay off the
debt in case of loss it would be a
disaster for the business
As it is a fast food restaurant therewon’t be too much R&D involved
which would result into low innovation
As it is newly launched business there
won’t be any online webpage created
for online deliveries
Weak management team
OPPORTUNITY THREATS
Acquisitions
Emerging markets and expansion abroad
Innovation at a low scale
Online
Product and services expansion
Diversification into new categories other than fast
food
Competition
Cheaper technology
Economic slowdown
External changes (government,
politics, taxes, etc)
Exchange rate fluctuations
Lower cost competitors or imports
Price wars Product substitution
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9. PROJECT PARAMETES
Business Details
Small Business
No construction, place taken on rentLocated in Defense
Seating arrangement for 30-35 people maximum at a time
Initially Dine in and Take away only
All sales on cash basis i.e. No account receivables
Debt to Equity Ratio 50:50
Restaurant is based on a size of 800 SQ FT
The outlet will operate 7 days a week
There will be 2 peak hours in a day
10. COSTING
10.1. PROJECT INVESTMENT
Below is the total cost of the project
Table 9.1. Project Investment
Description Amount
Renovation Cost 1,000,000
Furniture 550,000
Equipment and Machinery 2,460,000
Rent Deposit 1,440,000
Cash at Bank 300,000
Miscellaneous 240,000
TOTAL 5,990,000
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10.2. PRODUCT MIX
Table 9.2. Product Mix
Broast Cost Price Unit Sales Total Cost Total Sales
Chicken Broast (Qtr.) 70 180 20 1,400 3,600
Chicken Broast (Half)100 300 8 800 2,400
Burgers
Chicken Burger 100 230 20 2,000 4,600
Chicken Cheese Burger 110 250 10 1,100 2,500
Beef Burger 80 200 8 640 1,600
Beef Cheese Burger 90 220 6 540 1,320
Zinger Burger 110 270 30 3,300 8,100
Fries
Normal fries 30 70 30 900 2,100
Masala fries 32 75 20 640 1,500
Mayo fries 45 90 10 450 900Masala vinegar fries 45 80 5 225 400
Sandwiches
Chicken Sandwich 50 80 20 1,000 1,600
Club Sandwich 60 120 15 900 1,800
Chicken Mayo sandwich 70 90 10 700 900
Chicken cheese sandwich 50 85 5 250 425
Toasted cheese tomato sandwich 70 150 5 350 750
Hot Dogs
Normal hot dog 40 100 5 200 500
Hot dog with cheese 60 130 5 300 650Soft drinks
Cola 30 60 30 900 1,800
Sprite 30 60 30 900 1,800
Miranda 30 60 15 450 900
Diet coke 30 60 10 300 600
Diet 7up 30 60 10 300 600
Mineral water (small) 20 50 10 200 500
Mineral water (large) 30 80 10 300 800
TOTAL 19,045 42,645
It is preferable to keep a variety of fast food items in order to capture our target market but at the
initial phase we have planned to keep low variety of fast food items in order to cover our initial
setup costs and achieve profits. Once the fast food business starts to establish a number of items
would be included in the product mix like Chinese, barbeque, pizza and other items.
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10.3. SALES
Following are the expected sales based on certain assumptions and market
research
Table 10.3. Sales
DESCRIPTION DAILY MONTHLY ANNUAL
TOTAL SALES 42,645 1,279,350 15,352,200
TOTAL RM 19,045 571,350 6,856,200
GROSS PROFIT 23,600 708,000 8,496,000
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11. MACHINERY AND EQUIPMENT
Table 11. Equipment and Machinery
Description Units Cost Total Cost
Freezer 2 45,000 90,000
Baking Oven 1 50,000 50,000
Burger Grill 1 300,000 300,000
Broast Machine 2 950,000 1,900,000
Microwave 2 10,000 20,000
Deep Well Fryer 1 60,000 60,000
Working Table & Shelves 2 20,000 40,000
Total 2,460,000
Machinery and equipment is an essential part of any project in order to satisfy their
needs and wants. As through machinery and equipment, quality of food depends.
11.1 MACHINERY MAINTENANCE
As it is important that any equipment in a company needs to be maintained in
order to remain clean and produce the same quality product therefore
maintenance would be done every month of the miscellaneous cost meaning that
yearly it would cost Rs.120000.
12. FURNITURE
Table 12. FurnitureDescription Units Cost Total Cost
Dining Table (2*2) 8 1000080,000
Chairs (14") 40 5,000 200,000
Air Conditioner (2ton) 2 120,000 240,000
Waiting Sofa 2 10,00020,000
Cutlery Set 20 50010,000
Total 550,000
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At one time the restaurant would be able to serve maximum of 30-35 people per day
which would be good enough to avoid any kind of conflict in the initial phase.
13. LAND REQUIREMENT
The land requirement is around 1200 Square Fit as there is no such rush on that road
where we have decided to start up a business.
14. RENTAL BASIS
The proposed premises will be acquired on a rental basis with 6 month deposit and 6
months advance rent after which rent will be payable on a monthly basis. The
monthly rent is PKR 120,000 per month for the proposed fast food outlet.
Table 14. Rent
Description Total Frequency
Rent 120,000 Monthly
15. STAFFING
There are some basic people required to run any fast food restaurant and according
to internal policies of the company following is the monthly requirement of workersalong with their monthly salary.
Table 15. Workers
Description Unit Cost Total Cost
Kitchen Supervisor 1 20,000 20,000
Cook 4 40,000 160,000
Waitors 4 15,000 60,000
Cashier 1 15,000 15,000
Cleaner 1 12,000 12,000
Guard 1 12,000 12,000
Total 279,000
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It is the duty of human resource to control the business therefore as per our project
size the above table shows the distribution of the staff we would wish to hire to
control the management affairs. Cashier would be responsible for handling the
payment.
16.
VARIABLE COST
Table 16. Variable Cost
Description Total Cost
Electricity 100,000
Water 10,000
Gas 70,000
Telephone 15,000
Raw Material Cost (chicken, bun, potato etc.) 571,350
Maintenance Cost 10,000Total 776,350
17. MISCELLANEOUS COST
After all other cost there is some kind of miscellaneous things required in every
business. In fast food business following are the things required for day to day
activities.
Table 16. Miscellaneous Cost
Description Unit Cost Total Cost
Potato Cutter 2 24,000 48,000
Working crockeryset 2 60,000 120,000
Aprons 4 1,200 4,800
Gloves 10 960 9,600
Table Cloth & Napkins 16 2,400 38,400
Hand Sanitizer 4 1,200 4,800
Kitchen Tissue Roll 6 2,400 14,400
Total 240,000
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18. FINANCIAL ANALYSIS
18.1. ASSUMPTIONS
For our project the following assumptions have been made:
Table 18.1. Assumptions
1 All sales on cash basis i.e. No account receivables
2 Debt to Equity Ratio 50:50
3 Tax Rate are varying (those applicable on a sole proprieter)
4 Increase in Sales 15 % per year
5 Increase in Cost of Raw Materials 10 % per year
6 Increase in Staff Salaries 10 % per year
7 Increase in Utility Expenses 10 % per year
8 Increase in Rent 10 % per year
9 Depreciation of Building, Furniture and Machinery at 10 % Straight Line Method)
10 Food Inventory 3 days
11 Cash initially placed in bank will be 300,000 (liquidity requirements)
12 Interest on Debt is assumed to be 18%
13 Rent will be paid on monthly basis
14 After year 5, Net Profit will increase 10 % annually from previous year
15 Business will continue for a forseeable future
16 Renovation cost will be 1,000,000 for the first year
17 Prepaid Rent Deposit of Rs 1,440,000 will be paid in advance
18 Opportunity cost of capital will be 18.80% (WACC)
The 15% annual increase in revenue is expected to result from a part increase in
population increase and demand for convenience.
As rent would be paid Rs.120000 per month it would be assumed that Rs.1440000 would
be given in advance before the business launches. This amount would include 6 months
deposit and 6 months advance rent. It would increase at a rate of 10% every year because
of the economic indicators and inflationary pressures.
All sales will be made strictly on cash basis. It is not wise to operate a fast food restauranton credit basis.
Source of long term debt finance would be for 5 years at a rate of 18% interest paid
annually. Installments are paid at the end of every year.
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18.2. INCOME STATEMENT
Year 1 Year 2 Year 3 Year 4 Year 5
Sales 15,352,200 17,655,030 20,303,285 23,348,777 26,851,094
less: COGS
Opening Balance - 57,135 62,849 69,133 76,047
Add Purchases 6,913,335 7,604,669 8,365,135 9,201,649 10,121,814
Closing Balance 57,135 62,849 69,133 76,047 83,651
Sub Total 6,856,200 7,598,955 8,358,851 9,194,736 10,114,209
Gross Profit 8,496,000 10,056,075 11,944,434 14,154,042 16,736,885
less: Operating Expenses
Rent 1,440,000 1,584,000 1,742,400 1,916,640 2,108,304
Wages 3,348,000 3,682,800 4,051,080 4,456,188 4,901,807
Electricity 1,200,000 1,320,000 1,452,000 1,597,200 1,756,920
Water 120,000 132,000 145,200 159,720 175,692
Gas 840,000 924,000 1,016,400 1,118,040 1,229,844
Telephone 180,000 198,000 217,800 239,580 263,538
Depreciation 401,000 401,000 401,000 401,000 401,000
Maintenance Cost 120,000 120,000 120,000 120,000 120,000
Subtotal 7,649,000 8,361,800 9,145,880 10,008,368 10,957,105
Operating Income 847,000 1,694,275 2,798,554 4,145,674 5,779,780
Financial Charges (18%) 539,100 463,746 374,827.8 269,904.5 146,095.1
Earnings before Taxes 307,900 1,230,529 2,423,726 3,875,769 5,633,685
Tax (varying slabs) - 65,553 249,152 568,942 1,049,263
Earnings after Taxes 307,900 1,164,976 2,174,574 3,306,827 4,584,421
Earnings after Taxes –
Monthly25,658.33 97,081.36 181,214.51 275,568.90 382,035.12
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INSTITUTE OF BUSINESS MANAGEMENT | Pre-Feasibility Report (Fast Food Restaurant)
18.3. BALANCE SHEET
Projected Balance Sheet Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Assets
Current Assets
Cash at Bank 300,000 533,130 1,599,404 3,585,787 6,598,870 10,765,0
Inventory 0 57,135 62,849 69,133 76,047 83,651
Prepaid
Rent
Deposit
1,440,000 1,440,000 1,440,000 1,440,000 1,440,000 1,440,00
Total Current Assets 1,740,000 2,030,265 3,102,253 5,094,920 8,114,917 12,288,6
Fixed Assets
Equipment
and
Machinery
2,460,000 2,214,000 1,968,000.0 1,722,000.0 1,476,000.0 1,230,000
Furniture 550,000 495,000 440,000 385,000 330,000 275,00
Renovation
Cost1,000,000 900,000 800,000 700,000 600,000 500,000
Total Fixed Assets 4,010,000 3,609,000 3,208,000 2,807,000 2,406,000 2,005,00
Miscellaneo
us Expenses240,000 240,000 240,000 240,000 240,000 240,00
Total Asset's 5,990,000 5,879,265 6,550,253 8,141,920 10,760,917 14,533,6
Equity 2,995,000 2,995,000 3,302,900 4,467,876 6,642,450 9,949,27
Retained Earnings 307,900 1,164,976 2,174,574 3,306,827 4,584,42
Total Equity 2,995,000 3,302,900 4,467,876 6,642,450 9,949,277 14,533,6
Liability
Long Term Liability 2,995,000 2,576,365 2,082,376 1,499,470 811,640 (0)
Total Equity and Liabilities 5,990,000 5,879,265 6,550,253 8,141,920 10,760,917 14,533,6
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18.4. CASH FLOW STATEMENT
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year
Cashflow from Operating Activities
Net Profit 0 307,900 1,164,976 2,174,574 3,306,826.82 4,584,421.435,042,8
57
Add: Depreciation Expense 0 401,000 401,000 401,000 401,000 401,000 401,00Change In Inventory 0 (57,135) (5,714) (6,285) (6,913) (7,605) (92,01
Net Cashflow from Operations 0 651,765 1,560,263 2,569,289 3,700,913 4,977,817 5,351,8
Cashflow from Financing Activities
Receipt of Long-Term Debt 2,995,000
Repayment of Long-Term Debt (418,635) (493,989) (582,907) (687,830) (811,640)
Owner's Equity 2,995,000
Net Cashflow from Financing Activities 5,990,000 (418,635) (493,989) (582,907) (687,830) (811,640) -
Cashflow from Investing Activities
Construction Cost (1,000,000)
Furniture (550,000)
Equipment and Machinery (2,460,000)
Rent Deposit (1,440,000)
Miscelleneous (240,000)
Net Cashflow from Investing Activities (5,690,000) 0 0 0 0 0 0
Net Cash Flow 300,000 233,130 1,066,274 1,986,382 3,013,083 4,166,177 5,351,8
Cash at the Beginning of the Year 0 300,000 533,130 1,599,404 3,585,787 6,598,87010,765,
7
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18.5. COMMON SIZING ANALYSIS
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18.6. RATIO ANALYSIS
18.7. DUPONT ANALYSIS
DuPont Analysis Year 1 Year 2 Year 3 Year 4 Year 5
RoE0.09 0.26 0.33 0.33 0.32
NPM2.01 6.60 0.09 0.17 0.17
Leverage ratio1.78 1.47 1.23 1.08 1.00
DuPont0.33 2.52 0.04 0.06 0.05
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18.8. CAPITAL BUDGETING
19. OVERALL DECISION AND COMMENTS
NPV is positive so we should pursue this project. Our profitability ratios are increasing
year by year which shows a positive sign of starting this project. Return on equity is more
or less similar each year. Debt is decreasing which shows that we are paying the debt on
time.
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INSTITUTE OF BUSINESS MANAGEMENT | Pre-Feasibility Report (Fast Food Restaurant)
20. CONCLUSION
NPV = RKR 18,215,590
IRR = 19%
WACC 18.80%
Payback period = 3.7084 years
PI = 4.04
Therefore we can start up this project because of the above assumptions.