Tinkerball hotdogs & Ice-cream Essay Example for Free

Tinkerball hotdogs Ice-cream Essay The purpose of this paper is to perform a case study analysis and provide a solution to the review questions pertaining to different aspects of projection evaluation and, thereby, concluding with recommendations. Mr. Terry Bell is planning to sell ice-cream and hotdogs by acquiring Mr. Jonathan van and other equipment from Mr. Luigi. Mr. Jonathan wishes to sell off his van and has asked Mr. Terry’s services to sell it off. There is a resale price for this van. Mr. Luigi had been in the same business of mobile vending van for almost 10 years and had an accident recently. He wishes to sell off his equipment and supplies at a price to Mr. Terry. Mr. Luigi was selling ice-cream under a franchise agreement with a company Mr. Whippy which will be no longer applicable after completion of 10 years and Mr. Terry shall not be entitled to terms under this franchise agreement. Mr. Terry has been provided with financial data by Mr. Luigi for last 10 years and has been able to draw the cash flows from the operating activities of the business. We will now look at the review questions and provide answers for them: If it is assumed that no cones are wasted the average price per icecream is $8.33 Term 1 2 3 4 5 6 7 8 9 10 Icecream Sales 55,660 37,660 49,880 54,350 57,560 44,350 56,430 57,990 55,320 58,010 Cones 2,783 1,883 2,494 2,718 2,878 2,218 2,822 2,900 2,766 2,901 Icecream 3,340 2,260 2,993 3,261 3,454 2,661 3,386 3,479 3,319 3,481 Franchise Fees 557 377 499 544 576 444 564 580 553 580 Total Payments 6,680 4,520 5,986 6,523 6,908 5,323 6,772 6,959 6,638 6,962 Price : Sales/Payments 8.33 8.33 8.33 8.33 8.33 8.33 8.33 8.33 8.33 8.33 Figures are stated in U.S. Dollars terms Table 1: Average Selling Price of Icecream As we can see from Table 2, the sales of icecream are more revenue generating and the return on investment / cost is higher compared to the sales of hotdogs, therefore, icecream is more profitable. Term 1 2 3 4 5 6 7 8 9 10 Icecream Sales 55,660 37660 49880 54350 57560 44350 56430 57990 55320 58010 Total Payments 6,680 4,520 5,986 6,523 6,908 5,323 6,772 6,959 6,638 6,962 Net Cash Flow 48,980 33,140 43,894 47,827 50,652 39,027 49,658 51,031 48,682 51,048 ROI % 733.23 733.19 733.28 733.21 733.24 733.18 733.28 733.31 733.38 733.24 Hot dogs Sales 21,210 33,320 23,240 22,210 19,990 24,380 20,890 21,990 21,210 24,300 Total Payments 4,772 7,497 5,229 4,997 4,498 5,486 4,700 4,948 4,772 5,468 Net Cash Flow 16,438 25,823 18,011 17,213 15,492 18,894 16,190 17,042 16,438 18,832 ROI % 344.47 344.44 344.44 344.47 344.42 344.40 344.47 344.42 344.47 344.40 Figures are stated in U.S. Dollars terms Table 2: Products Profitability From table 3, it is apparent that the sales of hotdogs are riskier. The rationing is based on the net cash flow from two products. The net cash flow from sales of ice cream are more consistent in terms of increasing trend, however, that from sales of hotdogs has a variant trend and is therefore considered to be riskier. Term 1 2 3 4 5 6 7 8 9 10 Icecream Net Cash Flow 48,980 33,140 43,894 47,827 50,652 39,027 49,658 51,031 48,682 51,048 Change% (32.34) 32.45 8.96 5.91 (22.95) 27.24 2.76 (4.60) 4.86 Hot dogs Net Cash Flow 16,438 25,823 18,011 17,213 15,492 18,894 16,190 17,042 16,438 18,832 Change% 57.09 (30.25) (4.43) (10.00) 21.96 (14.31) 5.26 (3.54) 14.56 Figures are stated in U.S. Dollars terms. Negative figures are in bold parenthesis. Table 3: Risk Evaluation Diversification Diversification is a risk management technique. From table 3 above we can conclude that by diversifying into two products it allowed Mr. Luigi to cater different customers. By doing this it is also noted that if one is product does not perform well in a year then the other product which may be doing comparatively well can reduce the negative impact on the cash flows. For projecting the remaining 3 weekends’ estimates (A) we assume that a constant average growth in figures based on 47 working weekends. This is performed by apportioning 47 working weekends result to total 50 working weekends. Another prudent approach can be adopted (B) where the YoY% change is adjusted for remaining 3 weekends. It is also assumed that franchise fees and license fees are paid at the start of the financial year and will remain the same. Year / Item 9 10 (47 weekends)    Actual Figures x 50/47 (A) Growth Rate   Ã‚  x 50/47 (B) Icecream sales 55,320 58,010 61,713 58,182 Hotdog Sales 21,210 24,300 25,851 24,497 Total Sales 76,530 82,310 87,564 82,679 Cones 2,766 2,901 3,086 2,910 Icecream 3,319 3,481 3,703 3,491 Buns 2,651 3,038 3,232 3,063 Hotdogs 2,121 2,430 2,585 2,450 Vehicle-related payments 2,880 2,660 2,830 2,646 Franchise fees 553 580 580 580 License fees 150 150 150 150 Total payments 14,441 15,239 16,166 15,289 Net cash flow 62,089 67,071 71,398    67,390    Figures are stated in U.S. Dollars terms Table 4: Estimates for remaining 3 working weekends For calculating the average annual rates for both products we assume figures from Table 4 Col B as the cash flow for the last year. Average Annual Growth Rate (AAGR) is ‘the average increase in the value of an individual investment or portfolio over the period of a year’ (Investopedia n.d.). Average annual rate is calculated by taking the arithmetic mean for 2 years. We also assume that cash flows are generated at the end of the financial year. In the first year it is assumed to have 100% growth. All other aspects of investment and setting up business expenses are ignored for the first year. Term 1 2 3 4 5 6 7 8 9 10 Given 10 New Icecream Net Cash Flow 48,980 33,140 43,894 47,827 50,652 39,027 49,658 51,031 48,682 51,048 51,201 Change% 100 (32.34) 32.45 8.96 5.91 (22.95) 27.24 2.76 (4.60) 4.86 5.17 AAGR % 33.83 0.06 20.71 7.43 (8.52) 2.14 15.00 (0.92) 0.13 0.29 Hot Dogs Net Cash Flow 16,438 25,823 18,011 17,213 15,492 18,894 16,190 17,042 16,438 18,832 24,497 Change% 100 57.09 (30.25) (4.43) (10.00) 21.96 (14.31) 5.26 (3.54) 14.56 15.49 AAGR % 78.55 13.42 (17.34) (7.21) 5.98 3.82 (4.52) 0.86 5.51 5.97 Figures are stated in U.S. Dollars terms. Negative figures are in bold parenthesis. Table 5: Average Annual Growth Rates Assumptions: Terry pays Mr. Jonathan the resale value of the van as prescribed by Mr. Joe. Terry pays for repairing of the van to Mr. Joe. Terry pays for van equipment and supplies to Mr. Luigi. Franchise agreement with Mr. Whippy is cancelled. Goodwill from Mr. Luigi business is ignored. Taxes are ignored. License fee is applicable at the same rate for next 10 years. There will be no new competition. There will be no new food regulations. There is no wastage. The demand for ice cream and hot dogs will be stable or growing at steady pace. Sickness or weekends off are ignored. An allowance of Mr. Terry time of 860 hours per year costing at $40 will be considered as cash outflow. Vehicle related expenses are considered to be $2,601, a constant figure, when indicated to be declining in previous years. However, they are extrapolated in the years when increasing based on respective years’ growth rate in these expenses. In the year 4th, 6th and 8th, they are assumed to increase by 22%, 12% and 9% respectively. The figures from Table 4 Col B are considered as base figures. The number of working weekends remains the same i.e. 50. The AAGR for both products are used for estimating future projections. Year / Item 0 1 2 3 4 5 6 7 8 9 10 Purchase Van (2,000) Equipment (1,200) Supplies (50) Repairing Van (2,500) Icecream sales 77,865 77,908 94,039 101,029 92,419 94,401 108,564 107,566 107,704 108,017 Hotdog Sales 43,739 49,609 41,006 38,048 40,323 41,865 39,971 40,315 42,536 45,075 Total Sales 121,604 127,517 135,045 139,077 132,743 136,267 148,535 147,881 150,240 153,092 Cones 3,894 3,896 4,703 5,052 4,622 4,721 5,429 5,379 5,386 5,402 Icecream 4,672 4,675 5,643 6,062 5,546 5,665 6,515 6,455 6,463 6,482 Buns 5,468 6,202 5,127 4,757 5,041 5,234 4,997 5,040 5,318 5,635 Hotdogs 4,374 4,961 4,101 3,805 4,032 4,187 3,997 4,031 4,254 4,508 Vehicle-related payments 2,601 2,601 2,601 3,165 2,601 2,913 2,601 2,835 2,601 2,601 License fees 150 150 150 150 150 150 150 150 150 150 Allowance 34,400 34,400 34,400 34,400 34,400 34,400 34,400 34,400 34,400 34,400 Total payments 55,560 56,885 56,724 57,391 56,392 57,270 58,089 58,291 58,572 59,178 Net cash flow (5,750) 66,044 70,631 78,320 81,685 76,350 78,997 90,446 89,590 91,668 93,914 Figures are stated in U.S. Dollars terms Table 6: Average Annual Growth Rates Net present value is the total value of cash flows from a project discounted at a suitable interest rate. This is a measurement tool used for predicting whether a project will be successful or not. Time Net Cash flow Discount Factor Present Value Net Present Value 0 (5,750) (5,750) 1 66,044 0.952381 62,898.71 2 70,631 0.822702 58,108.64 3 78,320 0.746215 58,443.92 4 81,685 0.676839 55,287.79 5 76,350 0.613913 46,872.49 6 78,997 0.556837 43,988.60 7 90,446 0.505068 45,681.23 8 89,590 0.458112 41,042.16 9 91,668 0.415521 38,090.12 10 93,914 0.376889 35,395.34 480,059 Figures are stated in U.S. Dollars terms Table 7: Net Present Value Conclusion: The NPV of future cash flow projections is positive which implies that the project may be accepted. They are other factors which Mr. Terry should consider before undertaking this business. Mr. Luigi has been in the business for almost 10 years. There is not much regarding his prior business history but he has done well in icecream and hotdogs selling business as well. Expectation to produce the same result by a teacher is somewhat subjective. Mr. Terry is a retired teacher ad has no prior experience of this business and it is assumed that he is in good health which would surely be an important factor for such business. We have assumed that despite of cancellation of Mr. Whippy franchise, Mr. Terry would be able to create good business for icecream and he would be able to purchase his supplies from a reliable source offering competitive prices. Other assumptions made for the above project evaluation can change hence altering the outcome of the project. Additional item which could be added to the above cash flow projections is tax liability and any financing activity which Mr. Terry may require to finance his initial investments.   We have also ignored the goodwill of business which Mr. Luigi has developed over the years. In accounting terms, a value for goodwill is an asset for business and should therefore be paid for to Mr. Luigi as commented by Mrs. Anita. This will be considered as part of initial investment. However, some may argue that Mr. Terry is not using the same name for his business and assumingly will not using Mr. Luigi goodwill for promoting his own business. It is however, likely f or Mr. Terry to enter this business with small investment and try to serve his customers with the same enthusiasm and strength as Mr. Luigi did for last 10 years. A more accurate projection can be made with further detailed information regarding the market and other issues. Finally, these projections will be adjusted once Mr. Terry actually enters this business. List of References Investopedia- A Forbes Digital Company (n. d.) Average Annual Growth Rate (AAGR). [online] available from www.investopedia.com/terms/a/aagr.asp [30 July 2008]   Ã‚  Ã‚  Ã‚  Ã‚   Tinkerbell hotdogs icecreams – Case Study. Financial Analysis Decision Making