DECEN

T
GARM
ENT
COLLE
CTION
PREPARED FOR:
Mr. Sadir Zaidi
Instructor: Corporate Finance

PREPARED BY:
Touqeer Ahmed Yasir Ali Bhatti Abdul Mounam
Roll # 63 Roll # 52 Roll # 39

Farhana Safdar Hina Arif

Roll # 51 Roll # 46

MBA (Life Sciences)

Semester II
Section (B)
Department of Economics and Business Management

UNIVERSITY OF VETERINARY AND ANIMAL SCIENCES

(UVAS), LAHORE

DATE OF SUBMISSION:
June 8, 2009
Acknowledgemen
t

We would like to thank following people for their

invaluable help

Mr. Sadir Zaidi who is always there to guide

and help us;

Mr.Ali Khalid for suggesting useful website;

Our class fellows to give about much

important information about boutique’s
business;

Sir Usman Qazi Who encourage us to work late night to

complete this report.
 EXECUTIVE SUMMERY
SUMMARY

Dear Mr. Sadir Zaidi

Thank you very much for giving us an opportunity to prepare a report on such an
interesting topic. We learn a lot by this report.

We planned the business of Gents Boutique, where we will design and stitch the
different types of cloths for people having various choices . With an initial investment
of Rs20,00,000/- we planned to start a reasonable and attractive gents boutique business
at MM Alam Market. The location plays a very important role in the sell volume, that’s
why in LAHORE we chosen MM ALAM MARKET for our out-let.

Feasibility reports helps us to analyze various financial aspects of business to start and
proceed it in a better way. To use our money in a better way that gives us reasonable
return on our investment. We have prepared a feasibility report , by working in a group
of for about two months. This report shows financial data to initiate business total
projected cash outflows and cash inflows ,payback period, Discounted payback period,
NPV ,ARR, IRR, PI and other tools to say yes or no to the project. And scenario
analysis, sensitivity analysis that shows the working of the project in various changing
conditions.

With the help of various financial instruments and following financial rules we analyzed
the project and finalized our decision for acceptance of the project.
Contents
INTRODUCTION.................................................................................................................................3
Tag Line:...........................................................................................................................................3
Mission Statement:............................................................................................................................3
Boutique Business:............................................................................................................................3
Objectives:.........................................................................................................................................3
Financial Objectives:.....................................................................................................................4
Non-Financial Objectives:.............................................................................................................4
Total Project Investment:...................................................................................................................4
Location of Boutique:........................................................................................................................4
Raw Material:....................................................................................................................................4
Products.............................................................................................................................................5
Key Success Factors:.........................................................................................................................5
Total Investment....................................................................................................................................6
Total Investment....................................................................................................................................6
PRO FORMA INCOME STATEMENT...............................................................................................6
Variable Cost.....................................................................................................................................7
Fixed Cost:........................................................................................................................................8
Total Cost..........................................................................................................................................8
Depreciation......................................................................................................................................8
Interest Paid to Bank..........................................................................................................................8
Projected Cash Flows, Friends Boutique...............................................................................................9
INVESTMENT CRITERIA................................................................................................................11
NET PRESENT VALUE (NPV).....................................................................................................13
PAY BACK PERIOD......................................................................................................................14
DISCOUNTED PAYBACK PERIOD.............................................................................................15
AVERAGE ACCOUNTING RETURN..........................................................................................16
INTERNAL RATE OF RETURN............................................................................................................17
PROFITABILITY INDEX..............................................................................................................18
SCENARIO ANALYSIS....................................................................................................................19
INCOME STATEMENT.................................................................................................................20

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Operating Cash Flow (OCF)............................................................................................................20
Present Value of Future Cash Flow.................................................................................................21
Net Present Value............................................................................................................................21
Sensitivity Analysis.........................................................................................................................22
Break even analysis.........................................................................................................................24
II) Cash Break Even........................................................................................................................25

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 INTRODUCTION
Tag Line:

Mission Statement:
“Satisfying the customers by providing them with high quality stuff and with
the better and unique designs.”

Boutique Business:
Clothing is a beautiful visual demonstration of the social and emotional needs
of the people wearing it. It also portrays in a clearly understood visual manner, what people
of different culture and styles want socially.

In a boutique business, the specifications and descriptions of the designs and

clothes are so general that they can fit more than one costume, which actually are quite
different in nature from each other and this is solely dependent on the taste of the people.

In reference to Pakistan, the boutique business is quite in vogue but scattered

and unrecognized. However, there is a massive potential in this field, if one has the ability to
design and market his/her products through introducing innovative designs.

Furthermore, there is huge export potential in this sector, as the demand for
Pakistani dresses, especially in countries like UAE, USA, and UK is massive due to a high
number of Pakistani expatriates who have settled in these countries.

Objectives:
There are two types of objectives

 Financial Objectives
 Non-Financial Objectives

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Financial Objectives:
 Increase in profit margin up to 5% per year
 To open at least 4 new outlets in next 5 years in different cities of Pakistan

Non-Financial Objectives:
 To be one of the leading boutiques of Pakistan
 Provide customer with variety of new collection
 Satisfy customers and employees equally

Total Project Investment:

The total investment made to start the boutique is Rs. 2,000,000.

Location of Boutique:
The selection of location is very important for the commencement of any new
business. By looking our target market we have decided to open this boutique on MM Alam
Market .

Raw Material:
Raw material required for such type of business includes;

Fabric:

Fabric; is the basic raw material requirement for a boutique, The fabric required will
be imported from markets specializing in designer cloth at Faisalabad, Karachi and Lahore.

Accessories:

Accessories such as buttons, laces, zippers, elastics, threads, needles, embroidery

threads, scissors etc.

Labels, Tags and Packaging:

Labels and tags can be obtained on order, as these serve as an identity for the boutique
and are useful for promotion.

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Products
Product Mix

Products will be priced at the high end to reflect the quality and exclusiveness associated with
the brand. The boutique will offer following product categories of men wears;

 Casual Wear
 Semi Formal Wear
 Formal Wear

Key Success Factors:

In case of a Boutique business, some of the key success factors are as follows;

 Proper care while producing dresses should be adopted

 Proper inventory management
 The dress designs should be according to the emerging trends and fashions
 Designing of the dresses should be according to the consumer tastes and preferences
 The customer satisfaction should be given due importance
 Excellent customer service should be provided

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 Total Investment

Contribution (300,000×5) Rs 15,00,000

Loan from Bank Rs 500,000

PRO FORMA INCOME STATEMENT

Years 2010 2011 2012

Sales 3,45,600 4216320 5270400
Variable Cost 0 0 0
3,45,600
Gross Profit 0 4216320 5270400
EXPENSES
Salaries 600,000 600,000 600,000
securityguar
d 120,000 120,000 120,000
diesel 300,000 900,000 900,000
rent 300,000 300,000 300,000
       
electricity 240,000 300,000 360,000
telephone 24,000 24,000 24,000
sweeping 72,000 72,000 72,000
maintainenc
e 60,000 60,000 60,000
advertising 5,000 3,000 5,000
depreciation 245,270 245,270 245,270
1,592,05 2,584,13
EBIT 709,730 0 0
Interest paid 180,000 180,000 180,000
Taxable 1,412,05 2,404,13
income 529,730 0 0
TAX RATE
34% 180,108 480,097 817,404
1,586,72
NET INCOME 349,621 931,953 6

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 Variable Cost
Material used:

Cloth used for one outfit Rs 275

Labor:

Tailor + Cutter Rs 70/outfit

Designer Rs 125/outfit

Press+ Cross check Rs 30/outfit Rs 225

Factory Overhead:

Button, Thread Rs 10/outfit

Electricity and other charges Rs 40/outfit Rs 50

Total Variable cost Rs 550

Variable Cost

Year Price per unit × Unit produce Total cost

1 1000×550 550,000
2 1100×550 605,000
3 1250×550 687,500
4 1300×550 715,000
5 1325×550 728,750

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 Fixed Cost:

Rent (Factory Outlet) [(10,000+20,000) ×12] 360,000

Salary for Salesman (6,000×12) 72,000

Total Fixed Cost 432,000

Total Cost

= Total fixed cost+ Total variable cost

= 14,22,000 + [(550×900)]

= Rs 19,17,000

Depreciation
Furniture and Fixture =350,000-75,000/5

= Rs 55,000

Machinery = 90,000-40,000/5

= Rs 10,000

Total Depreciation = 55,000+ 10,000

= Rs 65,000

Interest Paid to Bank

Amount of loan = Rs 500,000

Rate of Interest = 16%

Amount of Interest = 500,000×16%

= Rs 80,000

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 Projected Cash Flows, Friends Boutique

Operating Cash Flow

Years 0 1 2 3 4 5

EBIT 953,000 10,98,000 13,15,500 13,88,000 14,24,250

+Depreciatio 65,000 65,000 65,000 65,000 65,000

n
-Taxes (296,820) (346,120) (420,070) (444,720) (457,045)

OCF 721,180 816,880 960,430 1,008,280 1,032,205

Net Working Capital

years 0 1 2 3 4 5
Initial NWC -100,000
Change in +60,000 -4,000 -6,000 -2,000 -1,000
NWC

NWC 53,000
recovery

Total change -100,000 +60,000 -4,000 -6,000 -2,000 52,000

in NWC

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 Capital Spending

Years 0 1 2 3 4 5
Initial outlay -440,000
After tax
759,000
salvage

Capital
-440,000 759,000
Spending

Projected Total Cash Flow

Years 0 1 2 3 4 5
OCF 721,180 816,880 960,430 1,008,280 1,032,205
Change in
-100,000 +60,000 -4,000 -6,000 -2,000 52,000
NWC
Capital
-440,000 75,900
Spending
Total
projected -540,000 781,180 812,880 954,430 1,006,280 1,160,105
cash flow

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INVESTMENT CRITERIA

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 NET PRESENT VALUE (NPV)

The net present value is the difference between an investment market value and its cost.

NPV= - initial investment +present value (PV) of future cash flow

The net present value of this project is:

Where PV of future cash flow = OCF ÷ (1+r)t

PV of future cash flow = [781180 ÷ (1.21)1] + [812880 ÷ (1.21)2] + [954430 ÷ (1.21)3]

+ [1006280 ÷ (1.21)4] + [1160105 ÷ (1.21)5]

PV of future cash flow =645603.306 + 555207.978 + 538750.853 + 469437.047

+ 444270.698

PV of future cash flow = 2,656,269

NPV = -2,000,000 + 2,656,269

NPV = 656,269

The rule of net present value (NPV) is;

“If the NPV is positive then the project will be accepted and if the NPV is
negative the project will be rejected”

The net present value of this business is positive by Rs 656,269. This shows
that this business is highly favorable and we can get profit out of it and by
applying the rule of NPV we will accept that project.

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 PAY BACK PERIOD
The payback period is the amount of time required for an investment to generate cash flows
sufficient to recover its initial cost.

Year 1 = -2,000,000 + 781180

= -1,218,820

Year 2 = -1,218,820 + 812880

= -405,940

The next OCF value is greater then the remaining amount so we divide the remaining amount
on that year OCF value.

= Remaining amount ÷ current year OCF value

= 405,940 ÷ 954,430

=0.425

Pay back period = 2year + 0.425 year

Pay back period = 2.425 year

The rule of payback period is;

“An investment is acceptable if its calculated payback period is less than some pre-specified
number of years”

The total payback time of this investment is 2.425 year and it is acceptable.

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 DISCOUNTED PAYBACK PERIOD

The discounted payback period is the length of time required for an investment’s discounted
cash flows to equal its initial cost.

The discounted payback period of the business is;

Year1 = -2,000,000 + [781180 ÷ (1+.21)1]

Year1 =-2,000,000 + 645,603.306

Year1 =-1,354,396.694

Year2 = -1,354,396.694+ [812,880 ÷ (1+.21)2]

Year2 = -1,354,396.694+ 555,207.978

Year2 = -799,188.716

The next OCF value is greater then the remaining amount so we divide the remaining amount
on that year OCF value.

= Remaining amount ÷ current year OCF value

=799,188.716 ÷ 954,430

=0.837

Discounted Pay back period = 2year + 0.837 year

Discounted Pay back period = 2.837 year

The rule of discounted payback period is;

“An investment is acceptable if its calculated discounted payback period is less than some
pre-specified number of years”

The total discounted payback time of this investment is 2.837 year and it is acceptable.

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 AVERAGE ACCOUNTING RETURN

“The average accounting return is an investment’s average net income divided by its average
book value”

AAR=Average net income ÷ Average book value

Average net income = take the average of all the net incomes

Average book value = initial investment ÷ 2

Average net income:

Average net income = [576,180 + 671,880 + 815,430 + 863,280 + 887,205] ÷ 5

Average net income = 3,813,975 ÷ 5

Average net income = 762,795

Average book value:

Average book value = 2,000,000 ÷ 2

Average book value = 1,000,000

Average accounting return:

AAR= 762795 ÷ 1,000,000

AAR=0.762795

AAR=76.2795 %

RULE:

Based on the average accounting return rule, a project is acceptable if its average
accounting return (AAR) exceeds a target average accounting return.

We will accept that project as it is more then the targeted rate of return which was 70 %.

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 INTERNAL RATE OF RETURN

“The internal rate of return (IRR) is the discount rate that makes the net present value (NPV)
of an investment zero”

IRR = 34.332 %

Its mean is we take the rate of return “r” equals to 34.332% then the net present of that
investment becomes zero.

RULE:
The IRR rule is, an investment is acceptable if the IRR exceeds the required
return. It should be rejected otherwise.

We will accept this project as the IRR of the project which is 34.332% is higher then the our
required rate of return which was 21 %

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 PROFITABILITY INDEX

“The profitability index is the present value of an investment, future cash flows divided by its
initial cost. It also known as benefit-cost ratio”

PI = present value of future cash flow ÷ initial investment

Profitability index = 2,659,269 ÷ 2,000,000

Profitability index = 1.328

RULE:

The project will only accepted if the Profitability index of that very project is greater then
one.

DECISION:

We will accept this project as the profitability index of that project is greater then one and it
is strongly recommended in rule of profitability index that the project will accepted if its
profitability index value is greater then one, while our project scoured 1.328%.

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 SCENARIO ANALYSIS
No. of unit sold = 1000

Price per unit = Rs 2000

Variable cost per unit = Rs 550

Fixed cost = Rs 432000

With ±5% change

Base bound Upper bound Lower bound

No of unit sold 1000 1050 950
Sale price 2000 2100 1900
Variable cost 550 577.5 522.5
Fixed cost 432000 453600 410400

Base case Best case Worst case

No of unit sold 1000 1050 950
Sale price 2000 2100 1900
Variable cost 550 522.5 577.5
Fixed cost 432000 410400 453600

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 INCOME STATEMENT

Base case Best case Worst case

Sales 20,00,000 22,05,000 18,05,000

Variable Cost 550,000 548,625 548,625

Fixed Cost 432,000 4,10,400 453,600

Depreciation 65,000 65,000 65,000

EBIT 953,000 11,80,975 7,37,775

Taxes Paid 324,020 40,15,315 2,50,843.5

Net income 628,980 7,79,443.5 4,86,931.5

Operating Cash Flow (OCF)

Base case Best case Worst case

Net income 628,980 7,79,443.5 4,86,931.5

Depreciation 65,000 65,000 65,000

OCF 693980 844443.5 551931.5

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 Present Value of Future Cash Flow

PV = C × [1 – 1 / (1+r)t / r]

= C × [1 – 1 / (1+0.21)5 / 0.21]

= C × (2.926)

Net Present Value

Base case NPV = - initial investment + OCF × present value factor

= - 2,000,000 + 693,980 × (2.926)

= - 2,000,000 + 2,030,574.610

= 30574.61

Best case NPV = - initial investment + OCF × present value factor

=- 2,000,000 + 844,443.5 × (2.926)

= - 2,000,000 + 2470841.68

= 470841.681

Worst case NPV =- initial investment + OCF × present value factor

= - 2,000,000 + 551,931.5 × (2.926)

= - 2,000,000 + 1614951.569

= - 385048.431

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 Sensitivity Analysis
Price increase 7%

Base case New case

Units 1000 1000
Price 2000 2140
V.C 550 588.5
F.C 432000 432000

INCOME STATEMENT

New case
Sales 21,40,000
Variable Cost 588,500
Fixed Cost 432,000
Depreciation 65,000
EBIT 10,54,500
Taxes Paid 358,530
Net income 695,970

OCF = net income + depreciation

=695,970 + 65000

=760,970

NPV = - 2,000,000 + 760,970(2.926)

= - 2,000,000 + 2,226,580

= 226,586

Huge change in NPV with the change of price per unit and variable cost per unit a percentage
change of 7%.

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If Fixed cost change in base case

Base case
Sales 20,00,000
Variable Cost 550,000
Fixed Cost 450,000
Depreciation 65,000
EBIT 935,000
Taxes Paid 317,900
Net income 617,100

OCF = net income + depreciation

=617,100 + 65000

=682,100

NPV = - 2,000,000 + 682,100(2.926)

=- 2,000,000 + 1,995,824.6

=- 4175.4

Δ NPV = - 4175.4 – 30750.6

=- 34750

NPV will decreases if we change in fixed cost from 432,000 to 450,000

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 Break even analysis

I) Accounting break even

Q = FC+D/(P – V.C)

Base case

Q = 432000+65000/(2000-1000)

Q = 497000/1000

Q = 497 Units

Change In Prices

Q = 432000+65000/(2140-588.5)

Q = 497000/1551.5

Q = 320 Units

Change in Fixed Cost

Q = 450000+65000/(2000-1000)

Q = 515000/1000

Q = 515 Units

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 II) Cash Break Even

Q = FC+OCF/ (P – V.C)

Base case

Q = 432000+0/(2000-1000)

Q = 432000/1000

Q = 432 Units

Change In Prices

Q = 432000+0/(2140-588.5)

Q = 432000/1551.5

Q = 278 Units

Change in Fixed Cost

Q = 450000+0/(2000-1000)

Q = 450000/1000

Q = 450 Units

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 SUMMARY
This feasibility report for a Boutique Business in Lahore showed various tools and analysis to
analyze the possible profitability of this business.

Tools Pay Back Discounted NPV IRR AAR PI

Period Payback
Project 2.425 years 2.837 years Rs.656,269 34.332% 76.2795% 1.328
Result Yes Yes Yes Yes Yes Yes

On the basis of these tools like Pay back period, Discounted payback period, NPV etc and
their results we decided to say “yes” to the project.

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