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CHAPTER 5 FINANCIAL STUDY (PART1)

This portion should show in specified terms whether the project will be profitable even
with existing competition and unfavorable economic conditions.

A. Major Assumptions
They serve as the foundation for estimating the future expenditures, expenses, and
revenues of the project as accurately as possible.
o Existing business practices in the industry (credit term, bad debts allocation,
dividend policies, sales return and allowances, depreciation method etc.)
o Previously made related feasibility studies may contribute additional facts (selling
price, sales forecast, unforeseen costs, production volume and mix.
o Governmental regulations and incentives (tax rates, import/export policies, related
PDs & LOIs)
o Other pertinent data which can justify other assumptions (industry profiles,
conferences, industry associations)
o Source of financing, the amount and term such as repayment period, interests,
and other features.

Bluesea Lobster Major Assumptions

• It is assumed that the costs of raw materials will increase 5% per year
• The selling price of the product will increase 5% per annum
• Wages and salaries will increase 5% annually
• Income tax will be 30% of the net income throughout the operation
• ₱ 5,190,589.92 will be borrowed from the Land Bank
• It is assumed that all expenses will increase 5% per annum
• Loan is amortized using diminishing method with a loan term of three (3) years and
an interest rate of twelve percent (12%), payable annually
• All transactions are on cash basis
• The selling price of lobster per kilogram for the following years is assumed to
increase 5% starting with P1600/kg for the first year.

B. Total Project Cost known as the initial asset requirement.

❖ Fixed Asset Requirement- most approximate acquisition cost of the

following
1. Land and land improvements
Cost of land
Fees associated with acquisition
Registration duties and other related costs
Fencing, roads and paths
2. Building includes:
Construction of building and foundation
Water, gas supply, telephone & electrical connections
3. Machinery and Equipment
Purchase taxes
Freight and insurance/Custom duties
Installations, trial run tests of machine and equipment
4. Furniture and Fixtures including costs and transportation

❖ Current Assets requirement –is divided into:

1. Inventory Investments
Purchase of materials and supplies
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Freight/transport expenses.
2. Inventory Related Costs
Warehousing expenses: labor, utilities and maintenance
3. Cash Credits
Prepaid expenses (rent/leases in advance)
Intangible assets (patents, licenses, copyrights)
Organization and pre-operating expenses
Operating and administrative salaries and wages (Direct, Indirect, Administrative)
Administrative salaries and wages
Operating taxes
Office utilities and supplies
Communication expenses
Costs for transportation, advertising and borrowing
Provision for unforeseen costs

Bluesea Lobster Total Project Cost or Initial Asset Requirement

FIXED-ASSET REQUIREMENTS
Building 383,482.12
Add: Office furniture and fixture 5,950.00 389,382.12
Equipment 100,000.00
Tools 3,400.00
TOTAL COST OF FIXED-ASSETS 492,782.12

CURRENT ASSETS
Inventories
Direct materials 3,263,988.00 3,263,988.00
Inventory-related cost
Farm maintenance 3,000.00
Direct labor 219,000.00 222,000.00

Cash Credits:
Insurance 7,000.00
Engineering cost 38,348.21
Administrative salary 433,000.00
Office supplies 1,000.00
Advertisements 1,000.00
Utilities 5,756.00
Orgn & pre-operating expense 10,000.00
Unforeseen cost 14,882.96 510,982.19
TOTAL COST OF
CURRENT ASSETS 3,996,970.19
Multiply assumed ratio (1.5:1) x 1.5
Total Cost of Working Capital 5,995,455.28
TOTAL PROJECT COST 6,488,237.40

Less: Partner's equity (20%) 1,297,647.48

Loan (80%) 5,190,589.92
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Note:
o Total Cost of Current Assets must be multiplied with 1.5 to provide extra fund to
offset changes.
o The result is Total Cost of Working Capital to be added to the Total Cost of Fixed
Asset to get the Total Project Cost.
o Partners need to invest a minimum of 20% of the TPC. The balance will be the
Loanable amount (80%).

The Amortization Schedule

Annual Loan Payments = Principal Loan
Present Value Interest Factor Annuity (PVIFA k,n)
Note: Present Value Interest Factor Annuity
From Table (D-4): k=12%, n=3 is 2.40

= 5190589.92
2.40
= 2162745.8

AMORTIZATION OF LOAN
LOAN BEG. OF YEAR INTEREST PRINCIPAL END OF YEAR
YEAR PAYMENT PRINCIPAL PAYMENT PRINCIPAL
1
2,162,745.80 5,190,589.92 622,870.79 1,539,875.01 3,650,714.91
2
2,162,745.80 3,650,714.91 438,085.79 1,724,660.01 1,926,054.90
3
2,162,745.80 1,926,054.90 231,126.59 1,931,619.21 (5,564.31)

The Depreciation Schedule

Straight line method

Depreciation/year= Original Cost-Salvage value

Economic Life
ASSETS ORIGINAL COST LIFE SPAN DEPRECIATION/YEAR
Building 383,432.12 10 38,343.21
Equipment 100,000.00 10 10,000.00
Tools
60 kg. Weighing Scale 2,500.00 5 500.00
Bolo 900.00 10 90.00
Office furniture and fixture
Table 2,500.00 10 250.00
Wooden Chair 700.00 10 70.00
Pail 1,500.00 2 750.00
Styr boxes 1,250.00 10 125.00
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Blue Lobster Depreciation Schedule

Year 1 2 3 4 5 6 7 8 9 10
Building 38,343.21 38,343.21 38,343.21 38,343.21 38,343.21 38,343.21 38,343.21 38,343.21 38,343.21 38,343.21
Equipment 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00
Weighing
500.00 500.00 500.00 500.00 500.00 - 500.00 500.00 500.00 500.00
Scale
Bolo 90.00 90.00 90.00 90.00 90.00 90.00 90.00 90.00 90.00 90.00
Table 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00 250.00
Wooden
70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00
Chair
Pail 750.00 750.00 - 750.00 - 750.00 - 750.00 - 750.00
Styr boxes 125.00 125.00 125.00 125.00 125.00 125.00 125.00 125.00 125.00 125.00
TOTAL 50,128.21 50,128.21 49,378.21 50,128.21 49,378.21 49,628.21 49,378.21 50,128.21 49,378.21 50,128.21

Preparation of Pro-forma (Projected) Financial Statements

1. Income statement is a computation of the project’s total revenues and total
expenses for one period or fiscal year, thereby arriving at the net income or deficit
within the period.

Please see attached table

Bluesea Lobster Income Statement

2. Statement of Cash Flow or the “Cash Budget” is a systematic presentation of

cash receipts and disbursements for a given operating period.
a. Cash Receipts-cash coming into the business
o Cash from financing- stock issued, bond issues, and long term loans.
o Cash from sales revenues-the “profit-before-income tax” is entered and
increased in the adjustments in non-out-of-pocket costs such as
amortization and depreciation.
b. Cash Disbursements-cash going out of the business such as out of pocket
expenses on intangible assets and fixed assets are entered; including cash
dividends issued and tax payments.

Please see attached table

Bluesea Lobster Statement of Cash Flow

3. Balance Sheet shows the assets derived by the project form corresponding
liabilities and equities. It is an overall picture of a firm’s financial condition as of a
certain time.
a. Assets-current assets (easily converted to cash within a year, fixed assets
(assets with service life that extend beyond a year) and intangible (patents,
copyrights, leases, licenses, franchises & organization and pre-operating
expenses.
b. Liabilities-are subdivided into current liabilities (expected to be paid within one
year), long term liabilities (expected to be paid more than a year.
c. Equities-are claims due to the owners.

Please see attached table

Bluesea Lobster Balance Sheet
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Production cost per unit or per kilogram

Determine how much does it cost to produce one kilo/one unit of output?
Production Cost= Fixed (Overhead Costs) + Variable (Operations Costs)
Ave. Volume of Production (in units or kilograms)

A. Fixed Costs are costs that do not vary with production and are paid regardless
of the level of output.
Examples:
depreciation on fixed assets real estate taxes
amortization cost of intangible assets fixed asset insurance
research and development office supply
administrative heat, light, and power fixed rental and leases
interest payments on debts
admin & Indirect salaries/fringe benefits

B. Variable Costs are costs that vary or change directly as production volume
changes.
Examples:
direct materials indirect materials
heat & power requirements of production direct labor
maintenance of factory machineries supplies for production

Bluesea Lobster Production Cost per Kilogram

FIXED COSTS Note: Depreciation Cost only for a year

Equipment ₱10,000.00

Furniture & Fixture 1,195.00

Tools 590.00
Building 38,343.21
Interest Expense 622,870.79
VARIABLE COSTS 1,063,699.60
Direct Material ₱3,263,988.00
Direct Labor 219,000.00
3,482,988.00
TOTAL COST 4,546,687.60
PRODUCTION VOLUME
4,342 kgs.
(kgs)
AVERAGE COST ₱1,047.14 per kg
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BLUESEA LOBSTER PRODUCTION

Proforma Income Statement
For the years ending Dec. 31
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue 6,947,200.00 7,689,360.00 8,476,160.00 9,299,360.00 10,162,560.00 11,062,000.00 11,999,520.00 12,975,120.00 13,991,040.00 15,042,880.00
Less: Cost of sales
Direct Materials 3,263,988.00 3,443,507.34 3,623,026.68 3,802,546.02 3,982,065.36 4,161,584.70 4,341,104.04 4,520,623.38 4,700,142.72 4,879,662.06
Direct Labor 219,000.00 229,950.00 240,900.00 251,850.00 262,800.00 273,750.00 284,700.00 295,650.00 306,600.00 317,550.00
Farm Maintenance 3,000.00 3,150.00 3,300.00 3,450.00 3,600.00 3,750.00 3,900.00 4,050.00 4,200.00 4,350.00
Total Cost of Sales 3,485,988.00 3,676,607.34 3,867,226.68 4,057,846.02 4,248,465.36 4,439,084.70 4,629,704.04 4,820,323.38 5,010,942.72 5,201,562.06
Gross profit 3,461,212.00 4,012,752.66 4,608,933.32 5,241,513.98 5,914,094.64 6,622,915.30 7,369,815.96 8,154,796.62 8,980,097.28 9,841,317.94
Less: Operating Expense
Administrative Salaries 433,000.00 454,650.00 476,300.00 497,950.00 519,600.00 541,250.00 562,900.00 584,550.00 606,200.00 627,850.00
Depreciation Expense 50,128.21 50,128.21 50,128.21 50,128.21 50,128.21 50,128.21 50,128.21 50,128.21 50,128.21 50,128.21
Office Supplies 1,000.00 1,050.00 1,100.00 1,150.00 1,200.00 1,250.00 1,300.00 1,350.00 1,400.00 1,450.00
Utilities 5,756.00 6,043.80 6,331.60 6,619.40 6,907.20 7,195.00 7,482.80 7,770.60 8,058.40 8,346.20
Insurance 7,000.00 7,000.00 7,000.00 7,000.00 7,000.00 7,000.00 7,000.00 7,000.00 7,000.00 7,000.00
Advertising 1,000.00 1,025.00 1,050.00 1,075.00 1,100.00 1,125.00 1,150.00 1,175.00 1,200.00 1,225.00
Engineering Cost 38,343.21
Unforeseen Cost 14,882.98 17,006.86 17,006.86 17,006.86 17,006.86 17,006.86 17,006.86 17,006.86 17,006.86 17,006.86
Total Operating Expense 551,110.40 536,903.87 558,916.67 580,929.47 602,942.27 624,955.07 646,967.87 668,980.67 690,993.47 713,006.27
Net Income before Tax and Interest Expense 2,910,101.60 3,475,848.79 4,050,016.65 4,660,584.51 5,311,152.37 5,997,960.23 6,722,848.09 7,485,815.95 8,289,103.81 9,128,311.67
Less: Interest Expense 622,870.79 438,085.79 231,126.59 - - - - - - -
Net income before tax 2,287,230.81 3,037,763.00 3,818,890.06 4,660,584.51 5,311,152.37 5,997,960.23 6,722,848.09 7,485,815.95 8,289,103.81 9,128,311.67
Less: Income Tax Expense (30% ) 686,169.24 911,328.90 1,145,667.02 1,398,175.35 1,593,345.71 1,799,388.07 2,016,854.43 2,245,744.78 2,486,731.14 2,738,493.50
Net Income after Tax 1,601,061.57 2,126,434.10 2,673,223.04 3,262,409.15 3,717,806.66 4,198,572.16 4,705,993.66 5,240,071.16 5,802,372.66 6,389,818.17
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BLUSEA LOBSTER PRODUCTION

Proforma Balance Sheet
For the years ending Dec. 31,
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
ASSETS
Current assets
Cash 4,495,708.48 2,821,176.68 939,335.68 995,028.20 1,044,806.41 1,092,434.62 1,142,212.83 1,192,341.04 1,242,119.25 1,292,247.46
Total Current Assets 4,495,708.48 2,821,176.68 939,335.68 995,028.20 1,044,806.41 1,092,434.62 1,142,212.83 1,192,341.04 1,242,119.25 1,292,247.46
Fixed assets
Building 383,432.12 383,432.12 383,432.12 383,432.12 383,432.12 383,432.12 383,432.12 383,432.12 383,432.12 383,432.12
Equipment 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00
Tools 3,400.00 3,400.00 3,400.00 3,400.00 900.00 3,400.00 3,400.00 3,400.00 3,400.00 3,400.00
Furniture & Fixture 5,950.00 5,600.00 5,950.00 5,600.00 5,950.00 5,600.00 5,950.00 5,600.00 5,950.00 5,600.00
Total Fixed Assets 492,782.12 492,432.12 492,782.12 492,432.12 490,282.12 492,432.12 492,782.12 492,432.12 492,782.12 492,432.12
Less: Accumulated Depreciation 50,128.21 99,906.42 150,034.63 199,812.84 247,441.05 297,219.26 347,347.47 397,125.68 447,253.89 497,032.10
Total Fixed Assets: NET 442,653.91 392,525.70 342,747.49 292,619.28 242,841.07 195,212.86 145,434.65 95,306.44 45,528.23 (4,599.98)
Other Asset
Organization and Pre-operating Expense 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00
Total other asset 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00
TOTAL ASSETS 4,948,362.39 3,223,702.38 1,292,083.17 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48
LIABILITIES & EQUITY
Current Liabilities
Loan Payable 5,190,589.92 5,190,589.92 5,190,589.92 - - - - - - -
Less: Principal Amortization 1,539,875.01 3,264,535.02 5,196,154.23 - - - - - - -
Total Loan, net 3,650,714.91 1,926,054.90 (5,564.31) - - - - - - -
EQUITY
OWNER'S EQUITY 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48
TOTAL LIABILITY AND EQUITY 4,948,362.39 3,223,702.38 1,292,083.17 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48 1,297,647.48
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