NOD Co a franchise of Dr.

Reddyy pharmacy, sells 250 strips/day of low budget drugs at an average contribution of Rs
Sales volume and average price are expected to grow by 5% every year for both the drugs
To operate a franchise , it needs to have a 1250 sqft space for retail shop with a lease rental of Rs.175 / sqft / month (re
A one time renovation of the premises worth Rs.30,00,000 will need to be incurred at the start. Required personnel cos
Wage inflation in the economy is 8%. Other operational expenses are expected to be 30% of the contribution, generate
Tax rate in the economy is 35%. Tax losses cannot be carried forward
The initial investment (deposit + renovation) can be funded by 60% bank loan (@13% interest rate). The remaining sho
Other investment opportunity with NOD Co. is expected to provide a return of 25%
Evaluate the business opportunity with a project life of 5 years
After 5 years the franchise will be handed over to Dr. Reddyy and the deposit will be refunded to the NOD Co.(Ignore d
 rage contribution of Rs.40/ strip and 150 strips/day of high budget drugs at an average contribution of Rs.70/ strip

Rs.175 / sqft / month (rental contract for 5 years, deposit of Rs.15,00,000 at the start)
Required personnel costs are Rs 125,000/month
contribution, generated for the period

ate). The remaining should be funded using equity. The debt is to be repaid at the end of 5 years in lump sum

o the NOD Co.(Ignore depreciation) If NOD Co. invests in the project, what is the expected IRR?
 Year-0 Year-1 Year-2 Year-3 Year-4 Year-5
Sales Volume (Strips/Day)
Low Budge 250 5% qty sold 250 262.50 275.63 289.41 303.88
High Budg 150 5% 150 157.50 165.38 173.64 182.33

commission (Rs./Strip)
Low Budge 40 5% sp 40 42.00 44.10 46.31 48.62
High Budg 70 5% 70 73.50 77.18 81.03 85.09

Annual Sales 365 7,482,500 8,249,456 9,095,026 10,027,266 11,055,060

Rent E 12 1250 175 2,625,000 2,625,000 2,625,000 2,625,000 2,625,000

Salarie 12 125000 8% 1,500,000 1,620,000 1,749,600 1,889,568 2,040,733
Other Expenses 30% 2,244,750 2,474,837 2,728,508 3,008,180 3,316,518
Interest Expense 13% 351,000 351,000 351,000 351,000 351,000
PBT 761,750 1,178,619 1,640,918 2,153,518 2,721,809
Tax Expense 35% 266,613 412,517 574,321 753,731 952,633
PAT 495,138 766,103 1,066,597 1,399,787 1,769,176

Cash Flow Calculations

Initial Investment (4,500,000) <==

Debt Raised 2,700,000
Debt Repaid (2,700,000)
Deposit Refund 1,500,000
PAT 495,138 766,103 1,066,597 1,399,787 1,769,176
Total Cash Flow (1,800,000) 495,138 766,103 1,066,597 1,399,787 569,176

IRR 34.15% good investment as IRR > Cost of Capital

opportunity 25.0%

operational sensitivity
% growth in sales volume
34.15% 3% 4.00% 5% 6% 7%
300 #NUM!
310 #NUM!
320
workdays
330
/yr
340
350
365

0 1 2 3
-100 -10 -10 -10
irr Err:523 irr > coc
coc 20%

financing sensitivity
 interest rate %
34.15% 11% 12.00% 13% 14% 15% <== LOW IMPACT ON IRR
0%
15%
30%
% debt 45%
60%
75%
90%

DEBT = RISK
RISK ==> MORE RETURNS
LEVERAGE
Deposit 1,500,000
Rennovation 3,000,000
Initial Invest 4,500,000

Debt 2,700,000 60%

Equity 1,800,000

Debt is to be repaid at end of 5 years

= LOW IMPACT ON IRR