Banking Academy of Vietnam

International School of Business

ASSIGNMENT
FINANCIAL PLANNING

Group 2: Phạm Lan Hương

Nguyễn Phương Nhi

Bùi Thanh Trà

Nguyễn Thị Kim Anh

Nguyễn Thị Thu Trang

Class: CityU6B

Mark:

Hanoi – 1st December, 2019

The coffee business has run some years and got profit, now we decide to expand it. In
our financial plan, we focus on how we plan and evaluate the feasibility of the project.
We detail all the cost, which involved many expenses, the projected sales and annually
expenses of actual operating over the three financial years, the volume of business we
will need to generate to be profitable.

I. General assumptions
According to our conservative estimate, the project is expected to maintain healthy
financial position over the next three years. The following assumptions about
operating cost in the project.
1. Variable cost per cup
items Cost
We estimate that some supplies such as
Coffee 5,000
cup, lid, labor and other ingredients such as
Milk 3,000
coffee, milk and others are involved to Take away cup and
produce a cup of coffee. lid 1,000
Labor 4,000
Others 7,000
Total 20,000

2. Fixed cost
We estimate some annually payments: Annual fix cost
• Insurance fee for 1 year with 250,000 per month
• Renting a house with 70m2, 1 million/m2 per month Insurance 30,000,000
• Utilities include electronic and water with 6 million/month
Rent 840,000,000
• Salaries for baristas and waiters
Utilities 72,000,000

Salaries 19,220,000
các chi phí trong vòng 1 nm
Total 961,220,000
 3. Depreciation
2 type of long-term assets are expensed using straight-line depreciation method
over the five to seven years
Useful Monthly Annually
Type Value life Savage cost depreciation depreciation
Coffee shop
equipment 135,100,000 7 0 1,608,333 19,300,000
Furniture and
fixture 76,000,000 5 0 1,266,667 15,200,000
Total 2,875,000 34,500,000

Amount
4. Sale and others index
Items VND
• We set price one cup of coffee equal 2.2 of Price per cup 44,000
variable cost Cups sold year 1 43,890
2.2 x 20,000 = 44,000 vnd Cups sold year 2 52,668
• We assume number of sale units in the first Cups sold year 3 59,252
year is 43,890 units Variable cost per cup 20,000
Number of sale units in year 2 increase 20% of Fixed cost 961,220,000
year 1’s sale units Depreciation 34,500,000
Number of sale units in year 3 increase 35% of Tax rate 25%
year 1’s sale units Required return 20%
• Other assumptions: required return 20%, Initial Net Working capital 75,000,000
initial NWC 75,000,000 vnd Equipment and Furniture 211,100,000

5. Proforma statement
Pro Froma Income Statement
Year 1 Year 2 Year 3
Sale 1,931,161,931 2,317,394,317 2,607,068,607
Fixed cost 961,220,000 961,220,000 961,220,000
Variable
cost 877,800,000 1,053,360,000 1,185,030,000
Depreciation 34,500,000 34,500,000 34,500,000
EBIT 57,641,931 268,314,317 426,318,607
Tax (25%) 14,410,483 67,078,579 106,579,652
Net Income 43,231,448 201,235,738 319,738,955
II. Cost of capital
As a coffee firm, we assume that the capital structure of firm is combined both debt
and equity. We suppose that our firm currently has 10,000 shares outstanding, trading
at price of 58,000 vnd per share and issued 1000 bonds which sold at market price of
1,100,000 vnd with a coupon rate of 7% due at the end of year 3. The current risk-free
rate is at 2.4%, the market risk premium is at 5.3% and beta is 1.5 (we recognize our
firm is small business that easy to effect by economy). The corporate tax rate at 25
percent.
❖ As a first step we need to find the cost of equity and market value of equity.
Based on information of equity was given:

𝑟𝑒𝑞𝑢𝑖𝑡𝑦 = 1.5 + 2.4% x 5.3%=10.35% Stock Price 58,000vnd

Market risk premium 5.30%
E =58,000 x 10,000 = 580,000,000 vnd Risk free rate 2.40%
beta 1.5
Number of share
outstanding 10,000

❖ Then find the cost of debt and market value of debt

Bond issue 100

Time to maturity 3
Coupon rate 7%
Market price 1,100,000

Par value 1,000,000

Annuity cash flows in 3 years:1,000,000 x 7%=70,000

70,000 70,000 70,000 + 1,000,000
1,100,000 = + 2
+
1 + 𝑟𝑑𝑒𝑏𝑡 (1 + 𝑟𝑑𝑒𝑏𝑡 ) (1 + 𝑟𝑑𝑒𝑏𝑡 )3
 𝑟𝑑𝑒𝑏𝑡 = 3%

D=1,100,000 x 100 = 110,000,000 vnd

 ❖ Thus, the WACC of the coffee firm is:
𝐷 𝐸
WACC =[ x 𝑟𝑑𝑒𝑏𝑡 x (1-𝑇𝑐 )] + [ x 𝑟𝑒𝑞𝑢𝑖𝑡𝑦 ]
𝑉 𝑉
110,000,000 580,000,000
=[ × 0.03 × (1 − 0.25)] + [ ×
110,000,000+580,000,000 110,000,000+580,000,000
0.1035] = 0.0911 (9.11%)
III. Analysis
1. Compute NPV, IRR and Payback period

Based on Pro forma statement, we calculate NPV, IRR and payback period to make
a decision that we should invest in this project or not.

Calculating the operating cash flow each year

Year 1 Year 2 Year 3
Net Income 43,230,000 201,234,000 319,737,000
Depreciation 34,500,000 34,500,000 34,500,000
OCF 77,730,000 235,734,000 354,237,000

The total cash flow for each year of this project

Year 0 1 2 3
Operating cash
flow 77,730,000 235,734,000 354,237,000
Change in NWC (75,000,000) 75,000,000
Capital Spending (211,100,000)
Total project cash
flow (286,100,000) 77,730,000 235,734,000 429,237,000

NPV 190,780,208.33
IRR 49%
Payback period 1.89 year

The net present value of this expanding project is 190,780,208.33 vnd and Internal
rate of return is 49% (is greater than the required rate of return of 20 percent), thus,
we should accept this project.
 2. ‘What if’ analysis
2.1. Sensitivity analysis
In this case, we want to find out the effect of a company’s sales and fixed cost on its
profit. The analysis will isolate each of these sales and fixed costs and record the
possible outcomes.

Base scenario
The cash flow for each year of this project
Year 0 Year 1 Year 2 Year 3
Sale 1,931,160,000 2,317,392,000 2,607,066,000
Fixed cost (961,220,000) (961,220,000) (961,220,000)
Variable cost (877,800,000) (1,053,360,000) (1,185,030,000)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT 57,640,000 268,312,000 426,316,000
Tax (25%) (14,410,000) (67,078,000) (106,579,000)
Net Income 43,230,000 201,234,000 319,737,000
Operating cash
flow 77,730,000 235,734,000 354,237,000
Change in
NWC (75,000,000) 75,000,000
Capital
Spending (211,100,000)
Total project
cash flow (286,100,000) 77,730,000 235,734,000 429,237,000

Required
return 20%

NPV (VND) 190,780,208

IRR (VND) 49%

❖ Assume that sales will be 1% higher/lower than baseline values. Provided

other inputs remain constant, the cash flows will be as follows:
 • Higher case:

Year 0 Year 1 Year 2 Year 3

101% Sale 1,950,471,600 2,340,565,920 2,633,136,660
Fixed cost (961,220,000) (961,220,000) (961,220,000)
Variable cost (877,800,000) (1,053,360,000) (1,185,030,000)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT 76,951,600 291,485,920 452,386,660
Tax (25%) (19,237,900) (72,871,480) (113,096,665)
Net Income 57,713,700 218,614,440 339,289,995
Operating cash
flow 92,213,700 253,114,440 373,789,995
Change in NWC (75,000,000) 75,000,000
Capital Spending (211,100,000)
Total project cash
flow (286,100,000) 92,213,700 253,114,440 448,789,995

Required return 20%

NPV (VND) 226,235,099

% change in NPV 18.58%
Sensitivity of NPV 18.58

• Lower case
Year 0 Year 1 Year 2 Year 3
99% Sale 1,911,848,400 2,294,218,080 2,580,995,340
Fixed cost (961,220,000) (961,220,000) (961,220,000)
Variable cost (877,800,000) (1,053,360,000) (1,185,030,000)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT 38,328,400 245,138,080 400,245,340
Tax (25%) (9,582,100) (61,284,520) (100,061,335)
Net Income 28,746,300 183,853,560 300,184,005
Operating cash
flow 63,246,300 218,353,560 334,684,005
Change in NWC (75,000,000) 75,000,000
Capital Spending (211,100,000)
Total project cash
flow (286,100,000) 63,246,300 218,353,560 409,684,005
 Required return 20%

NPV (VND) 155,325,318

% change in NPV -18.58%
Sensitivity of
NPV -18.58

➢ An increase in the sales price by 1% will result in an increase in the NPV by

18.58%, and if the sales price drops by 1%, the NPV of a project will decrease
by 18.58%.

❖ Assume that fixed cost will be 1% higher/lower than baseline values.

Provided other inputs remain constant, the cash flows will be as follows:
• Higher case:

Year 0 Year 1 Year 2 Year 3

Sale 1,931,160,000 2,317,392,000 2,607,066,000
101% Fixed cost (970,832,200) (970,832,200) (970,832,200)
Variable cost (877,800,000) (1,053,360,000) (1,185,030,000)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT 48,027,800 258,699,800 416,703,800
Tax (25%) (12,006,950) (64,674,950) (104,175,950)
Net Income 36,020,850 194,024,850 312,527,850
Operating cash
flow 70,520,850 228,524,850 347,027,850
Change in NWC (75,000,000) 75,000,000
Capital Spending (211,100,000)
Total project cash
flow (286,100,000) 70,520,850 228,524,850 422,027,850

Required return 20%

NPV (VND) 175,594,267

% change in NPV -7.96%
Sensitivity of NPV -7.96
 • Lower case:

Year 0 Year 1 Year 2 Year 3

Sale 1,931,160,000 2,317,392,000 2,607,066,000
99% Fixed cost (951,607,800) (951,607,800) (951,607,800)
Variable cost (877,800,000) (1,053,360,000) (1,185,030,000)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT 67,252,200 277,924,200 435,928,200
Tax(25%) (16,813,050) (69,481,050) (108,982,050)
Net Income 50,439,150 208,443,150 326,946,150
Operating cash
flow 84,939,150 242,943,150 361,446,150
Change in NWC (75,000,000) 75,000,000
Capital Spending (211,100,000)
Total project cash
flow (286,100,000) 84,939,150 242,943,150 436,446,150

Required return 20%

NPV (VND) 205,966,149

% change in NPV 7.96%
Sensitivity of NPV 7.96

➢ This means that with an increase in fixed costs of 1%, the NPV of a project
will decrease by 7.96%, and vice versa, if fixed costs are reduced by 1%, the
NPV will increase by 7.96%
❖ Sensitivity analysis shows that the NPV of a project are most vulnerable to the
change in the sales price and less vulnerable to the change in fixed costs.
❖ As above, we should estimate the sales price as accurately as possible
because they have the greatest impact on the net present value of a project.
2.2. Scenario analysis
❖ With the analytical principles as in the ''What if'' analysis, scenario analysis is
the process of estimating the expected value of a portfolio after a given period
of time.
❖ Assuming a specific change in case there is more coffee shop near the store,
sale and variable costs will change.
 ❖ New competitor enters the market:
✓ Sales will be decreased by 15%
✓ Variable cost will increase to 25% of sales

Base scenario
Year 0 Year 1 Year 2 Year 3
Sale 1,931,160,000 2,317,392,000 2,607,066,000
Fixed cost (961,220,000) (961,220,000) (961,220,000)
Variable cost (877,800,000) (1,053,360,000) (1,185,030,000)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT 57,640,000 1,321,672,000 426,316,000
Tax (25%) (14,410,000) (330,418,000) (106,579,000)
Net Income 43,230,000 991,254,000 319,737,000
Operating
cash flow 77,730,000 1,025,754,000 354,237,000
Change in
NWC (75,000,000) 75,000,000
Capital
Spending (211,100,000)
Total project
cash flow (286,100,000) 77,730,000 1,025,754,000 429,237,000

NPV 190,780,208

Competing scenario
Year 0 Year 1 Year 2 Year 3
Sale 1,641,486,000 1,969,783,200 2,216,006,100
Fixed cost (961,220,000) (961,220,000) (961,220,000)
Variable cost (820,743,000) (984,891,600) (1,108,003,050)
Depreciation (34,500,000) (34,500,000) (34,500,000)
EBIT (174,977,000) (10,828,400) 112,283,050
Tax (25%) 43,744,250 2,707,100 (28,070,763)
Net Income (131,232,750) (8,121,300) 84,212,288
Operating cash
flow (96,732,750) 26,378,700 118,712,288
Change in NWC (75,000,000) 75,000,000
 Capital Spending (211,100,000)
Total project cash
flow (286,100,000) (96,732,750) 26,378,700 193,712,288
NPV - 236,290,065

➢ Project analysis given a particular combination of assumptions. The result is a

very comprehensive picture of the future (a discrete scenario). Therefore, it can
be seen that if there are more competitors entering the market, the coffee shop
will suffer heavy losses. This is a very dangerous case and it is necessary to
take measures (increasing advertising, promotions, ...) to retain customers and
prevent the reduction of sales.

2.3 Break-even analysis

In accouting perspective, the break-even point is the sales level that show whether
the company earn profit or incurs loss with the following formula:
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡𝑠+𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
Break-even level of revenue =
𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 𝑓𝑟𝑜𝑚 𝑒𝑎𝑐ℎ 𝑎𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 £ 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠

(Additional profit from each additional £ of sales is the relationship between

variable costs and sales)

However, in corporate finance we use NPV break-even analysis of level of sales at

which the project is initially invested. In order to have minimum acceptable return,
present value of cash flows must be equal to (or higher than) initial investment.

Year 1-3
Variable cost 0.454% of sales
Fixed cost 961,220,000
Depreciation 34,500,000
EBIT (0.546 x sales) - 995,720,000
Tax (25%) 0.25 x (0.546 x sales - 995,720,000)
profit after tax 0.75 x (0.546 x sales - 995,720,000)
34,500,000 + 0.75 x (0.546 x sales -
OCF
995,720,000)

We assume that the operating cash flow is annuity in 3 years for 20%
 Initial investment = 286 100 000 VND

PV cash flows = (34,500,000 + 0.75 x (0.546 x sales – 995,720,000)) x 4.4 =

286,100,000

 Sales = 1,898,199,578 VND

961,220,000
Break-even sale in units = = 40,051 cups per year
44,000−20,000

It is clear that sales need to be at least 1,898,199,578 VND and 40,051 cups annually
to reach break-even level.

 It is acceptable to run the project.