FINANCIAL STUDY

FINANCIAL STUDY

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Chapter IV
FINANCING STUDY

This chapter will discuss basically the needs of the company. It also includes the

assessment of the viability of this study with respect to the capital it will put up, the sales

it will accumulate and the revenues it will generate after considering the costs the

business will incur. The researchers, moreover, reside on the following assumptions

which indicate the stability and profitability of the business.

4.1 Summary of Assumptions

 The five partners will each invest PHP 1,540,000 which sums up to PHP

7,700,000.

 The business will need to loan the amount of PHP 3,300,000 from Security

Bank.

 There will be no increase in the number of employees for the next five years.

 The parameters used in the technical and marketing studies are used: 206

annual working days; annual growth rate on sales or production- 4.91%

 The labor and compensation for the manpower and wage increase are based

on 1.024% inflation rate.

 The annual revenue will be based on the annual supply that was sold.

 Comparative pricing was used to come up with the prices of the products.

 Inflation rate of 3.76 is assumed for the increase of prices of the products.

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Table 35. Total Project Cost

Description Total Cost

Pre-operating cash 316,000.00
Cleaning Tools 9,423.00
First Aid Supplies 3,364.60
Office Supplies 29,669.00
PPE and Auxiliary Equipment 13,418.00
Office Furniture and Equipment 246,288.00
Safety and Security Equipment 64,722.00
Manufacturing Plant Equipment 4,735,800.00
Service Station Equipment 368,273.00
Building Construction 2,702,469.40
Land Expense 2,510,573.00
Working Capital 3,000,000.00
TOTAL 14,000,000.00

The table above shows the total cost in coming up with the project. The

statement of these accounts are shown in the following sections. The sum of

costs is PHP 11,000,000.00; the amount needed as investment to fund the

project.

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4.2 Sources of Capital

The capital needed for Green Fuel Petroleum Corporation amounts to

PHP 14,000,000. The proponents assume to follow the 70-30 sourcing for the

needed capital investment.

4.2.1 Capital Outlay

The capital outlay for Green Fuel Petroleum Corporations will

come from individuals who will form a corporation type of business. The

needed capital outlay is 70% of the total project cost. The proponents

assume that they are also the shareholders in this business; they are the

ones who will finance the proposal from their own earnings. As shown in

the following table, each partner will invest the same amount for the

business and will amount to PHP 10,000,000.

Table 36. Shareholders’ Capital

Shareholder Investment
Ms. Maria Vonna Caytuna PHP 2,000,000
Mr. Alcon John Concordia PHP 2,000,000
Ms. Angela Mordeno PHP 2,000,000
Mr. Christian Nino Panoy PHP 2,000,000
Mr. Al Christ Selim PHP 2,000,000
TOTAL PHP 10,000,000

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4.2.2 Bank Loan

The proponents grabbed the opportunity of acquiring bank loan for

the capital investment of the project. Thirty (30) per cent of the total project

is needed to be financed thru loan financing to accumulate the necessary

amount for the project completion. The advantage of this bank loan is that

the bank does not interfere with the operations of the business. And once

the amortization is completed, the business will no longer have any

obligations to the bank.

The proponents chose Security Bank to obtain a loan amount of

PHP 4,000,000. Under Security Bank Corporation’s loan terms, the

amount loaned is payable in five (5) years with interest due of 3%.

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4.3 Amortization Schedule

The loaned amount is an added liability of the company. Thus,

amortization must be applied. It is any method of repaying a debt, the principal

amount borrowed on top of the interest, usually by a series of equal payments at

equal interval of time. We assume the parameters set by Security Bank

Corporation: interest = 3%; terms to pay= 60 months or 5 years.

To compute, we use the formula for annuity:

i(1+i)n
A=P
(1+i)n−1

where: A= amount to be paid annually

i = interest due
P= initial amount
n= number of payments

Substituting the values, we get:

0.03(1+0.03)5
A=4,000,000
(1+0.03)5−1

A = 873,418.29

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Table 37. Amortization Schedule

Outstanding
Interest Due Principal (End
Period Principal (Beg. Payment
(End of period) of period)
of the period)
1 4,000,000.00 120,000.00 873,418.29 3,246,581.71
2 3,246,581.71 97,397.45 873,418.29 2,470,560.87
3 2,470,560.87 74,116.83 873,418.29 1,671,259.41
4 1,671,259.41 50,137.78 873,418.29 847,978.90
5 847,978.90 25,439.37 873,418.29 -0.02

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4.4 Pre-Operating Expenses

Before a company materializes the project itself, the need to have a

feasibility and profitability study is a must in order to come up with a square

consideration on all aspects affecting the company. Thus, the series of

consultations involving professional individuals must incur costs. Moreover, a

grand opening of the facility and service station leaves an impression among

customers that the company could fare well in the market it is penetrating. A new

company also, like Green Fuel, needs to comply with the necessary licenses and

registrations in order to operate the business legally and within bounds. To

effectively penetrate the market, prior to the operations, the company must have

a publicity or exposure through paid advertisements.

Table 38. Pre-Operating Expenses of Green Fuel

Description Amount (PHP)

Feasibility Cost
Civil Engineer Consultation 8,500
Chemical Engineer Consultation 13,000
Accountant Consultation 4,000
Proofreading 1,200
Printing 2,000
Bookbinding 350
Subtotal 29,050
Business Launching
Food catering 5,500
Invites 1,000
Priest’s stipend 1,000
Logistical needs, Mascots, Decorations 3,600
Subtotal 11,100
Permits & Licenses

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Barangay Clearance 1,600

Documentary Stamp 50
Application for Building Permit 13,450
BFP Clearance 1,200
Local Business Permit 14,750
BIR Registration 3,500
SEC Registration 15,150
DOLE Registration 3,500
DENR Clearance 2,000
Environmental Compliance Fee 15,300
DTI Permit 2,000
DOE License for Operations 16,550
Vehicle Registration 2,000
Subtotal 91,050
Advertising expense
Newspaper 175,000
Tarpaulin 6,000
Leaflets 3,800
Subtotal 184,800
Total Php316,000.00

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4.5 Operating Expenses

Operating expenses are the costs that Green Fuel incurs which are not

related to the production of its outputs. These expenses are essentially the costs

to keep the business running.

Table 39. Annual Operating Expense of Green Fuel for Year 1

Description Amount (PHP)

Salaries
Manufacturing Plant 2,373,600.00
Service Station 1,427,088.00
Subtotal 3,800,688.00
Utilities
Electricity 432,000
Water 59,400
Internet 15,600
Subtotal 507,000.00
Contributions
Social Security System 503,580
Phil Health 64,550
Subtotal 568,130.00
Depreciation 585,059.40
Miscellaneous
First Aid Supplies 3,365
Office Supplies 29,669
Cleaning Tools 9,423
PPE and Auxiliary Equipment 13,418
Subtotal 55,875.00
TOTAL 5,516,752.40

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4.6 Fixed Assets

Properties that are expected to last or be in use for more than one year is

considered as fixed assets. The table below presents the expenses that were

considered as fixed assets in this project.

Table 40. Fixed Assets of Green Fuel

Description Amount (PHP)

Equipment
Manufacturing Plant Equipment 4,735,800.00
Service Station Equipment 368,273.00
Safety and Security Equipment 64,722.00
Office Equipment 246,288.00
Subtotal 5,415,083.00
Building Construction 2,702,469.40
Land Expense 2,510,573.00
TOTAL 10,628,125.40

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Chapter V

FINANCIAL ANALYSIS

The financial analysis of this project is presented in this study. It is an aspect of

the overall business finance function that involves examining the company’s data to

gain information about the current and future financial health of a company. In this

chapter, Green Fuel will be evaluated if it will be profitable with respect to the costs and

revenues using Generally Accepted Accounting Principle (GAAP).

5.1 Summary of Assumptions

 There will be no increase in the number of employees for the next five years.

 The parameters used in the technical and marketing studies are used: 206

annual working days; annual growth rate on sales or production is 4.91%

 The labor and compensation for the manpower will not increase for the first

five (5) years of operations.

 Any wage increase is based on 1.024% inflation rate.

 The annual revenue will be based on the annual supply that was sold.

 Comparative pricing was used to come up with the prices of the products.

 The increase in price of the products is pegged at 3.76% due to oil inflation.

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 5.2 Balance Sheet

Green Fuel Petroleum Corporation

Balance Sheet
End of Year 2017-2026

2017 2018 2019 2020 2021 2022

Assets
Current Assets
Cash 3,821,926.83 1,857,245.90 190,969.40 (1,145,049.27) (2,115,994.44) (1,810,400.42)
Inventory Goods 1,142,160.00 1,210,509.98 1,282,950.18 1,359,725.48 1,441,095.24 1,527,334.39
Total Current Assets 4,964,086.83 3,067,755.87 1,473,919.58 214,676.21 (674,899.20) (283,066.03)
Non-current Assets
Property, Furniture, Fixtures 5,415,083.00 4,830,023.60 4,244,964.20 3,659,904.80 3,074,845.40 2,489,786.00
Accumulated Depreciation 585,059.40 585,059.40 585,059.40 585,059.40 585,059.40 585,059.40
Total Non-Current Assets 4,830,023.60 5,415,083.00 4,830,023.60 4,244,964.20 3,659,904.80 3,074,845.40
2,985,005.6
Total Assets 9,794,110.43 8,482,838.87 6,303,943.18 4,459,640.41 0 2,791,779.37
Liabilities and Owner's Equity
Liability
Loans Payable 3,246,581.71 2,470,560.87 1,671,259.41 847,978.90 0 0
Owner's Equity
Owner's Capital 6,547,528.72 6,012,278.00 4,632,683.77 3,611,661.51 2,985,005.60 2,791,779.37
Total Liabilities and
9,794,110.43 8,482,838.87 6,303,943.18 4,459,640.41 2,985,005.60 2,791,779.37
Owner's Equity

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Assets
Current Assets
Cash (1,086,315.40) 100,892.39 1,800,025.12 4,064,434.76
Inventory Goods 1,618,724.33 1,715,603.90 1,818,270.41 1,927,080.78
Total Current Assets 532,418.93 1,816,496.29 3,618,295.54 5,991,515.54
Non-current Assets
Property, Furniture, Fixtures 1,904,726.60 1,319,667.20 734,607.80 149,548.40
Accumulated Depreciation 585,059.40 585,059.40 585,059.40 585,059.40
Total Non-Current Assets 2,489,786.00 1,904,726.60 1,319,667.20 734,607.80
Total Assets 3,022,204.93 3,721,222.89 4,937,962.74 6,726,123.34
Liabilities and Owner's Equity
Liability
Loans Payable 0 0 0 0
Owner's Equity
Owner's Capital 3,022,204.93 3,721,222.89 4,937,962.74 6,726,123.34
Total Liabilities and
Owner's Equity 3,022,204.93 3,721,222.89 4,937,962.74 6,726,123.34

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 5.3 Income Statement

Green Fuel Petroleum Corporation

Income Statement
For Year 2017-2026

2017 2018 2019 2020 2021 2022

Sales
4,248,264.1 4,624,431. 5,479,639. 5,964,840 6,493,004.
Net sales 5,033,906.68
2 38 75 .81 56
Less:
1,142,160.0 1,210,509 1,282,95 1,359,725. 1,441,09 1,527,334.
Cost of sales
0 .98 0.18 48 5.24 39
Gross Income 3,106,104.12 3,413,921.40 3,750,956.50 4,119,914.27 4,523,745.57 4,965,670.17
Pre-operating 316,000.0
Less: expense 0
Less: Operating expense
120,000.0 97,397. 74,11 50,137. 25,43
Interest
0 45 6.83 78 9.37
3,800,688.0 3,847,816. 3,895,52 3,943,834. 3,992,73 4,042,247.
Salaries
0 53 9.46 02 7.56 51
507,000.0 513,286. 519,65 526,095. 532,61 539,223.
Utilities
0 80 1.56 24 8.82 29
568,130.0 575,174. 582,30 589,527. 596,83 604,238.
Contributions
0 81 6.98 59 7.73 52
55,875.0 56,567. 57,26 57,979. 58,69 59,426.
Miscellaneous
0 85 9.29 43 8.38 24
5,051,693.0 5,090,243. 5,128,87 5,167,574. 5,206,33 5,245,135.
Total Expenses
0 44 4.11 06 1.85 55
(1,945,588.8 (1,676,32 (1,377,91 (1,047,659. (682,58 (279,465.
Income before tax
8) 2.04) 7.61) 78) 6.28) 38)
(583,676.6 (502,89 (413,37 (314,297. (204,77 (83,839.
Income tax
Less: 6) 6.61) 5.28) 94) 5.88) 61)
Net income (1,361,912.22) (1,173,425.43) (964,542.32) (733,361.85) (477,810.39) (195,625.77)

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Sales
Net sales 7,067,935.18 7,693,773.70 8,375,027.82 9,116,604.37
Less:
Cost of sales 1,618,734.33 1,715,603.90 1,818,270.41 1,927,080.78
Gross Income 5,449,200.85 5,978,169.80 6,556,757.40 7,189,523.59
Less: Pre-operating expense
Less: Operating expense
Interest
Salaries 4,092,371.38 4,143,116.78 4,194,491.43 4,246,503.13
Utilities 545,909.66 552,678.94 559,532.16 566,470.36
Contributions 611,731.07 619,316.54 626,996.06 634,770.82
Miscellaneous 60,163.12 60,909.14 61,664.42 62,429.06
Total Expenses 5,310,175.23 5,376,021.40 5,442,684.07 5,510,173.35
Income before tax 139,025.62 602,148.39 1,114,073.33 1,679,350.24
Less: Income tax 41,707.69 180,644.52 334,222.00 503,805.07
Net income 97,317.93 421,503.88 779,851.33 1,175,545.17

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 5.4 Statement of Cash Flows

Green Fuel Petroleum Corporation

Statement of Cash Flows
For Fiscal Years Ending December 2017-2016

2017 2018 2019 2020 2021 2022

Cash Flows From Operating Activities
(1,676,322. (1,377,917 (1,047,65 (682,586.2 (279,465
Income before tax
1,945,588.88) 04) .61) 9.78) 8) .38)
Depreciation 585,059.40 585,059.40 585,059.40 585,059.40 585,059.40 585,059.40
(1,091,262. (792,858 (462,60 (97,526.8 305,594.
Net Cash Flow for Operations
(1,360,529.48) 64) .21) 0.38) 8) 02
Cash Flow For Investing Activities
Fixed Asset Acquisition 10,628,125.40
Pre-operating Expenses 316,000.00
873,418. 873,418 873,41 873,418.2
Amortization
873,418.29 29 .29 8.29 9
Net Cash Required for 873,418. 873,418 873,41 873,418.2
Investments 11,817,543.69 29 .29 8.29 9 0
Cash Flow by Financing Activities
Investment of Capital 10,000,000.00
Loans 4,000,000.00
Net Cash Flow Provided by
Financing 14,000,000.00 0 0 0 0 0
(1,964,680. (1,666,276 (1,336,01 (970,945.1 305,594.
Net Increase/Decrease
821,926.83 93) .50) 8.67) 7) 02
3,821,926. 1,857,245 190,96 (1,145,049.2 (2,115,994
Add: Working Capital
3,000,000.00 83 .90 9.40 7) .44)
Add: Beginning Balance

Cash at the end of year (1,810,400.42

3,821,926.83 1,857,245.90 190,969.40 (1,145,049.27) (2,115,994.44) )

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2023 2025 2026
4
Cash Flows From Operating Activities
602,148.3
139,025.62 1,114,073.33 1,679,350.24
Income before tax 9
585,059. 585,059.4
585,059.40 585,059.40
Depreciation 40 0
1,187,207. 1,699,132.7
Net Cash Flow for Operations 724,085.02 2,264,409.64
79 3

Cash Flow For Investing Activities

Fixed Asset Acquisition
Pre-operating Expenses
Amortization
Net Cash Required for Investments 0 0 0 0

Cash Flow by Financing Activities

Investment of Capital
Loans
Net Cash Flow Provided by Financing 0 0 0 0

1,187,207. 1,699,132.7
724,085.02 2,264,409.64
Net Increase/Decrease 79 3
(1,810,400.42 (1,086,315. 100,892.3
1,800,025.12
Add: Working Capital ) 40) 9
Add: Beginning Balance
100,892.3
Cash at the end of year (1,086,315.40) 1,800,025.12 4,064,434.76
9

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5.6 Indices of Profitability

5.6.1 Rate of Return on Sales

This provides insight how much profit is being produced per amount of

sales. An increasing rate of return indicates the company is growing efficiently

while decreasing rate designates financial unrest.

ROR = Net income / Net sales

Table 41. ROR on Sales

Year Net Income Net Sales ROR on sales

2017 (1,361,912.00) 4,248,264.12 -0.32
2018 (1,173,425.43) 4,624,431.38 -0.25
2019 (964,542.32) 5,033,906.68 -0.19
2020 (733,361.85) 5,479,639.75 -0.13
2021 (477,810.39) 5,964,840.81 -0.08
2022 (195,625.77) 6,493,004.81 -0.03
2023 97,317.93 7,087,935.18 0.01
2024 421,503.88 7,693,773.70 0.05
2025 779,851.33 8,375,027.82 0.09
2026 1,175,545.17 9,116,604.37 0.13

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5.6.2 Rate of Return on Partner’s Equity

The amount of net income returned as a percentage of owner’s

equity. Return on equity measures a company’s profitability by revealing

how much profit a company generates with the money the owners have

invested.

ROR = Net income / Owner’s equity

Table 42. ROR in Owner’s Equity

Year Net Income Owner’s Equity ROR on Equity

2017 (1,361,912.00) 6,547,528.72 -0.21
2018 (1,173,425.43) 6,012,278.00 -0.20
2019 (964,542.32) 4,632,683.77 -0.21
2020 (733,361.85) 3,611,661.51 -0.20
2021 (477,810.39) 2,985,005.60 -0.16
2022 (195,625.77) 2,791,779.37 -0.07
2023 97,317.93 3,022,204.93 0.03
2024 421,503.88 3,721,222.89 0.11
2025 779,851.33 4,937,962.74 0.16
2026 1,175,545.17 6,726,123.34 0.17

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5.7 Payback Period

Payback period is the length of time required for an investment to recover

its initial outlay in terms of profits or savings. It is computed using the formula:

Payback period = Investment / Accumulated Net Income

= 14,000,000.00 / 738,089.63

= 18.97 years

The payback period seems to be that lengthy since the investment is quite

big. For the kind of business, first and foremost, the payback is already expected

to be longer.

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