BSc Honours

In
ECONOMICS

Graduation Project

Project Title
Feasibility study of “Cup of Coffee”

By
Aliaa Ashraf

A.N. Other

Supervised By

Assoc. Prof. Mostafa Aboelsoud

Economics Department
The British University in Egypt

July 2021

1
 The British University in Egypt

BSc Honours
In
ECONOMICS
Graduation Project

Project Title
Feasibility study of “Cup of Coffee”

By
Aliaa Ashraf

A.N. Other

Assoc. Prof. Mostafa Aboelsoud

Economics Department
The British University in Egypt

July 2021

2
 Confidentiality
In
Use of Data
Provided by Third Parties

The data received from the organisations listed below have been used solely in the
pursuit of the academic objectives of the work contained in this Project and has not and
will not be used for any other purpose out with that agreed to by the provider of the
data.

Name (Print): Aliaa Ashraf Mohamed Elwan Selim

Signature: ________________________________________________

Date: ___________________________

Student I.D.:___________________________

List of Data Providers

3
 Declaration

I declare that the work undertaken for this Dissertation has been undertaken by myself
and the final project is produced by me. The work has not been submitted in part or in
whole in regard to any other academic qualification.

Title of Project:

Feasibility study of “Cup of Coffee”

Name (Print): ______________________________________________

Signature: ______________________________________________

Date: ______________________________________________

Student I.D.:___________________________

4
Table of content
Introduction…………………………………………………………………………………… 6
1. Chapter one: Market Analysis…………………………………………………………… 7
1.1 Microeconomic analysis……………………………………………………………….. 7
1.2 Macroeconomic Analysis……………………………………………………………… 10
2. Chapter two: Legal & technical Analysis……………………………………………... 14
2.1Legal Analysis ………………………………………………………………….............. 14
2.2Technical Analysis……………………………………………………………………… 15
3. Chapter three: Financial Analysis…………………………………………………….. 19
3.1Capital Budgeting techniques………………………………………………………… 19
3.1.1Net present value……………………………………………………………………………..... 20
3.1.2Internal rate of return………………………………………………………………………….. 20
3.1.3Profitability index…………………………………………………………………….............. 21
3.1.4Payback period …………………………………………………………………..…….. 22
3.2Risk and return………………………………………………………………………….. 23
3.2.1Capital asset pricing model (CAPM)……………………………………………………….. 23
3.2.2Weighted average cost of capital (WACC)………………………………………………... 23
3.3Decision Analysis………………………………………………………………………. 24
4. Chapter four: Socioeconomic Analysis………………………………………………. 25
4.1Job creation and GDP……………………………………………………………………25
5. Chapter five: Environmental Analysis………………………………………………... 26
5.1Law number 4 1994 and Law number 9 2009……………………………………... 26
5.2Kyoto protocol, Montreal protocol and Paris Agreement………………………. 26
Conclusion………………………………………………………………………………….. 28
Reference List ……………………………………………………………………………... 29
Appendix A: projected financial statements………………………………………..... 30
A.1Balance sheet………………………………………………………………………….. 30
A.2Income statement…………………………………………………………………….. 31
Appendix B: BQC…………………………………………………………………………. 32

5
Introduction:

• Cup of coffee is a coffee shop that will provide high quality of coffee to the targeted
consumer base.
• The market of coffee is very competitive in Egypt since, there is high demand on
coffee.
• Cup of coffee will only sell one product at one branch at the beginning to analyse
the consumer’s demand.
• The macroeconomic indicators analysis can expect the future changes through
analysing the flow of the past few years.
• The main objective of “Cup of Coffee” is to produce high quality products without
harming the environment and to gain profit. Since, the majority of the population
consume more than 2 cup of coffees per day.
• The production process could need a lot of machines but at the end the revenue
can cover the expenses.
• This objective will be achieved through analysing the market and the process. The
main five chapters to analyse the investment. The first chapter is the market
analysis which includes microeconomic analysis and macroeconomic analysis.
The second chapter is the legal and technical analysis. The third chapter is the
financial analysis. The fourth chapter is the socioeconomic analysis. The fifth
chapter is the environmental analysis.

6
Chapter (1) Market Analysis:
The market analysis chapter is evaluate the market. So, market analysis chapter is
divided into two parts. The first part is macroeconomic analysis to know and analyse the
macroeconomic indicators. The second part is the microeconomic analysis to explore and
examine the market of coffee.

1.1 Microeconomics Analysis:

As was mentioned before, the Microeconomic analysis will analyse and discover the
market of coffee in Egypt. Since, it’s one of the biggest market in Egypt. Market of coffee
has a big share in the Egyptian economy and GDP. Almost 90% of the adult population
from the age 16 and above highly consume coffee since, it helps them the concentrate
more and to be able to fulfil their daily tasks. The average consumption of coffee in a day
per person is two cups of coffee and it may increase. The consumption and the demand
of coffee increase every year. Moreover, it’s the only market that doesn’t get effect by any
factors because the majority consume coffee as a necessity not as a luxurious product.
Which encourage people to invest in this market even if it’s their first project or a start-up
although they know that there is a high competition.

So, the current industry production: The current production level, is the new equilibrium
of quantity demanded and quantity supplied which is 9.5 coffee bean per pound.
Equilibrium means that the quantity supply equal quantity demand: There are two
scenarios: the first scenario if the price is above the equilibrium so, that means the
quantity supplied is more than the quantity demanded which will cause surplus resulting
decrease in prices until reaching equilibrium again in order to stay in the competition and
it will negatively affect the market price of the product so, consumers will increase their
demand. The second scenario if the price is below equilibrium so, that means that the
quantity supplied is less than the quantity demanded which will cause shortage resulting
increase in prices and quantity. The quantity supplied of the coffee will increase along
with increase in prices eventually, equilibrium will be reached because there are some
consumers cannot afford the coffee after the increase in price so, that will balance the
quantity demanded and quantity supplied. In any market there are possible changes can
occur in demand and supply that effects market price.

7
The possible changes that can occur in demand includes changes in income,
preferences, and prices of the same product. When the income increase the demand also
increase which will increase the market but if the income decreased the demand will
decrease because some consumers cannot afford the coffee at the same price so, it
depends on the percentage of consumers that stopped purchasing coffee whether they
should decrease the price to balance supply and demand or the price remain the same.
It’s possible that the consumer change their taste or preferences which means that they
may change the place where they purchase coffee from even if the prices and the quality
remained the same so, that effects the market price the same change if the income
changes because if they are small percentage they will not tremendously effect the project
so, it depends on the percentage. The third possible change that can happen in demand
is decrease in price of the substitute product so, most of the consumers will shift and
purchase the substitute product because the natural behaviour of the consumers is to
purchase the cheaper of the two products if they have the same quality and it doesn’t
depend on the consumer’s category resulting decrease in the market price and the
quantity supplied to reach equilibrium.

While the possible changes in the supply includes changes in cost of production, taxes
and competitors .If the cost of materials that are used in production or the cost of
production increased: there are two options whether to increase the market price to cover
the cost of production with the supply unchanged or to decrease the supply of product
with the market price unchanged because the target is to balance the supply and demand
to reach equilibrium but in both cases the project will negatively be effected until reaching
equilibrium again. Appling taxes on products are uncontrolled because it’s applied by the
government so, the market price will increase. There are two types of taxes in Egypt which
are the income taxes and the value added taxes. The first type is the income taxes
calculated differently according to the salary of each employee, the higher the income the
higher the income tax rate. Moreover, the corporate income taxes is the tax that any
company or project pay from that total income of the project except some other sectors.
The second type is the value added taxes is a fixed tax rate charged on any services and
goods, the value added taxes started to be imposed on goods and services in 2016 with
13% in 2016/2017 fiscal year and it increased in the next fiscal year 2017/2018 reaching

8
14%. The total tax rate in “Cup of Coffee” is 34% which includes 14% value added taxes
and 20% income taxes .The initial cost or price of the coffee can be adjusted, thus if the
initial price is decreased when the taxes are added the total price of the coffee will remain
the same which will not affect the consumer’s demand. As was mentioned before, market
of coffee is a competitive market, so, if the competitors in the market increased so, the
market price will decrease to attract the consumers. The price of cappuccino is 40 EGP
and this price was chosen after analysing the competitor’s prices and they include
Beano’s, second cup, Starbucks and Cilantro. So, if the price increased by 10% it will be
44EGP which will not affect the demand on cappuccino because the difference is 4 EGP
and even if the demand changed it will not affect the project because it will be less than
10 % decrease.

Which indicates that the product is inelastic demand because if the price increased by
10% that will not significantly affect the demand. Therefore, the total revenue will remain
unchanged because the demand is unchanged. There are variable inputs and fixed inputs
in any project. So, the variable inputs means a factor of production that can be changed
in the short run and it includes are packaging materials like receipt papers, recyclable
utensils, take-out containers and ingredients like coffee beans, dairy products. Those
factors of production can be changed to decrease or increase the quantity supplied
according to the market price and consumer’s demand. While the fixed input means costs
that can’t be changed in the short-run, the fixed cost to produce the cappuccino, and it
includes interest rate, rents, labour, taxes, deposits, wages, equipment maintenance and
utilities. Thus, those costs are fixed they are unchanged and don’t depend on the demand,
supply, prices, revenue or even if the project is functioning or not. “Cup of Coffee” is
considered as perfect competitor because it meets all the characteristics of perfect
competition since there are large number of buyers and sellers, free entry and exit in the
market, transparency in market knowledge and there is no price control.

Accordingly, the market of coffee in Egypt have a large number of buyers and seller since
its profitable market and the consumers purchase it on daily basis. Moreover, there is
available market knowledge to collect the information needed about the market. The
prices increase or decrease according to the supply and demand so, it’s uncontrolled.

9
 “Cup of Coffee” is similar to other competitors in the market regarding the type of the
product that are provided which is cappuccino , the same segment or category which A
and B ,since “Cup of Coffee” will have 4 branches in new Cairo , Maadi, Zamalek and
sheikh Zayed. Finally the targeting age which is from 16 years old and above. On the
other hand, there are several differences between this project and other competitors
which are the coffee will be imported from Indonesia since it have high quality with low
prices thus the cost of production can be decreased to increase the supply and there will
be the option of dairy-free cappuccino with alternatives like almond milk and coconut milk
to respect all the consumer’s tastes since, there are some people that suffer from lactose
intolerance and it’s not popular in Egypt to use milk alternatives so, it will positively affect
the project and attract a huge consumer base. Moreover, the marketing strategy that will
be used it will be different to attract the targeted age to meet their expectation and it will
be mainly through social media because the cost will be less and it will reach a bigger
consumer base.

1.2: Macroeconomic Analysis:

As was mentioned before, “Cup of Coffee” will be implemented in Egypt so, it’s very
important to Know and analyse the factors that may affect it which are the inflation rate ,
unemployment rate, Exchange rate ,GDP Per Capita ,GDP and Interest rate. Moreover,
the history or flow of those indicators should be evaluated to know how the market is
reacting and it is summarized in table (1). Furthermore, there is a graph for each indicator
to show the changes through the years.

Table (1): Macroeconomic indicators:

Inflation Unemployment Exchange GDP Per GDP Interest

Rate (%) Rate (%) Rate Capita (In billion rate (%)
(In L.E)
thousand
L.E)
2016 10.21% 12.41% 0.055 3519.87 332.4EGP 14.75%
USD EGP
2017 23.53% 11.8% 0.056 2444.29 235.7EGP 18.75%
USD EGP

10
2018 20.851% 10.932% 0.056 2907.3 250.25EGP 16.75%
USD EGP
2019 13.875% 8.612% 0.062 3008.8 302.34EGP 14.25
USD EGP
2020 5.683% 8.296% 0.064 2900.0 361.85EGP 8.25%
USD EGP
2021 6.178% 10.13% - 3050.0 394.28EGP 9.5%
EGP

1.2.1 Inflation Rate:

Graph (1) Inflation Rate in Egypt:

Inflation Rate (%) - Egypt

23.53
20.851
Inflation Rate (%0

13.875
10.21

5.683 6.178

2016 2017 2018 2019 2020 2021

% 10.21 23.53 20.851 13.875 5.683 6.178
Years

Source: Central bank of Egypt

Inflation is the increase in prices of goods and services. As shown in Table (1), the
inflation rate in Egypt is significantly decreasing. Starting 2017 the inflation rate
significantly increased reaching 23.53% due to floatation of the currency which
devaluated the Egyptian pound. In 2018 the inflation rate was also high reaching 20.851%
and it kept decreasing until reaching 6.178% in 2021. So, the flow of inflation rate through
5 years shows that the Egyptian economy reacted to the increase of inflation rate the
currency devaluation. Although, it gradually started decreasing from 2018 which is a good
sign to start the project because it will decrease the production cost and the quantity

11
supplied can be increased. Moreover, the situation or the condition in the market and the
economy will positively be effected by the decrease of inflation rate.

1.2.2 Unemployment Rate:

Graph (2) Unemployment Rate in Egypt:

Unemployment Rate (%) - Egypt

Unemployment Rate (%)

12.41
11.8
10.932
10.13
8.612 8.296

2016 2017 2018 2019 2020 2021

% 12.41 11.8 10.932 8.612 8.296 10.13
Years

Source: world Bank

Moreover, the unemployment rate in Egypt was decreasing until Covid-19 hit the world.
In 2018, the unemployment rate was 10.932% and in 2021 reached 10.33 so, the
unemployment is not improving due to many factors. Thus, this project will have several
branches within 3 years and it will provide job opportunities so, the unemployment rate
will decrease even if with a slight decrease it’s positive sign or impact on the economy
and economic growth because when the unemployment decrease the production will
increase.

1.2.3 Exchange Rate:

The exchange rate in Egypt is very important since, some material will be imported to
meet the high quality in the market. So, to review or know the exchange rate every month
or year is crucial in this project. The exchange rate in Egypt in 2020 0.064 USD and it is
expected to increase in the coming years according to the flow of the exchange rate from
2018 until 2020.Consequently, some materials should be stocked if there is no expiration

12
date and to find alternatives in The Egyptian market with the same quality( Central bank
of Egypt,2021)

1.2.4 GDP Per Capita:

Furthermore, The GDP per Capita in Egypt is increasing through years after the sudden
decrease that occurred in 2017 due to currency floatation and it reached 2444.29 whereas
in 2016 the GDP Per Capita was 3519.87. In 2018, the GDP per Capita was 2907.3 EGP
and it kept increasing until it reached 3050.0 EGP. Which is a great sign because in 2020
the GDP per Capita decreased 2900.0 EGP due to the pandemic and a consequences of
the increase of unemployment rate. Although in 2019 the GDP per Capita reached 3008.8
EGP (World Bank, 2021)

1.2.4 GDP:
The GDP in Egypt is also increasing which reflect the boost in economic growth. The GDP
in2016 was 332.4 EGP and it decreased as some of the macroeconomic indicators due
to currency floatation and it reached in 2017 235.7EGP but then from 2018 it consistently
increased until 2021 reaching 394.28 EGP. Moreover, in 2020 the GDP also increased
reaching 361.85 EGP in the middle of pandemic that effected the whole world specially
developing countries. So, that show that the Egyptian economy can face and handle any
crisis. Thus, it’s negatively affected also by the pandemic but the government implement
several policies to face the pandemic impacts (World Bank, 2021)

1.2.5 Interest Rate:

Moreover, The interest rate in Egypt in 2016 was 14.75% and it increased in 2017
reaching18.5% Due to flotation of the Egyptian currency, starting 2018 the interest rate
started decreasing from 16.75% until 2020 reaching 8.25% but in 2021 increased by
1.25% reaching 9.5% .So, the project can be supported by a loan with low interest rate
which is on the side of the project. Thus, part of the initial investment will be from a loan.
Which will be 2,000,000 EGP. Thus the interest rate of this loan by calculating
2,000,000*4*9.5%=760,000. The 2,000,000 is the principle loan amount, 4 years is the
number of years in term and 9.5% is the interest rate in 2021(central bank of Egypt,2021).

13
Macroeconomic indicators analysis:

In 2016, the Egyptian currency floatation occurred due to the requirements of the
International Monetary Fund (IMF) to take 12 billion dollars loan. These requirements led
to increase in inflation rate and unemployment , decrease in GDP ,GDP Per Capita ,
exchange rate and interest rate as shown above in Table(1) and explained thoroughly in
the macroeconomic analysis for each indicator and how those changes will affect the
project .

Chapter (2) legal analysis and Technical analysis:

This chapter will is divided into two parts. The first part is the legal analysis which will
discuss the legal regulations and steps to start a coffee shop in Egypt. The second part
is the technical analysis and it will show and discuss everything related to the project from
the equipment, building and branches side.

2.1 Legal Analysis:

As was mentioned before, the project will be founded or implemented in Egypt so, the
legal regulation that will discussed in this part is in Egypt only because it differs from
country to country.

1) there are new investment law that are implement in Egypt that guarantee fair and equal
treatment for local and foreign investors. The new law also give the right to every business
to export the products, raw materials, machines and equipment without restrictions the
exports registry.2 % flat rate of the value of any machine , equipment and devices that
are important to start the business as a unified custom duty.

2) The quality standards will meet the consumer protection agency standards. The
consumer protection agency role is to ensure the quality of products and services that are
provided to the consumer. The quality control in the coffee shop will be restricted and

14
extremely controlled to ensure the highest quality for both products and services
especially during the current pandemic.

3) Moreover, as was mentioned before in the microeconomics chapter the two types of
taxes that are available in Egypt. The income tax and the value added taxes. The
difference between them is that the income tax rate is according to the income ,which
means the higher the income the higher the tax and it’s not only applied on individuals
but also on corporate while the value added tax is a tax rate applied on goods and
services and it is measured or applied by the government . The income tax rate in Egypt
is 20% and the value added tax is 14%.

The Required documents are:

1) Copy from the ID

2) Military certificate if the age is between (21 and 30 years old)
3) Copy from the ownership contract of the land or the rent contract and to check
the original contract.
4) The Map and the design of the coffee shop from the engineering office
5) The criminal status of the owner
6) Health certificate to the employees
7) Pay the fees
So after submitting all the required documents and the administrative authority check all
the requirements and visit the building to decide if it is eligible or not to establish the
project.

2.2 Technical Analysis:

In technical analysis part, will include everything related to the building and equipment
that will be used in this project.

“Cup of Coffee” doesn’t require specific soil nature because it’s unrelated to this project.
The raw materials that will be used some of them will be available in Egypt and the rest
of the materials will be imported to insure the high quality of the product and if there is
any deficit in any material there will be substitutes to be replaced, either the deficit will be
from the imported materials substitutes will be found domestically or will be imported from

15
another country or deficit will be from a domestic materials so, it will be imported. On other
words, either way the deficit will be managed to continue the production process. As was
mentioned before in the microeconomic analysis the coffee beans will be imported from
Indonesia. “Cup of Coffee” will have several branches in Egypt and the potential places
are New Cairo, Maadi, Zamalek and Sheikh Zayed. Although, the coffee shop will have
only one branch at the beginning to experiment the market and the customer’s needs.

Some of The equipment that will be used in the coffee shop will be imported to also insure
the high quality and annual maintenance to sustain the quality of the product so, the
project will be operating at the optimal scale of operation. The equipment and the
machines that will be used with high technology and in efficient way to save place and to
reduce the cost. Moreover, there is an agreement or contract with recycling company to
manage all the waste resulted from the production process to avoid any harm to the
environment.

The architects from the engineering offices assigned will provide a detailed design and
their targets are to make “Cup of Coffee” unique, the workers can move freely without
disturbing customers, respecting social distancing and ventilation due Covid-19
precautions and to be prepared to any climate change. The building will consists of two
floors. Moreover, indoor area and outdoor area will be provided. The first floor will divided
into outdoor and indoor. The indoor area will include the kitchen, storage room, counter
for the cashier and two bathrooms. The second floor will also be divided into two parts
indoor and outdoor. The second floor is no smoking area to satisfy all consumers. The
work schedule is prepared, Although its subject to change due to the current situation in
Egypt since there are several business are losing or they are not reaching the expected
profit .

Furthermore, as was mentioned above the equipment and machines that will be used in
the coffee shop will be imported to introduce new technology to the Egyptian market and
to facilitate the production process. Moreover, the staff will be trained to use this machines
and equipment efficiently. Although, the new technology will not be invented every year
so, it’s not constant to import technology annually it will be only imported if it’s available
and suitable for the project and the environment.

16
The equipment and the furniture needed in this project will be listed in the below table to
summarize and calculate the cost of them along with another table or working schedule
and the salaries.

Table (2): Equipment & Supplies

Item Quantity Cost per unit seller

(EGP)
Blender, Fama MTQ 3 9,795 CaldoeFreddo
Smoothie& Frappe 5 16,500 CaldoeFreddo
blender, Vema FC 2084
Refrigerator, Tecnodom 2 36,000 CaldoeFreddo
Portable AC, Carrier 8 28,309 CaldoeFreddo
Espresso machine, 4 57,000 CaldoeFreddo
Cime CO-03
Coffee brewer & 5 17,500 CaldoeFreddo
grinder, Obel Mito
Touch 75
Kitchen supplies 3 10,000 IKEA
Ice flaker maker, Brema 1 94,500 CaldoeFreddo
G 510+Bin 240
Ice cube maker, Brema 1 86,837 CaldoeFreddo
VM 500+Bin 240
Dishwasher, Bergam PS 2 29,000 CaldoeFreddo
D50-32
Chairs, VEDBO 100 4,995 IKEA
Tables, KVISTBRO 40 995 IKEA
Cashier machine, Casio 4 6,299 Souq.com
WIFI 1 500 Vodafone

17
As shown in table (2) the majority of the equipment will be purchased from CaldoeFreddo.
Since its one of the famous shops to prepare a coffee shop. The total cost of equipment
will be 1,560,190 EGP. Although it subject to change if there is any equipment with low
prices and at least the same quality or if there is new technology and developed
equipment to save space and to lower the equipment cost. Moreover, this cost also
includes the maintenance of the equipment since there are 6 years guarantee.

Table (3) Work Schedule:

Job title Employees Required salary

CEO 1 20,000

shareholders 1 10,000

Financial manger 1 7,200

Human resources 1 6,800

manger

Legal Affairs 3 4,000

Marketing Manger 1 8,000

Accountants 4 4,700

Operation manger 1 5,500

Branch manger 4 4,200

18
 Barista 10 2,200

Waiter/waitress 10 2,600

Office Boy 1 1,300

IT technical support 1 2,800

Total 39 157,200/month

According to table (3), the cost of salaries is 157,200 per month which means that the
total salaries per year is 1,886,400 EGP from the fixed cost which is 3,000,000 EGP. The
table above shows all the jobs with their salaries including the CEO. The number of
available vacancies is subject to change according to the number of branches and the
demand on “Cup of Coffee”. Thus, the number of branches will depend on the demand
as was mention in the microeconomic analysis that at the beginning only one branch will
open to analyse the market from the consumer’s side.

Chapter (3) Financial Analysis:

This chapter is divided into two parts. The first part is to decide whether to accept or reject
the project through the capital budgeting techniques. It consists of two main types which
are discounted cash flow techniques and non-discounted cash flow techniques. The
discounted cash flow techniques are Net present value (NPV), Profitability index (PI) and
Internal rate of return (IRR). The Non-Discounted cash flow technique is Payback Period.
The second part in the financial analysis chapter is to calculate the risk and the return
through Capital asset pricing model (CAPM) and weighted average cost of capital
(WACC).

3.1Capital Budgeting Techniques:

Capital budgeting techniques: It’s a process to evaluate any potential project.on other
words. Its techniques or way to help the investor to decide whether to start the project or

19
not and when to invest. There are two types of capital budgeting techniques which are
discounted cash flow techniques and non-discounted cash flow techniques. Discounted
cash flow techniques is a process or method to calculate the present worth of an assets
through projected cash flows. The difference between them that the discounted cash flow
techniques consider the time value of money while non-discounted cash flow techniques
don’t consider the time value of money.

3.1. Net Present Value (NPV)

∑𝑐𝑓𝑡
𝑁𝑃𝑉 = − 𝑐𝑓0
(1 + 𝑖)𝑛
945,622 −1,436,582 1,473,556 4,486,464
𝑁𝑃𝑉 = ( + + + ) − 3,161,710
(1 + 0.11)1 (1 + 0.11)2 (1 + 0.11)3 (1 + 0.11)4
= 557,063 𝐸𝐺𝑃

The Net present value is mainly the difference between the value of the cash flows and
the value of the outflows over period of time in this project is 4 years. There are two main
importance of net present value. The first importance is that it’s the time value of money.
The second importance is that it gives or anticipate numbers that can be used by the
managers to differentiate and analyze between the initial outflow and the present value
of return. The 557,063 is the value created by the project in 4 years according to the
estimated cash flows. The NPV is positive, which reflect that the inflows in the projected
4 years, discounted by 11%, will exceed the initial investment by 557,063 EGP .This is
encouraging since the value created out of the projects idea is positive. On the other
hand, The NPV alone is not enough to estimate or to forecast the project’s success.

3.2 Internal Rate of Return (IRR)

Internal rate of return is a technique to calculate the rate of return of an investment.

Moreover, it’s calculated automatically in the BQC sheet. The IRR and The NPV are
similar but the variables that are used in calculating the two techniques are different .The
importance of calculating the internal rate of return is to know if the project will lose money
or will gain profit if they invest in this project. The Internal Rate of Return of this project is

20
16.1%. So, the expected rate of return is 16.1% and this 16.1% will be also the expected
rate which will make the NPV equal zero.

Graph (3) IRR and NPV:

Net Present value (EGP)

The NPV profile of project (A)

Crossover Rate

The NPV profile of project (B)

IRR (B)

Cost of Capital (%)

IRR (A)

According to graph (3), in hypothetical condition we will assume that the grey line is the
NPV profile of this project-cup of coffee- and the orange line is the NPV of another project.
It’s preferable to choose cup of coffee before the crossover rate because it’s producing
higher NPV with the same range of internal rate of return or cost of capital (%).Although,
after the crossover ratio we will chose project (B) because it’s producing higher NPV with
following range of internal rate of return or cost of capital (%).

3.3 Profitability Index (PI)

∑𝑐𝑓𝑡
𝑃𝐼 = /𝑐𝑓0
(1 + 𝑖)𝑛
945,622 −1,436,582 1,473,536 4,486,464
𝑃𝐼 = ( + + + ) /3,161,710
(1 + 0.11)1 (1 + 0.11)2 (1 + 0.11)3 (1 + 0.11)4

= 1.17

21
Profitability index is another discounted technique to decide whether to invest in this
project or not. It calculated as shown in the equation above .The profitability index of “
Cup of Coffee” is 1.17 which is more than 1 ,this indicates that the initial investment will
be covered in the project’s projected 4 years discounted cash-flow by 1.17 times.
Although the profitability index is more than one but it is not high as expected or compared
to other competitors.

3.4 Payback Period

The payback period is a non-discounted cash flow technique and it calculate or measures
the time that is required to cover the initial investment. Moreover, as a financial advisor
it’s a very important technique because according to the number of years required to
recover the initial investment it shows the risk of this project. On other words, the more
the years to recover the initial investment the higher the risk. The payback period of “Cup
of coffee” is between three years and four years to be accurate it is 3.49 years .However,
it’s not accurate measure because it doesn’t include the future changes in the money
value through time. Furthermore, the payback period could be less than the predicted
period above if the demand increased or many changes in the market occurred.

Table (4) Cash Inflows and cumulative cash Inflows:

Year Cash inflow Cumulative cash inflow

0 -3,161,710 -3,161,710

1 945,622 -2,216,088

2 -1,436,582 -3,652,671

3 1,473,556 -2,179,115

4 4,486,464 2,307,349

22
3.2 Risk and Return Analysis

The second part in the financial analysis chapter is risk and return analysis which will
calculate the expected return from this project and analyze the risk associated in the
future from this investment through calculating capital asset pricing model(CAPM) and
weighted average cost of capital (WACC).

3.2.1 Capital asset pricing model (CAPM)

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛(𝑟𝑖) = 𝑅𝐹 + (𝑅𝑀 − 𝑅𝐹) ∗ 𝛽𝑖

𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛(𝑟𝑖) = 15.3% + 7% ∗ 0.88 = 21.4%

The capital asset pricing model is a model that shows the relationship between risk and
expected assets return. The RM represents the expected rate of return on the market,
RM-RF represents the average market risk premium. The rate of return is fixed according
to the central bank of Egypt which is 15.3% and the average rate of market of coffee is
7% and the beta of competing projects like Starbucks is 0.88. So, the CAPM of “Cup of
Coffee” is 21.4% which means that the minimum accepted expected rate of return on
assets is 21.4%. Moreover, CAPM is one of the most preferable techniques since it take
into consideration the risk. Nevertheless, the capital asset pricing model (CAPM)
calculate the assets expected rate of return supposing that there is no debt. Thus, the
weighted average cost of capital (WACC) is the most efficient technique.

3.2.2 Weighted average cost of capital (WACC)

𝐷 𝐸𝐿
𝑊𝐴𝐶𝐶 = 𝐸(𝑅𝐴 ) = ( 𝐸(𝑅𝑑 ) + 𝐸(𝑅𝐿 )) (1-Taxes)
𝐸𝐿 +𝐷 𝐸𝐿 +𝐷

11,000,000 2,119,980
𝑊𝐴𝐶𝐶= ( (0.20) + (1.08%)) − (1 −
11,000,000+2,119,980 11,000,000+2,119,980

34%)=11%

23
The weighted average cost of capital (WACC) is another technique used to calculate the
risk and return of any investment. Moreover, it’s more efficient than the capital asset
pricing model (CAPM). Weighted average cost of capital measures the weight of the
company’s debt and the cost of borrowing money. Part of sourcing this project is through
loans and it consists of 2,000,000EGP corporate loan with 20% interest rate and the date
of maturity is more than one year. As shown on the equation above the weighted average
cost of capital of “Cup of Coffee” is 11% which means that the average cost to finance
the project is 11%. In other words, “Cup of coffee” owes 11% for each pound it finances.
Thus, as a financial advisor we can analyze the project by comparing between weighted
average cost of capital and the capital asset pricing model along with the internal rate of
return.

3.3 Decision Analysis:

Table (5) Evaluating the capital budgeting Techniques and Risk & Return

Techniques:

Method Value Condition Accept/Reject

NPV 557,063 Positive Accept

IRR 16.1% Greater than Accept

WACC

PI 1.17 More than 1 Accept

CAPM 21.4% More than WACC Accept

WACC 11% less than IRR and Accept

CAPM

According to the calculation applied in the financial analysis through capital budgeting
techniques and risk and return analysis. “Cup of coffee” met all the requirements to be

24
founded or implemented in real life. Considering that the internal rate of return (IRR) is
16.1% which is more than the weighted cost of Capital 11% and that indicates that the
expected internal rate of return on the investment will be more than the cost to finance
the project by almost 5.1%.Moreover, the weighted average cost (11%) is less than the
capital asset pricing model (21.4%) so, it indicates value creation. In other words, with
every 1 pound of this project it generates 10.4% (0.104 EGP).Furthermore, “Cup of
Coffee” create positive Net present value (NPV) which is 557,063 EGP. Thus, the
profitability index is 1.17 which is more than 1 although it’s not high as expected due to
low cash inflow at the first few years in this project. The payback period is not mentioned
in the table above since it’s not accurate to decide whether to accept or reject the project
according to the payback period, however, the payback period of “Cup of Coffee” is
between 3 years and 4 years (3.49 years).

Chapter (4) Socioeconomic Analysis:

This chapter will discuss the project contribution in the society and its effect on
unemployment and GDP.

4.1 Job Creation and GDP

Cup of Coffee will increase the employment rate in Egypt by creating more Job
opportunities. People with Special needs will be also have equal opportunity to get the
job. Since, this project support youth both females and males. Moreover, this project is
against any kind of discrimination. One of the targets of this project is to create a place
that doesn’t harm anyone or anything, whether the environment or the people and to
decrease discrimination. The building will be equipped or suitable for different ages and
for special needs. As was mentioned before, job opportunities for special needs will be
provided and there will be screens that will ease the ordering process between the
customer and the employee. Furthermore, that will increase the quality and amount of the
products and services because the employees will have a healthy work environment. Cup
of Coffee will have a positive impact on GDP and economic growth. Since, it will increase
the investment which will attract or will open a lot of vacancies for both females and males
and that will decrease the unemployment rate.

25
Section (5) Environmental Analysis:

This chapter will analyze the impact of this project on the environment through discussing
different protocols, laws and agreements which their main aim to protect the environment.
Since, this project is friendly to the environment. Moreover, to set rules or plan to not
affect the environment negatively through the production process and to protect the future
generations from different risks.

5.1 law number 4 1994 and law number 9 2009

The Egyptian Environmental affairs agency implemented two main laws: law number 4 in
1994 and law number 9 in 2009 which is the amendment of law number 4 under the
supervision of ministry of Environment. Law number 4 assign the responsibilities of EEAA
(Egyptian Ministry of Environment and Egyptian Environmental Affairs Agency) to prevent
any conflicts with current law. Moreover, law number 4 in 1994 forbid using any substance
or materials that can harm the environment.

According to Law number 4 of 1994 chapter two part one article 29, 30, 31 and 32 The
Egyptian government forbid transferring dangerous substance with license or permission.
Thus, managing dangerous substance should be according to the law and requirement.
Basically, those articles forbid transferring or managing dangerous substance without the
approval of the authority. Furthermore, chapter two part two article 37 states that the
government prohibit burning or throwing waste in unspecialized places far from the
residential areas and any place that could be harmed from the waste.

5.2 Kyoto protocol, Montreal protocol and Paris agreement

The Montreal protocol was established before the Kyoto protocol. the difference between
those protocols that the Montreal protocol was established to limit the production of
substance that cause ozone depilation while the Kyoto protocol was established to limit
the greenhouses emission except the substance that can cause ozone depilation.
Although, Kyoto protocol was established to developed countries only while Paris
agreement was established for developed countries and developing countries to limit the

26
greenhouse emissions. Moreover, countries set their own targets according to their
technology and development.

So, the usage of plastic in “Cup of Coffee” will be extremely reduced nearly will be
eliminated for the benefit of the environment and people. Since, the plastic is from the
main polluters to the environment and it has a tremendous negative effect on the
environment and Human being. it can cause soil pollution, water pollution and air pollution
.Although, the usage of papers or any alternative of plastic will be more expensive.

Furthermore, the packaging will be ecofriendly and can be recycled. The project will offer
the coffee in paper cup to meet all the consumers’ preferences and concerns regarding
the current situation. Thus, they don’t want to use to usual cups even if it’s sanitized. So,
the project will balance between the environment, the quality and the consumer’s
preferences. Cup of coffee will have portable ACs because it is easier to get cleaned and
it reduce the transmission of virus since the central ACs can transmit air transmitted
viruses easily.

The project will rely on solar energy, since there will many equipment and machines along
with the working hours or the opening hours that will need electricity. So, the solar energy
panels will take the heat and converted to electricity and this the most efficient way to
operate which will result in decreasing the electricity cost.

27
Conclusion:

Finally, after analyzing the market through macroeconomic indicators and

microeconomics, it shows that “Cup of Coffee” will add to the market. Moreover, the
financial analysis supports the market analysis since all the capital budgeting techniques
and risk and return shows that this project will be profitable. Thus, the net present value
is positive, internal rate of return is greater the weighted cost of capital (WACC),
Profitability index is more than 1, capital asset pricing model is more than the weighted
cost of capital (WACC) and the weighted cost of capital is less than the internal rate of
return and the capital asset pricing model. As a financial advisor, according to these
calculation the project should be accepted. Furthermore, the project is designed to not
harm the environment and

28
Reference list:

• CentralbankofEgypt,(2021).Retrievedfrom:
https://www.cbe.org.eg/en/EconomicResearch/Statistics/Pages/Inflationhistorical.
aspx
• WorldBank,(2021).Retrivedfrom:
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2020&locations=E
G&start=2016
• Worldbank,(2021).Retrivedfrom:
https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?end=2020&locations=E
G&start=2016
• CentralbankofEgypt,(2021).Retrievedfrom:
https://www.cbe.org.eg/en/EconomicResearch/Statistics/Pages/ExchangeRatesh
istorical.aspx
• Worldbank,(2021).Retrievedfrom:
https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?end=2019&locations=
EG&start=2016
• CentralbankofEgypt,(2021).Retrivedfrom:
https://www.cbe.org.eg/en/EconomicResearch/Statistics/Pages/MonthlyInterestR
ates.aspx
• American chamber of commerce in Egypt, (2021).Guide to doing business in
Egypt.Retrievedfrom:https://www.amcham.org.eg/information-resources/trade-
resources/doing-business-in-egypt/laws-regulations
• United nation climate change, (2021).What is the Kyoto Protocol? Retrieved from:
https://unfccc.int/kyoto_protocol
• Ministry of Environment, (2021).Environmental protection law. Retrieved from:
http://www.eeaa.gov.eg/en-us/laws/envlaw.aspx
• United Nations climate change, (2021). What is Paris agreement? Retrieved from:
https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
• United nations environment program,(2021).About Montreal protocol.Retrieved
from: https://www.unep.org/ozonaction/who-we-are/about-montreal-protocol

29
 Appendix A: Projected financial statements

A.1 Balance sheet:

Your Company Name Balance Sheet

Cup of Coffee
Assets
Current assets: 9/29/2021 9/29/2022 9/29/2023 9/29/2024 9/29/2025
Cash 2,472,340 8,788,290 8,900,310 2,720,580 4,400,960
short -term investment 250,610 230,500 183,540 72,490 285,180
Inventories 1,380,100 1,460,350 1,550,210 1,500,210 1,630,100
Net receivable 900,370 1,700,420 1,340,100 1,100,410 1,400,350
sales security 550,380 270,690 255,300 230,100 210,150
Other 230,720 185,550 92,400 74,530 285,210
Total current assets 5,784,520.00 12,635,800.00 12,321,860.00 5,698,320.00 8,211,950.00

Fixed assets: 9/29/2021 9/29/2022 9/29/2023 9/29/2024 9/29/2025

Land and improvements 49,000 48,700 48,700 48,700 48,000
building and improvement 500,820 610,290 790,100 710,580 590,800
Machinary furniture equivalent 1,560,190 1,700,240 1,670,320 1,750,100 1,300,680
intangeble assests 450,390 1,100,230 910,000 790,850 560,180
long-term investments 490,630 350,670 380,700 400,240 485,690
other assets 370,950 420,280 450,300 485,600 570,620
other properties 2,800,610 3,100,000 3,680,000 3,490,500 11,750,200
Total fixed assets 6,222,590.00 7,330,410.00 7,930,120.00 7,676,570.00 15,306,170.00

Other assets: 9/29/2021 9/29/2022 9/29/2023 9/29/2024 9/29/2025

Goodwill 2,600,270 2,800,270 3,550,900 3,510,800 3,600,290
Total other assets 2,600,270.00 2,800,270.00 3,550,900.00 3,510,800.00 3,600,290.00
Liabilities and owner's equity label is in cell at right.
Total assets 14,607,380.00 22,766,480.00 23,802,880.00 16,885,690.00 27,118,410.00

Liabilities and owner's equity

Current liabilities: 9/29/2021 9/29/2022 9/29/2023 9/29/2024 9/29/2025
Accounts payable 800,620 1,150,210 1,272,000 1,220,690 1,100,210
short/current long term debt 680,100 - 300,810 - 1,600,450
Total current liabilities EGP 1,480,720.00 EGP 1,150,210.00 EGP 1,572,810.00 EGP 1,220,690.00 EGP 2,700,660.00

Long-term liabilities: 9/29/2021 9/29/2022 9/29/2023 9/29/2024 9/29/2025

long-run debt 8,800,590 11,000,000 10,100,000 7,000,000 14,600,400
Other liabilites 1,310,000 1,280,130 1,400,100 1,300,490 890,270
Deferred long term liability charges - 7,210,160 7,690,500 5,000,200 6,500,420
Minority interests 6,810 6,000 6,200 1,100 5,400
Total long-term liabilities EGP 10,117,400.00 EGP 19,496,290.00 EGP 19,196,800.00 EGP 13,301,790.00 EGP 21,996,490.00

Owner's equity: 9/29/2021 9/29/2022 9/29/2023 9/29/2024 9/29/2025

Common stock 1,200 1,200 1,200 1,100 1,100
Retained Earnings 3,008,060 2,118,780 3,032,070 2,362,110 2,420,160
Total owner's equity EGP 3,009,260.00 EGP 2,119,980.00 EGP 3,033,270.00 EGP 2,363,210.00 EGP 2,421,260.00

Total liabilities and owner's equity 14,607,380.00 22,766,480.00 23,802,880.00 16,885,690.00 27,118,410.00
Previous Year Balance is auto calculated in cell C49 and Current Year Balance in cell D49.

Balance - - - - -

30
A.2 Income statement:

Your Company Cup of Coffee

Income Statement
2021 2022 2023 2024 2025

Revenue
Cost of Revenue 10,000,000 12,000,000 11,200,400 13,500,800 14,700,100
Gross profit 4,000,000 6,500,000 5,490,000 7,099,200 8,000,700
Total Revenue & Gains EGP 14,000,000.00 EGP 18,500,000.00 EGP 16,690,400.00 EGP 20,600,000.00 EGP 22,700,800.00

Expenses
Selling General & Adminstrative 1,600,000 1,650,100 1,000,000 1,700,600 1,700,400
Others 500,430 442,400 375,200 440,300 426,370
Operating income or loss 1,899,570 4,407,500 4,114,800 4,958,300 5,873,930
Other income expense 240,820 960,300 788,100 43,600 -12,400
EBIT 1,040,231 -2,569,170 1,840,131 3,441,631 1,820,300
Interest Expense 96,460 175,250 331,210 440,100 485,650
Tax Provision 353,678 -873,518 625,644 1,170,154 300,230
Minority Interest -220 350 4,650 3,620 -300
Total Expenses EGP 5,730,968.87 EGP 4,193,212.87 EGP 9,079,734.87 EGP 12,198,304.87 EGP 10,594,180.00
Income before tax EGP 8,269,031.13 EGP 14,306,787.13 EGP 7,610,665.13 EGP 8,401,695.13 EGP 12,106,620.00
Income tax expense 4,335,510 5,790,300 4,470,160 1,170,400 1,350,420
Net Profit EGP 3,933,521.13 EGP 8,516,487.13 EGP 3,140,505.13 EGP 7,231,295.13 EGP 10,756,200.00

31
Appendix P: BQC

Sector: Market for Coffee

Name: Cup of Coffee
Date:

Assumptions
In EGP

Building Initial Investment 500,820

Equipment Initial Investment 1,560,190 In EGP
Net Working Capital Needed 1,100,700 In EGP Y0 Y1 Y2 Y3 Y4
Variable Cost % of Sales in Y1 15.0% Free Cash Flows -3,161,710 945,622 -1,436,582 1,473,556 4,486,464
Tax Rate 34.0% Cumulative Cash Flows -3,161,710 -2,216,088 -3,652,671 -2,179,115 2,307,349
Net Salvage (Building) 75,123 Av. Cost of Capital 11.0%
Net Salvage (Equipment) 780,095 NPV ($) 557,063
Av. Cost of Capital 11.00% IRR (%) 16.1%
Payback Period (Years) 3.49
In EGP
2021 2022 2023 2024 2025 Formulas
Y0 Y1 Y2 Y3 Y4 =NPV(K13,L11:O11)+K11
Sales Volume 462,500 417,260 515,000 567,520 =IRR(K11:O11)
% Change 10.8% 18.9% 9.3% =3+ABS(N12/O11)
Sales Price 40 40 40 40
% Change 0.0% 0.0% 0.0%
Variable Cost % of Sales 15.0% 15.0% 15.0% 15.0%
% Change 0.0% 0.0% 0.0% 0.0%
Fixed Costs 3,000,000 3,000,000 3,000,000 3,000,000
% Change 0.0% 0.0% 0.0%
Depreciation Rates (Building) 5.00% 5.00% 5.00% 5.00%
Depreciation Rates (Equipment) 15.00% 15.00% 15.00% 15.00%

Free Cash Flows

2020 2021 2022 2023 2024
In EGP Y0 Y1 Y2 Y3 Y4
I. Initial Investment Outlays
Building -500,820
Equipment -1,560,190
∆NWC -1,100,700
Total net investment -3,161,710
II. Operating Cash Flows
Sales Revenues 18,500,000 16,690,400 20,600,000 22,700,800
Variable Cost 9,300,400 11,100,200 10,600,500 11,099,800
Fixed costs 7,900,300 7,900,300 7,900,300 7,900,300
Depreciation 259,070 259,070 259,070 259,070
EBIT 1,040,231 -2,569,170 1,840,131 3,441,631
Taxes 353,678 -873,518 625,644 1,170,154
NOPAT 686,552 -1,695,652 1,214,486 2,271,476
Depreciation 259,070 259,070 259,070 259,070
Operating Cash Flow 945,622 -1,436,582 1,473,556 2,530,546
III. Terminal Cash Flows
∆NWC 1,100,700
Net Salvage Value 855,218
Total Terminal Cash Flows 1,955,918
Project's Free Cash Flows -3,161,710 945,622 -1,436,582 1,473,556 4,486,464

32