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Financial Analysis (LiliRose Pty Ltd)
The LiliRose Pty Ltd should implement the proposal of starting a new salon in Mount Pleasant. The analysis of this project reveals that the project would be viable with a net present value of $146419 for the ten years, which is considered the life period of the project. The WACC of the company is found out to be 13.45%. In order to obtain the projected NPV, the salon will have to operate six stations 3 for massage, 2 for massage, and one for skin therapy. As such, the analysis of the project recommends the company to invest in the new salon, and operate for 48 hours per week.
Statement of Business Problem
LiliRose Pty Ltd will need to expand its three salons in order to facilitate expansion and boost profitability. The company considers opening a new salon at Mount Pleasant. To get return for money invested, the company will require to have sustainable cash flow, and positive net present value of the annual returns. The new salon project will be evaluated for a period of ten years. If the project will have stable cash flow, positive NPV and have projected sustainability then it would be viable. In analysing the report, the expected cash flow in the ten operational years is calculated, various scenarios are taken, the WACC of the company is obtained, and NPV is calculated. The best scenario that has the highest NPV is chosen as the optimal investment opportunity (Dayanada, 2012).
Analysis of the Proposal
The new project requires the initial investment amounting to $ 61 000. This will cater for feasibility study, signage, and branding, recoverable deposit for the premises, furniture, IT equipment, and beauty and therapy equipments (Dayanada, 2012). With level of the investment in the new salon, it is projected that in the first year the salon will earn an annual net income of $ 22047, assuming that the salon will have six stations. The salon will have 3 manicure stations, 2 massage stations and 1 skin therapy station. For this level of income, it is assumed that the manicure stations will have an average of 50% daily productive hour’s usage, massage will have 45% and ski therapy stations will have 40% daily usage in the first year. It is projected that the annual income will grow at the rate of 2.8% annually, which will be facilitated by the growth in the number of productive hours percentage due to increase in the number of customers, which means that the first five years will have an income of $22047, $22665, $23299, $23952 and $24622 respectively.
If the company opens a salon operating 3 manicure stations, 2 massage stations and 1 skin therapy station operating at 50% per productive hour the annual income would be $ 39525, while operating at 30% the company would have annual loss of $ 58165. If the company operates 5 stations comprising of 2 manicure, one massage stations and 2 skin therapy station, each operating at 70%, 50% and 65%, it will have an annual net profit of $ 28268. If the company opens, a new salon that………………….