New Hair Product - Essay Example

INVESTMENT PROPOSAL of ARG Hairs Group Introduction Hair Softe is a hair shampoo that could cleanse and refresh hair with shampoos for all hair types. It is developed by ARG Hairs Group that firmly believes that Hair Softe could revolutionize the hair product market. The Company. ARG Hairs Group is a registered company operating in UK. The company has an established reputation for selling cosmetic products and has done well along this line. Hair Shine Shampoo is a new product that has been developed by its research and development team, and they are confident that this product would change the dispositions of consumers on shampoos. Marketing strategy. Initially ARG Hairs Group wanted Hair Softe to be carried by supermarkets in UK and Ireland. ARG Hairs Group also plans to open a company website wherein prospective customers can order the product on line. A separate study on the marketing strategy is being prepared to initialize the campaign. Production capability. Hair Softe Shampoo is a commodity item that is saleable for both men and women, and a target of 24,000 ml units of shampoo monthly could easily be sold in the UK market. It has a production capacity of 1,000 ml. units per day, but has the capability to increase future production. Investment plan. An investment of $150,000 and equity capital of ARG Hairs Group are needed to launch the product in the market. Owners’ capital is $65,000.00 while investors will have to provide $150,000 in form of stock equity. Rationale for investment. The proposal for investment to the Hair Softe Products is being recommended to investors knowing that investing in ARG Hairs Group will be a rewarding investment based on the following assumptions: 1. The return on the equity of the owner is 9% on the first year of operation. The 9% return on investment is higher than the prevailing bank rate of interest in UK which is 0.5%. UK interest rate is expected to remain at the recent level because of the government’s monetary policy. (Bank of England, 2011) Monetary Policy Decisions. (http://www.bankofengland.co.uk/) 2. The cash flow statement of the company prepared for a 12 month operation shows that for the first three months there is a shortage of cash inflow to sustain all the expenses of the company and there is a need for an outside financing for its day to day operations because of capital expenses during these months. Thereafter, after March, company will have available cash to pay for its loan obligations, taxes and interest and to pay for equity. The cash flow has been prepared based on the 1,000 ml. units of production per day and operations of 24 days in a month. Sales are expected to increase by 5% a month, and profit is also anticipated along the operations. The cash flow statement present all the cash expected to be received during the operations as well as the requirements for the expenses in the operation for the month. A cash inflow statement is a projection of cash receipts and disbursements to know whether there is a foreseeable need for funds during a certain span of time. It also allows the management to plan its financial requirements and manage excess funds. At the start of the operation, cash inflow is expected to come from loan or equity from investors. It is expected that the amount of $150,000 will be available to purchase the plant equipments needed for the manufacturing. 3. The proposed operation has a net profit margin of 46%. The net profit margin is calculated as: Net income divided by revenue which is Net income = $265,192.95 Revenue = 498,883.55 NET PROFIT MARGIN = 53% Net income of $265,192.95 is the total net income from January to December, while revenue of $498,883.55 is the total revenue from the same months. The high net profit margin ratio indicates how well the operation converts the sales into profit. Net profit margin is how much of each dollar of sales a company will keep after expenses. 4. For purposes of estimates in the financial statement, the projected sales comes from the manufacturing capacity of the plant, which is not yet set on the maximized level. As the operation progresses, increases in sales and manufacturing level will follow, and set at 5 percent increase monthly. Cost of goods sold is estimated at 40 percent of revenues. Cost of goods are direct costs of manufacturing that includes all materials used for the product The gross profit left after deducting the costs of goods sold is then used for expenses to fund other activities. These are variable and fixed cost of expenses. Variable costs are used for selling that includes advertising and promotion to introduce the product in the market. Selling and promotion are marketing strategies needed to launch the product in order to catch the attention of the consumers to buy HAIR SOFT SHAMPOO. The other costs are cost of electricity, water, fuel, transportation and other expenses that vary according to the activities. Variable cost is 25% of selling price. Fixed costs are for rental, salaries and depreciation. Estimates are kept at minimum. A monthly allocation of tax payments is included in the estimates that are set at 28% UK tax rate. The estimates on cash inflows were drawn from the assumption of selling activities for one year A loan structure of $150,000 is available for the company for purchase of plant equipment. Loan requires a monthly repayment for a period of 12 months and a 2% loan interest for one year A onetime expense of $150,000 for plant and equipment is set aside at the beginning of the operation and is capitalized as an asset of the company. The assumption in the balance sheet is based on owner’s equity and loan. The balance sheet presents the assets as cash accumulated in the operation and the equipment investment , inventory, and accounts receivable of the company. It is balanced by the retained earnings and capital contribution of the owner. It is assumed that there is no capital and retained earnings withdrawal in the year end. Analysis of the break -even point of sales The break even unit of sales is at 2,626 units of 250 ml. which is expected to be achieved in the first month of operation. Break -even point is the level of sales at which profit is zero. Expected production and sales in the first month is 24,000 units and $53,760 respectively. Conclusion The proposal for investment at ARS Group presents a fair share of investment returns at 9% which is comparatively higher than the prevailing interest rate in the UK. On the basis of the assumptions of the proposal, an investor’s yield of return will be higher than those promised in the equity market such as the bonds. The product has a promise of appeal to consumers and it will be easy to introduce in the market. The company that will handle the product has an experience in entrepreneurship and will have an advantage in the marketing playing field. For the first three months of operations, there is projected shortage of funds due to investments in equipment and research and development. Other than this, succeeding operations of the company show a healthy cash flow for operations. In order to meet this shortage of funds for the first three months, financial arrangement of moratorium of loan amortization for the first three months should be arranged with creditor banks. However, if funds should come from investors, payment of investment and returns may be scheduled at the mid-year and end of the year. Attachments to this report are: 1. Assumptions used 2. Marginal cost statement analysis 3. Break even point analysis 4. Projected cash flows 5. Projected Financial statement and balance sheets ATTACHMENTS 1. ASSUMPTIONS USED IN PREPARATION OF THE FINANCIAL STATEMENTS & CASH FLOW STATEMENT Product: Hair Shampoo, cleanse and refresh hair with shampoos for all hair types Unit Cost selling price, per 250 ml. $2.24 Production capacity 1,000 units per day Working days 24 days a month Total production per month 24,000 units of 250 ml Total expected sales : 24,000 x $2.24 $53,760.00 per month Sales to increase per month 5% increase monthly Cost of goods sold assumed at 40 percent of gross income Selling & Administrative 25% a month of gross income Depreciation of equipment Straight line – 5 years $2,500.00 month Research & Development – one time INVESTMENT $20,000.00 Taxable income – based on income tax in UK 28 percent Interest on loan 2% p.a Loan amortization paid monthly for 12 months Amount of loan or equity from stockholders $150,000 Fixed cost Building rental P1,000.00 Depreciation, 2,500.00 Salaries of executives 2,500.00 Variable cost Selling expenses such as advertising & promotion 25% of gross income $128,292.67 Administrative expenses include office materials, light, water ,telephone, insurance, maintenance There is a shortage of funds available for first 3 months because of purchase of equipment and research & development expenses.. Net income for first 3 months not sufficient to support operation. By the month of April, business is able to survive all expenses and will have accumulated profit end of year. Return on investment calculation: Gain from investment minus cost of investment divided by cost of investment. Cost of investment ($65,000 + $150000) $215,000.00 Gain from investment , $234,573.45 ROI = GI – CI divided by CI 9 percent 2. MARGINAL COST STATEMENT ON A PER UNIT BASIS Price of shampoo per bottle 2.24 Less Cost of sales (40% of sale price) 0.896 Gross profit 1.34 Less: Variable cost (25% of price) 1.2254 Marginal cost profit contribution. 0.1146 3. BREAK EVEN POINT ANALYSIS FIXED COST RENTAL 1,000.00 Depreciation 1,500.00 Salaries 2,500.00 Total Fixed Cost (TFC) 6000.00 Break Even Analysis TFC/(SPU-VCU) TFC 5,000.00 Variable cost per Unit (VCU) 1.2254 Selling price per unit (SPU) 2.24 SPU-VCU 1.0146 TSFC/(SPU-VCU) 5,000/1.0146 BEP unit 2,626.25 Note: Fixed costs are expenses that do not vary with sales and remains the same monthly. Variable costs are expenses that may either go up or go down depending on the monthly activities of the company. See explanatory notes on assumptions. In the chart below, profit is realized when the quantity sold is 2625 units. At 2625 units of bottle sold, there is neither profit or loss, and thus it is called break-even-point. Sales Quantity SPU TFC VCU TC Profit 0 0 2.24 6,000.00 1.23 6,001.23   $1,120 500 2.24 6,000.00 615.00 6,615.00 (5,495.00) $2,240 1000 2.24 6,000.00 1,230.00 7,230.00 (5,190.00) $4,480 2000 2.24 6,000.00 1,845.00 7,845.00 (3,365.00) $6,720 3000 2.24 6,000.00 2,240.00 8,240.00 (1,520.00) $8,960 4000 2.24 6,000.00 2,800.00 8,800.00 160.00 $11,200 5000 2.24 6,000.00 3,360.00 9,360.00 1,840.00 4. Proforma Balance sheet HAIR SOFT PRODUCTS PROJECTED BALANCE SHEET YEAR END CURRENT ASSETS CURRENT LIABILITIES Cash resources year end 92,309.00 Unpaid portion of loan P12,500.00 Merchandise inventory 46,281.00 Res. & Dev. 20,000.00 Accounts receivable 6,483.45 Equity & retained earnings Fixed Assets Stated capital 65,000.00 Equipment 150,000.00 Retained earnings 265,1925..95 Less: depreciation 30,000 147,000.00 TOTAL CURRENT LIABILITIES TOTAL ASSETS 312,073.45 & RETAINED EARNINGS 312,073.45 HAIR SOFT PRODUCTS PROJECTED INCOME STATEMENT YEAR END PROJECTED SALES 855,284.46 LESS: COST OF SALES Opening inventory 125,000.00 Purchases 217,113.78 342,113.78 Closing inventory 46,281.00 295,832.78 GROSS PROFIT 559,451.46 Less OPERATING COST Fixed Cost Rental 12,000 Depreciation 30,000 Salaries 30,000 TOTAL FIXED COST 72,000.00 Variable cost Selling and administrative 25% of gross income 128,292.67 TOTAL FIXED & VARIABLE COST 200,292.67 INCOME BEFORE TAXES & INTEREST 359,158.79 LESS Taxes (25.3 percent) 90,965.84 Interest on loans 2% 3,000.00 Total taxes & interests 93,965.84 Net income 265,192.95 HAIR SOFTE SHAMPOO CASH FLOW STATEMENT YEAR END Cash inflows from operating activities Net income for the year 265,192.95 Decrease in working capital items Accounts receivables 6,483.45 Balance of loan amortization 12,500.00 Inventory 46,281.00 , 65,264.45 Cash resources from operating activities 199,298.50 SIGNIFICANT POLICIES AND GENERAL INFORMATION 1. Nature of business – privately owned corporation, subject to UK laws 2. Property, plant and equipment are stated at cost. Depreciation is amortized at straight line- 5 years.: Where SL = Cost divided by no. of years. Item Cost ACCUM. DEPN.. Net book value 2011 Book Value 2015 Machinery $150,000 30,000 120,000 0 3. Long term debt Bank term loan bearing interest at 2% Repayable at monthly amortization of $12,500.00 2011 Bank loan 150,000.00 Unpaid portion 12,500.00 Approximate principal payments 137,500.00 4. Stated capital (owner’s equity) 65,000.00 5. Net profit margin is a measure on how the company controls its costs, and high profit margin indicates efficiency in operation. 6. Selling and administrative expenses are part of the variable costs which is equivalent to25% of gross income 7. Income statement, balance sheet, and cash flow are stated in one year. 8. Selling & administrative expenses are taken up in the Income statement. 9 Taxes are derived from the income before taxes and interest. Taxes are not based on gross income but from income as result of operation Reference: Bank of England, 201. Monetary Policy Decisions. Retrieved 09 August 2011 (http://www.bankofengland.co.uk/) Read More