Introduction to Finance Paper

Topics: Net present value, Internal rate of return, Cash flow Pages: 16 (4479 words) Published: September 24, 2014

Start up costs
We will require initial funding costs of $381,151 to fund our investments and expenses in the three month start up period. FE Exhibit 1: Initial Start Up Costs, displays our company’s start up costs; which includes our inventory investment, office assets costs, IS assets costs, pre-marketing expenses, the machinery investment and miscellaneous expenses. The majority of our starts up costs are miscellaneous expenses that total $232,539.64. These expenses are broken down into three categories; factory expenses, salary and wage expenses, and IS expenses; refer to FE Exhibit 1 for a detailed outline of miscellaneous expenses. We will need to invest $47,920.21 in raw materials in order to manufacture a pre-built stock to fulfill orders placed in the beginning of year one. In order to create this pre-build stock, we plan to purchase the appliances needed for production; which include the wood sawing and shaping machine, the volt drill, a metal sheet cutter, the workstations and the pressure sensor machine use for quality tests. The overall operations management start-up investment totals $48,293.38. We plan to purchase a total of $45,841.13 in IS assets as well as $2666.36 in office assets in our start-up period. The major IS assets includes the Microsoft dynamics + Customization software ($23,100) and the power generator ($24,500). The office assets purchase includes office chairs, conference table, refrigerator, and all other supplies needed to set up the office. The pre-marketing expenses of $3,890 comprises the cost of running a one-third page ad in Accessories Magazine, a trade publication for fashion accessories which will help push our product into retailers.

The paid-in-capital for our project that will cover total amount of funding we will require for years zero through five totals $825,490. We will need an initial cash investment of $539,308 to begin production in our start up period. To account for our negative cash flows in year one, we will require another cash investment of $286,182.

Npv, Irr & Working capital
For our base case scenario, Bellus’s  NPV is $1,777,133 and IRR is 62%, based off of a 25% discount rate assumption.  Investors will have an NPV of $951,685 and an IRR of 54% with a 60% stake in the company. The 60% stake takes into account the risk of the project the investors will absorb; risk factors will be addressed later. Friends and family will have a $825,448 NPV and a relatively higher IRR of 80%, and a 40% ownership in the company. The enhanced functionality of The Heeler contributes to the positive NPV, or in other words, an IRR of above 25%.  From a financial perspective, net income as a proportion of sales increases significantly over the years due to our high gross margin, which averages 65% over the first five years, comparable to The Brown Shoe Company’s gross margin of 40%. Due to the fact that our product expects to have a relatively long product life cycle and involves simple technology, we will generate a perpetual stream of net cash flows decreasing at a 5% annual rate after year 10. Since we are expanding from years one through seven, our total net working capital increases over the years in proportion to the increase in sales. Refer to the FE Exhibit #:Change in net working capital. Depreciation Expense Method

We are using straight-line depreciation for a period ten years with no residual value for the wood sawing and shaping machine, and the server we intend to purchase. There will be a three year depreciation period for the laptops, desktops, and tablets we intend to buy; for the remainder of the information systems hardware, operations machinery and office supplies we will apply a 5 year straight-line depreciation with no residual value

A noteworthy factor about our expensing method is that the cost of purchasing software will be accounted for as an expense as opposed to an asset that can be depreciated. Also, utilities expense is...
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