Scenario: You're a savvy entrepreneur that wants to open an ice cream shop downtown near the college campus. However, you remember your lesson on financial planning and decide it's a good idea to project cash flows for your business before investing your time and money in the operation. Your objective is break-even on a cash basis within 3 years of opening shop - Otherwise, the business opportunity is not worth your time. You make the following assumptions and notes: Each ice cream cone is sold for ₱25 and costs ₱25 to make in materials. You plan on selling 10,000 cones in year 1, 15,000 cones in year 2, and 25,000 cones in year 3. Sales projections after year 3 are difficult to make, but you know that they will not be lower than 25,000 cones per year. Your lease for the business location is ₱125,000 annually, and your lease for the ice cream equipment is ₱62,500 annually. You plan on hiring part-time staff to help you during peak season. You assume that this would cost ₱62,500 annually for years 1 and 2 and ₱125,000 in year 3. Your overhead, legal and accounting costs amount to ₱62,500 in the first year and ₱31,250 per year in subsequent years. Required: Prepare a cash flow projection for the next 3 years for your ice cream business. Is the ice cream shop worth your time as an investment according to your criteria?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter4: Time Value Of Money

Section: Chapter Questions

Problem 1cM

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Question

Scenario:

You're a savvy entrepreneur that wants to open an ice cream shop downtown near the college campus. However, you remember your lesson on financial planning and decide it's a good idea to project cash flows for your business before investing your time and money in the operation. Your objective is break-even on a cash basis within 3 years of opening shop - Otherwise, the business opportunity is not worth your time.

You make the following assumptions and notes:

Each ice cream cone is sold for ₱25 and costs ₱25 to make in materials.
You plan on selling 10,000 cones in year 1, 15,000 cones in year 2, and 25,000 cones in year 3.
Sales projections after year 3 are difficult to make, but you know that they will not be lower than 25,000 cones per year.
Your lease for the business location is ₱125,000 annually, and your lease for the ice cream equipment is ₱62,500 annually.
You plan on hiring part-time staff to help you during peak season. You assume that this would cost ₱62,500 annually for years 1 and 2 and ₱125,000 in year 3.
Your overhead, legal and accounting costs amount to ₱62,500 in the first year and ₱31,250 per year in subsequent years.

Required:

Prepare a cash flow projection for the next 3 years for your ice cream business.
Is the ice cream shop worth your time as an investment according to your criteria?

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