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The company is Coca-Cola, the product is ready to drink drinks and green tea. The previous papers are attached and please provide as much detail as possible.
Using your learning from MBA 520 and MBA 640, analyze the projected costs, revenue streams, and net present value for the concept from launch until two years after the breakeven point. Be sure to include a budget, an assessment of assets and liabilities, your anticipated sources of funding, and the associated costs of attaining that capital as part of the analysis. Justify the analysis with relevant primary and secondary data in an appendix, specifying any relevant assumptions and limitations. You should include, among other support, sales forecasts, cash flow statements, income projections, and any other relevant calculations or financial reports.
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Running head: MILESTONE 4: FINANCIAL ANALYSIS AND FUNDING PLAN
Milestone 4: Financial Analysis and Funding Plan
Name
Institution
Date
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MILESTONE 4: FINANCIAL ANALYSIS AND FUNDING PLAN
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Introduction
Financial analysis and funding plan is a critical aspect of a product implementation.
Before launching the product, a critical analysis of the expected costs and revenues must be
done. This gives the company vision and helps in remaining on track as far achieving objectives
is concerned. This section will, therefore, discuss Coca cola’s budget for launching two of its
products namely ready to drink and green tea. The paper also discusses the sources of funding,
the costs associated with these funding and final an assessment of the company’s assets and
liabilities.
Budget
The launch of these two products will require a total of $ 1,005,317 to launch. A good
percentage of this money will be used to acquire fixed assets whereas the remaining small
portion will be used in the pre-launch operating costs. This is well illustrated in the summary
attached in the appendix. The graph below shows the apportionment of this investment.
Operating Budget Allocation
capital
7%
Fixed assets
93%
MILESTONE 4: FINANCIAL ANALYSIS AND FUNDING PLAN
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In addition to the first investment, the budget also includes revenue and cost projections
for three years. The estimated revenue for the first year as shown in Appendix II is $1,084,807.
This is made up of 125,503 units of ready to drink at $ 3.65 per unit and 107,132 unit of green
tea at $ 5.85 per unit. This amount is projected to increase based on an assumption of a 10%
growth rate both in year two and year three. The growth is expected because within three years
the brand awareness among consumers will have increased thereby leading to increased demand
(Ciccone, 2005; Marsh, 2013). The expenses for the three year period have also been forecasted.
Unlike the revenue, not all the expenses are expected to increase at the same rate. The growth
rate is different with some of the expenses having negative growth rate as shown in Appendix
III. Even so the total operating has increased throughout the period. The projected operating
expenses for the three years are $112,520, $113,106 and $113,861 for year 1, 2 and 3
respectively.
Based on this projected budget, the company is expected to break-even during the first
year of operations as shown by positive net income in the projected income statement under
Appendix I. The projected income for the first year is $ 6,799. In the second year, high growth in
sales and low growth in expenses are expected to lead to a net income of $ 50,233. However
comes year three, this is expected to drop significantly as the product demand starts to normalize
thereby leading to a forecasted income of $ 12,571.
The break-even point for these products was reached before the end of year one. The
yearly and monthly break-even values are 443,149 and 36,929 respectively for the first year. The
break-even analysis is clearly outlined in appendix VIII. These two figures further support the
argument that the break-even point was reached before the end of the first year of operations.
MILESTONE 4: FINANCIAL ANALYSIS AND FUNDING PLAN
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Net Present Value (NPV)
In addition to forecasting the revenues and costs, the project NPV have also been
determined to evaluate whether the whole project is a good one. To calculate the net present
value, the projected cash flow has been calculated by adding depreciation to the net income. This
is because depreciation is a non-cash item and not included when calculating cash flows
(Brealey, Myers, Allen, & Sandri, 2011). An assumption has been made concerning the discount
rate. A discount rate of 105 has been used to discount the projected cash flows. The NPV has
been calculated as shown in the table below.
Discount rate
Net Income
Add back depreciation
Projected cash flow
NPV
Determination of NPV
10.00%
Year 0
$ (1,005,317)
Year 1
$ 6,799
0 $ 430,750
$ (1,005,317)
$ 437,549
Year 2
$ 50,233
$ 430,750
$ 480,983
Year 3
$ 12,571
$ 430,750
$ 443,321
$111,850.04
The NPV above is positive meaning the project is viable and therefore can be launched
(Goel, 2015).
Assets and Liabilities Assessment
Furthermore, the financial analysis includes the assessment of the company’s projected
assets and liabilities to determine the company’s going concern and liquidity status (Helfert &
Helfert, 2001; Marsh, 2013). The company’s projected balance sheet shows in detail the
company’s total assets and liabilities. As outlined in Appendix VI, the company’s estimated
assets are more than the liabilities. This shows that the company’s going concern is not
MILESTONE 4: FINANCIAL ANALYSIS AND FUNDING PLAN
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threatened. Moreover, the current assets are way more than the current liabilities indicating a
high liquidity level.
The company’s total assets for the year first amounted to $ 1,102,781 compared to
liabilities value of $ 397,276. The reason behind this big margin is because the product is still at
its infant stage and the company does not have many supplies or creditors. As time progresses,
this variance is bound to change. The variance between the two values will definitely reduce.
Even so, it is advisable that the liabilities always remain below the assets (Ciccone, 2005; Helfert
& Helfert, 2001; Marsh, 2013). Otherwise, the company’s going concern, as well as liquidity,
may be threatened and this will affect the company’s day to day operations. Therefore as it
stands, the company’s going concern and liquidity level is good.
Funding Sources
The main source for this product launch is the owners followed by commercial loan and
lastly by outside investors as clearly outlined in Appendix I. The owner equity alone was not
enough to fund this project and therefore the need to source for outside investors. The outside
invested an amount totaling to $ 201,707 through the issue of ordinary shares. This funding
source accounted for 20.06% of the total funding needed. The owners’ equity, on the other hand,
accounted for 49.44% of the funding. This clearly shows that the company still needed additional
capital. And therefore a third source of funding- commercial loan was sorted. This accounted for
the remaining 30.5%.
The total loan taken amounted to $ 306,611 which attracted an interest rate of 9% per
annum with a repayment period of 84 months meaning it was a long-term loan. Starting the first
year of operation, the company is expected to pay a total of $ 26,258 and $ 32,939 as interest and
MILESTONE 4: FINANCIAL ANALYSIS AND FUNDING PLAN
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principal amount for the first year as indicated in the amortization schedule under appendix V.
The second year interest will reduce to $ 23,168 while the principal repayment will increase to $
36,029. The final loan balance after three years will be $ 198,235. This will be after an interest
payment of $ 19,789 and the principal amount of $ 39,408 for the third year.
Cost of Capital
Both the equity and debt funding used by the company has associated costs. However,
currently, the main cost being felt is the costs associated with the commercial loan (Brealey,
Myers, Allen, & Sandri, 2011). This is because the company has not yet started giving out
dividends to its shareholders. The main cost of the debt capital is the monthly interest payment
which leads to an increase in the company’s finance costs. However, there are other costs
associated with this kind of funding. This cost includes the loan agreement contract costs and
other costs associated with looking for and applying for the loan.
As the company grows and start making more profits, it will expect to start paying
dividends to its shareholders. This will form the main cost of equity capital. However, there are
other costs like the cost of floating the shares to the public and the ...