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Coffee Shop: Feasibility Study Report
Coffee Shop: Feasibility Study Report
The Project will be different from what is available in the market due to the
unique type of coffee that will be supplied from the franchiser. The franchiser will
supply us with the inventory the whole year period. The cafe will have a menu
similar to what is available in the competitors' menus, hot and cold drinks. Also,
the cafe will offer some desserts like cup cakes, muffins, cookies, etc and some
light food like sandwiches and salads that are suitable for snack.
Starting the project, we surveyed 180 people from both genders and different
occupations. The survey was held using a questionnaire consists of 17 questions.
Our respondents were mainly university students and employees. We mainly
focused our questions on how much people are willing to pay and visit the shop
and what is their favorite coffee shop they used to buy from. In the process of
calculating the number of visitors and the market share we used the annual report
of the Ministry of Planning.
We used the numbers and figures we obtained from the survey to estimate the
sales by estimating price, number of visitors and the expected market share. For the
coming years, our sales is expected to increase by the inflation rate.
Moving to numbers and analysis, we used capital budgeting tools with some
other tools that help in making the decision. The figures we got is encouraging,
starting with a promising positive NPV with IRR and MIRR higher than the cost of
capital (WACC) we used. Moreover, the discounted payback period is less than the
project life we assumed as well as the profitability index is more than one. All
these indicators lead us to one decision that is to go ahead with the project.
*Note: All figures and numbers are calculated based on assumptions and inputs
that will be discussed later in the report.
The idea of the project is not new in the local market, the idea of the project is
a traditional coffee shop like some well known coffee shops Star Bucks, Caribou,
Coffee Republic and more. The thing that will differentiate the project from what
are in the market is the new franchise that will be imported to Kuwait for the first
time from Colombia. What makes this franchise so special is the type of the coffee
beans they use.
The cafe will have a menu similar to what is available in the competitors'
menus, hot drinks and cold drinks. Also, the cafe will offer some desserts like cup
cakes, muffins, cookies, etc and some light food like sandwiches and salads that
are suitable for snack.
The idea of the project came from a real investor who want to open such a kind
of project. We have been asked by him to evaluate the feasibility of project in the
local market to decide whether to accept or reject.
Survey:
A survey was conducted with 180 people of different ages, gender and
occupations mainly students and employees. The survey was held through a
questionnaire consists of 17 questions (Appendix 1).
1. Gender:
The surveyed sample was consisting of 66% females and 34% males.
2. Age:
The respondents were aimed to be chosen from the age group between 20-40
years and the reason behind this is that we believe that this age group is the
main customer of our product.
Price:
The price that we forecasted was calculated from the survey figures. We had
3 price categories in the survey 1-2KD, 2-4KD and 4-5KD, and as the first
step we calculated the average price of each of this categories' ranges. Then
we multiplied each of the price averages of each of the categories with its
weights that we have obtained from the survey and the result was rounded
up to 3 KD.
Visiting:
We followed the same manner of price calculations to get the number of
visiting weekly. We got the number of 2 visits weekly per customer.
Number of customers:
Before calculating the number of customers, we had to estimate our market
share if we entered the local market. The market shares of each of the
competitors of this business were estimated through our questionnaire. We
decided as one of the assumptions to determine our market share as the
average of the lowest three competitors we have (Gloria, Coffee Beans,
Columbus). The number we got was 1.34% of the market.
Moving on to calculate the number of customers and based on the fact that
we want to establish our shop in Hawalli governorate, we took the number
of the population in three main areas Hawalli, Salmiya and Jabriya - from
the annual report of Ministry of Planning - where we focused on the age
groups between 20-30 and 31-40 years that fit our assumption. We
multiplied the total number of each of this age groups by its weight from the
age table we have from the survey. As a final step, we multiplied the total by
the calculated market share and end up with around 601 customers per week.
Yearly sales = Price No. of customers per week No. of visiting per week
market share 52week.
= 3 601 2 1.34% 52 = 187,512 KD
Assumptions (Inputs):
Regarding the inputs, we gathered our information from the franchiser and from
a managers of one of the competitors. While for the rest of the inputs, the numbers
were estimated based on the current market situations and some consultants from
different fields.
4. Variable costs are estimated as 35% of the sales. (20% as franchise cost)
All the rest of the expenses are estimated from one of the competitor's manager
and some are modified according to the project needs.
Starting with the capital budgeting tools, we can summarize what we calculated
in this table:
Project Analysis
NPV 51,724.26
IRR 31.80%
MIRR 26.58%
Payback 3.28 Years
Discounted Payback 4.00 Years
Profitability Index 1.327
Std. 397.49
CV 0.008
We can notice that the project is acceptable according to the NPV method
(positive figure) and according to IRR and MIRR it's also acceptable since both are
higher than the WACC.
Profitability index (PI) is also another factor that encourages to accept the
project since it higher than one (1.327). It means that we are expecting to get
1.327KD for each 1KD we put as initial cost taking in consideration time value of
money. Profitability Index is calculated as NPV of future cash flows divided by
initial cost.
Risk Analysis:
Three techniques were used to assess project risk: sensitivity analysis, scenario
analysis, and basic simulation.
1. Sensitivity analysis:
We did the sensitivity analysis following two methods:
Normal sensitivity analysis:
By changing the WACC. We chose this factor to be changed
because part of the WACC ,that is the required rate of return, is
not calculated, instead it's taken from one of the competitors as
it's known to be in this type of business.
200,000.00
150,000.00
100,000.00
NPV
50,000.00
0.00
0% 10% 20% 30% 40% 50% 60% 70%
(50,000.00)
(100,000.00)
Growth
0% 1% 2% 3% 4% 5%
- - - - - -
5% 2,152,102 2,675,300 3,547,296 5,291,288 10,523,265 -
10% 904,094 1,000,619 1,121,275 1,276,405 1,483,244 1,772,819
WACC 15% 500,205 534,834 574,790 621,407 676,499 742,609
20% 305,257 321,399 339,334 359,379 381,929 407,487
25% 192,651 201,334 210,771 221,067 232,344 244,748
30% 120,443 125,562 131,046 136,936 143,280 150,131
35% 70,818 74,036 77,448 81,075 84,935 89,052
Cases Assumption
As a final step we calculated the expected NPV and the result was
promising since we got a positive number of 167,519KD.
3. Basic simulation:
The purpose behind the simulation is to examine the reality by
changing the most sensitive factor to get the ranges that the NPV will
change in between. We focused on the market share as the most
sensitive factor we have since there are lots of competitors and we can
consider that the market is saturated or in mature phase.
Confidence Level(95.0%)
Lower Bound 84,716.95
Upper Bound 147,498.42
NPV Profiles:
In doing the profiles for the project and since we have only one project, we
assumed a best case scenario different than the case used in the scenario analysis.
This new best case is being used as a project B. Of course by using different
WACCs, we did found different NPVs for each of the "projects" to draw the
profiles. The crossover rate is 58%.
Project A is the project under the base case.
NPV Profile
Project A Project B Cross-rate =0.58
250,000.00
200,000.00
150,000.00
100,000.00
50,000.00
0.00
0% 20% 40% 60% 80% 100%
(50,000.00)
(100,000.00)
(150,000.00)
Break-Even Analysis
Sales Fixed Total Cost BEU Approx. =33718
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
0 20000 40000 60000 80000 100000 120000 140000
No. of Customers
where:
Delay option:
To examine whether to delay the project due to extensive advertising
campaign. We assumed that we want to delay the option for 1 year
from now to expand our advertising campaign and to extend the
period of the advertisement. The idea is to increase the number of
customers. As we supposed the number will increase to 700 customers
per week. We also assumed that the variable cost will decrease to 30%
instead of 35%. The logic behind this reduction is that we will spend
more time is studying the market and this will help in finding better
suppliers with less cost.
Abandonment option:
The assumption we took for to apply this option is that if the sales
don't reach 102,000 K.D we will abandon and sell the equipments for
its book value. We chose this amount is because it's the break-even
point that makes the total sales equal to total costs.
We used the worst case scenario to estimate the sales in order to take
this option. The sales was around 52,000KD at the first year which is
less than 102,000KD so we decided to abandon the project.
With this option, we saved a loss of about 61,000KD (option value)
because the losses decreased from about 91,000KD to 30,000KD.
(Appendix 3)
NPV without Option (91,433.83)
NPV with Option (29,934.79)
Value of the Option 61,499.05
Shutdown option:
To examine the best year to sell the project at the best NPV. At the
beginning and before determining the shutdown year, we used the best
case scenario then we calculated the NPVs for each year including the
terminal value and we found the best year to sell is the third year.
We took two scenarios 50% probability for the base case and 50% for
the best case. The first scenario without option while the second with.
We noticed that we will gain more with the option by approximately
6,000KD, although we get high positive NPV in the first scenario.
(Appendix 4)
NPV without Option 374,654.68
NPV with Option 380,903.96
Value of the Option 6,249.28
16 | P a g e The Coffee Shop
Recommendation:
According to the results we obtained from:
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40 40-30 30-20 .2 : 20
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.7 :
5 : 4 4 : 2 2 : 1
.8 :
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5 ( ) .............. 5: 3 3: 1
.10 :
7 - 5 - 4 3 - 2 1
6
.11 :
.12 ( ) :
.13 ( ):
.14 :
.15 ( ):
( )
() 8
() 9
10 ()
11
12
13
.16 ( )
.17 ( )
10 9 8 7 6 5 4 3 2 1 1
6
10 9 8 7 6 5 4 3 2 1 2
6
10 9 8 7 6 5 4 3 2 1 3
10 9 8 7 6 5 4 3 2 1 4
10 9 8 7 6 5 4 3 2 1 ( ) 5
10 9 8 7 6 5 4 3 2 1 6
10 9 8 7 6 5 4 3 2 1 7
10 9 8 7 6 5 4 3 2 1 8
10 9 8 7 6 5 4 3 2 1 9
10 9 8 7 6 5 4 3 2 1 10
10 9 8 7 6 5 4 3 2 1 ( )..... 11
10 9 8 7 6 5 4 3 2 1 13
,,,
Appendix 2
Appendix 3
Appendix 4