Old book store

Group members
Rameen Kamran (078)
Anum Gul (010)
Yawer Shafique (125)
Zahran Minhas (070)
Suheer Haider (102)
Zeeshan Haider (126)
Sher Azhar (094)

Ma’am Hira Idress Financial management

Table of Contents
Feasibility report..........................................................................................................................................3
Idea behind startup..................................................................................................................................3
Economic life of project..........................................................................................................................3
Target audience:......................................................................................................................................3
Seasonality impact:..................................................................................................................................3
Product:...................................................................................................................................................3
Price........................................................................................................................................................3
Opening of store......................................................................................................................................3
Inflation rate:...........................................................................................................................................4
Justification for WACC...........................................................................................................................4
Market expansion:...................................................................................................................................4
Cash outflow...........................................................................................................................................4
Depreciation............................................................................................................................................4
Tax rate....................................................................................................................................................4
Salvage value of business........................................................................................................................4
Costs........................................................................................................................................................4
Balance sheet of beginning of 2019.............................................................................................................5
Income statement for 3 years.......................................................................................................................6
Weighted average cost of capital WACC....................................................................................................7
Cash flow estimations..................................................................................................................................8
Step 1: Net cash flow at time 0................................................................................................................8
Step 2: Depreciation Schedule.................................................................................................................8
Step 3: Annual operating Cash flows.......................................................................................................9
Step 4 Terminal cash flows......................................................................................................................9
Sellers Discretionary Earning (SDE)...................................................................................................9
Capital budgeting techniques.....................................................................................................................10
Discounted cash flow method:............................................................................................................12
Net present value NPV......................................................................................................................12
Internal rate of return (IRR)...............................................................................................................12
Profitability Index (PI):......................................................................................................................13

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 Modified internal rate of return (MIRR)............................................................................................13
Discounted payback period................................................................................................................14
The traditional method.......................................................................................................................15
Payback period method:....................................................................................................................15
Risk analysis techniques............................................................................................................................16
Stand-alone Risk Analysis.....................................................................................................................16
Break-Even Analysis.........................................................................................................................16
Result........................................................................................................................................................17
Recommendations.....................................................................................................................................17

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 Feasibility report
Idea behind startup
The Idea behind starting an Old Books store in the University?

It started because people often throw away their books and precious notes after they are
done with the semester and those valuable assets rot their till they are ultimately either
burned or sold as a mere piece of paper but with a shop in University that is willing to
buy those books and notes at a reasonable price, there would be no reason to throw those
things away. Every new semester students goes to market and buys books, so If there is
an Old books store in University they can get those exact books that they need at a
reasonable Price. We will provide course books of all subjects and courses.

Economic life of project

3 years.

Target audience:
All students of Bahria university of Islamabad campus.

Seasonality impact:
In university there are 3 semesters: spring, fall and summer. Our target is spring and fall
semesters because students who fail or want to improve their grades take summer
semester and they already have their notes and books.

Product:
We will offer wide range of old books, old course packs and old notes. This includes just
about every conceivable category including business, engineering, environmental and
social sciences, geology, geophysics and legal studies etc.

Price
We will buy old books in Rs. 600. Our selling percentage price will be Rs.1300.

Opening of store
Old book store in Bahria university will be opened on 11th September 2019.

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 Store wouldn’t be opened in weekend.

Inflation rate:
Inflation rate is increased by 1.0698% in 2020 and 1.05% in 2021 as compared to
previous year.

Justification for WACC

We chose Kd= 10.2%. This assumption is based with the coordination of bank interest
rate and CPEC interest rate. Pakistan must pay 2.5% interest rate on 62 billion for 20
years.
Ke= 9.9% this is rate of return on equity based on our own assumptions.

Market expansion:
Old book store startup in term of marketing is market expansion because in Bahria
university there is no old bookstore. So, all together it is a new project.

Cash outflow
It includes:

Cost of equipment.
Cost of building purchase
Inventories

Depreciation
Depreciation is basically non-cash expense, but we subtract it from income statement to
save our tax and after tax we add back into EAT.

Tax rate
Tax rate is 25% because in Pakistan small companies pays 25% tax on their
earning/profit.

Salvage value of business

After 3 years business have some salvage value in which we can sell our business.so, to
find that salvage/value of firm we used sellers’ discretionary earnings (SDE)

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Costs
Fixed cost includes insurance, and utilities and variable cost includes payroll, book cost
and advertising expenses.

CF0

Rent (1 year) 200,000

Equipment 110,000 this cost is for 3 years all

(book-shelf furnishing store and computer for recording furniture and replacement
of sales)
Inventory Rs.600 5,400,000
(3000 books)

Total CF0 Rs.5,710,000

Balance sheet of beginning of 2019

Assets Rs Liabilities & equity Rs

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Current assets: Current Liabilities

Inventory 5,400,000 A/P 210,000

Total CA Total Current Liabilities 210,000

5,400,000
Non-current assets Long term liabilities

Equipment 110,000 Notes/payable 2,000,000

Building 200,000
2,210,000
Total liabilities
TOTAL ASSETS 5,710,000
Equity
3,500,000
Owners’ equity
Total liabilities and 5,710,000
equity

Income statement for 3 years

2019 1.0698 2020 1.05 2021

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Revenue (2900) 3,770,000 1.0698 4,033,146 1.05 4,700,969
(2900) (3100)
-variable cost
45% of sales 1,696,500 1.0698 1,814,916 1.05 2,115,435
- Fixed cost 50,000 1.0698 53490 1.05 56,164
Dep on building 66,666 66,666 66,666
Dep on equip 36,666 36,666 36,666
=EBIT 1,920,168 2,061,408 2,426,038
-tax (25%) 480,042 515,352 606,509

=EAT 1,440,126 Rs.1,546,05 Rs.1,819,529

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 Earning After Tax
2000000
1819529
1800000

1600000 1546056
1440126
1400000

1200000

1000000

800000

600000

400000

200000

0
2019 2020 2021

Weighted average cost of capital WACC

The minimum cost a business is going to bear is WACC.

WACC= wd*kd(1-T) + We*Ke

Wd= 2,000,000/5,500,000

= 0.3636

We= 3,500,000/5,500,000

=0.6364

Kd= 10.2%

Ke= 9.9%

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WACC= 0.3636× 0.102(1-0.25) + 0.6364×0.099

=0.0278+ 0.063

= 0.898 = 9%

Cash flow estimations

Assumptions

EBIT1= Rs. 1,920,168

EBIT2= Rs. 2,061,408

EBIT3 = Rs. 2,426,038

Tax rate= 25%

WACC= 9

Step 1: Net cash flow at time 0

Equipment = (Rs.110,000)

Building = (Rs.200,000)

Inventory = (5,400,000)

CF0 = Rs. (5,710,000)

Step 2: Depreciation Schedule

Straight line method = (cost- SV) / no of useful years

=310,000 – 0 / 3

= Rs 103,333

Years Depreciation Tax depreciation

1 103,333 25,833
2 103,333 25,833
3 103,333 25,833

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Step 3: Annual operating Cash flows

0 1 2 3

Cost of asset (5,710,000)

EBIT 1,920,168 2,061,408

2,426,038

Tax 25% (480,042) (515,352) (606,509)

EAT 1,440,126 1,546,056 1,819,529

+ Depreciation 103,333 103,333

103,333

Tax Dep 25,833 25,833 25,833

CF (5,710,000) 1,569,342 1,675,222

1,948,773

1,760,292

3,709,065

Step 4 Terminal cash flows

Sellers Discretionary Earning (SDE)

Business owners calculate SDE to determine the true value of their business for a new owner, so
your SDE will include expenses like the income, non-cash expenses—whatever revenue your
business generates. Unlike EBITDA, though, you’ll also add back in the owner’s salary and
owner’s benefits into your SDE calculation. Large businesses generally use EBITDA
calculations to value their businesses, and small businesses typically use SDE, since small
business owners often expense personal benefits.

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 2020 2021
EBIT 2,061,408 2,426,038
+Depreciation 103,332 103,332
+ owner salary 0 0

2,164,740 2,529,370

Value of business = 2,164,740+2,529,370

= Rs. 2,347,055

Terminal cash flow

Salvage value = Rs. 2,347,055

Tax on SV = (586,763)

Terminal CF = Rs. 1,760,292

Capital budgeting techniques

The Capital Budgeting Techniques are employed to evaluate the viability of long-term
investments. The capital budgeting decisions are one of the critical financial decisions that relate
to the selection of investment proposal or the course of action that will yield benefits in the
future over the lifetime of the project.

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Since the capital budgeting is related to the long-term investments whose returns will be fetched
in the future, certain traditional and modern capital budgeting techniques are employed by the
firm to judge the feasibility of these projects.

The traditional method relies on the non-discounting criteria that do not consider the time value
of money, whereas the modern method includes the discounting criteria where the time value of
money is taken into the consideration.

Traditional
method

Payback Post payback Accounting

period period rate of return

Modern or
Discounted cash flow method:discounting
method
The discounted cash flow technique calculates the cash inflow and outflow through the life of an
asset. These are then discounted through a discounting factor. The discounted cash inflows and
outflows are then compared.

Net Present Internal12 rate of Profitability

value return Index
Net present value NPV
This is one of the widely used methods for evaluating capital investment proposals. In this
technique the cash inflow that is expected at different periods of time is discounted at a particular
rate. The present values of the cash inflow are compared to the original investment. If the
difference between them is positive (+) then it is accepted or otherwise rejected. This method
considers the time value of money.

NPV= -5,710,000 + 1,569,342 + 1,675,222 + 3,709,065

(1+0.09) (1+0.09)2 (1+0.09)3

= -5,710,000+ ( 1,439,763.3 + 1,410,000.84 + 2,864,078.71)

= -5,710,000 + 5,713,841.859

= Rs.3841.86 Accepted

This project should be opened because present value of cash inflows is greater that cash
outflows.

Internal rate of return (IRR)

This is defined as the rate at which the net present value of the investment is zero. The
discounted cash inflow is equal to the discounted cash outflow. This method also considers time
value of money. It tries to arrive to a rate of interest at which funds invested in the project could
be repaid out of the cash inflows.

5,710,000 = 1,569,342 + 1,675,222 + 3,709,065

(1+ ?) (1+?)2 (1+?)3

IRR= 9.033%

IRR> WACC, 9.033%>9% so that means project is profitable but not so much profitable.

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Profitability Index (PI):
It is the ratio of the present value of future cash benefits, at the required rate of return to the
initial cash outflow of the investment. It may be gross or net, net being simply gross minus one.
The formula to calculate profitability index (PI) or benefit cost (BC) ratio is as follows.

PI = PV cash inflows/Initial cash outlay

PI= 5,713,841.859

5,710,000

= 1.00067

PI> 1 so this projected should be accepted/opened.

Modified internal rate of return (MIRR)

The modified internal rate of return (MIRR) is a financial measure of an investment's
attractiveness. It is used in capital budgeting to rank alternative investments of equal size. As the
name implies, MIRR is a modification of the internal rate of return (IRR) and as such aims to
resolve some problems with the IRR.

1 1 2 3

-5,710,000 1,569,342 1,675,222 3,709,065

1,825,992

1,864,535

7,399,592

5,710,000 = 7,399,592

(1+MIRR)3

MIRR = 9.024%

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Discounted payback period
The discounted payback period is a capital budgeting procedure used to determine the
profitability of a project. A discounted payback period gives the number of years it takes to break
even from undertaking the initial expenditure, by discounting future cash flows and recognizing
the time value of money.

Disc Payback period = Year before full recovery + Unrecovered cost at the start of year

Disc Cash flow during the year

Year Cash flow Disc cash flows Cumulative disc

cash flow
0 (5,710,000)
1 1,569,342 1,439,763 (4,270,236)
2 1,675,222 1,410,001 (2,860,235)
3 3,709,065 2,864,079 3,844

Disc payback period = 2+ 2,860,235

2,864,079

= 2+ 0.998

= 2.998 years

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The traditional method
The traditional method relies on the non-discounting criteria that do not consider the time value
of money.

Payback period method:

As the name suggests, this method refers to the period in which the proposal will generate cash
to recover the initial investment made.

Payback period = Year before full recovery + Unrecovered cost at the start of year

Cash flow during the year

No of years Expected future cash flow Cumulated net cash flow

Year 0 (Rs.5,710,000) (Rs.5,710,000)
Year 1 1,569,342 (4,140,658)
Year 2 1,675,222 (2,465,436)
Year 3 3,709,065 1,243,629
Payback period 2.664 years

payback = 2 + 2,465,436

3,709,065

= 2+0.6647

= 2.66 years

This project could be taken/ accepted because its payback period is less than project life (3
years). But not so much profitable because ideal situation is that when payback period is half of
your project life. This project shouldn’t give ideal payback period. A small difference in 2.66 and
3 year.

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Risk analysis techniques
The Risk is prevalent in all the business decisions, but it is much more inherent in the capital
budgeting decisions. These decisions are the long-term decisions, which involves huge cost and
whose benefits are derived over a long period of time or during the lifetime of the project.

The risk varies according to the nature of investments. A research and development project can
be much riskier than the expansion project while; the expansion project can be much riskier than
the replacement project.

Stand-alone Risk Analysis

Analyzing the risk of a project when it is viewed in isolation.

Break-Even Analysis
The Break-Even Analysis is a method adopted by the firms to determine that how much should
be produced or sold at a minimum to ensure that the project does not lose money. Simply, the
minimum quantity at which the loss can be avoided is called as a breakeven point.

QBE = NI+ FC

Unit CM

At breakeven NI is always zero

FC= 50,000

Unit CM = price – variable cost

= 1300 – 600

= 700

Cm Ratio =unit CM/price ×100

=700/1300×100

=53.85%

QBE = 0 + 50,000/ 700

=71.4≈72 books

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Sales breakeven = NOI + FC

CM Ratio

= 50,000/ 0.5385

= RS.92,850 ≈ 93,600

If we sell 72 books in 1st year we will achieve breakeven point.

If we sold less than 72 books, we can bear losses.

So, if we focused on fixed cost profit will increases.

Result
This startup could be taken because it gave us a small amount of profit with consideration of
time value of money. But we must increase our profit by using some techniques and strategies so
that our project will more profitable. But if we accept this project we don’t bear loss.

Recommendations
Business owners who are familiar with the value of rare and out-of-print books can increase their
income by offering appraisals of books. All used book store business owners can generate more
revenue by selling book-related items in addition to books.

We can also increase sales volume by promotions and marketing in university. Networking used
to mean cocktails and handshakes. Now, marketing is all about immediacy. Give your business
an instant presence through online networks including Facebook, Twitter, YouTube, and
LinkedIn. Switch to a relationship-based sales model that gets customers coming back to you

The biggest ongoing expense for a used book store is purchasing more inventory. So, best way to
open online store. Online stores must also pay listing fees and shipping costs. Over 80 percent of
owners who have online stores keep their inventory in their home. This eliminates the need to
lease storage space. Physical stores must pay rent and utilities.

When your sales increase and expenses decrease similarly NPV, IRR increases, and profitability
of company will increase.

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