Financial Management

TERM PROJECT| FM ELEMENT

Department of Management and Social Sciences

FINANCIAL MANAGEMENT

TERM PROJECT

Element (The Rolex Dealership)

Submitted by:

Muhammad Shahbaz Khan BBA-191014

Awais Qamar BBA-191045
Muhammad Ali Faizan BBA-191023
Muhammad Sami-Ullah Ch BBA-191044

Submitted to:

Prof. Nasir Rasool

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Contents
ELEMENT (The Rolex Dealership) ............................................................................................................ 3
Mission of ELEMENT:................................................................................................................... 3
Brief History of Brand:........................................................................................................................ 3
Our Offerings: ..................................................................................................................................... 4
Luxury goods: ..................................................................................................................................... 4
Why the luxury watch market? ......................................................................................................... 4
A stable market: ................................................................................................................................. 5
The Covid- Impact: ............................................................................................................................. 5
The Revenue Model for the Elements: ........................................................................................... 5
ESTIMATION OF CASHFLOWS ................................................................................................................. 6
ASSUMPTIONS: ................................................................................................................................... 6
INITIAL CASHFLOWS: ........................................................................................................................... 7
1. Cost of Assets: ........................................................................................................................ 7
2. Working Capital: ..................................................................................................................... 7
3. Capitalized Expenditures: ....................................................................................................... 7
ESTIMATED ANNUAL EXPENSES: ....................................................................................................... 8
INCREMENTAL CASHFLOWS:................................................................................................................... 9
CAPITAL STRUCTURE: ............................................................................................................................ 10
CAPITAL BUDGETING TECHNIQUES: ..................................................................................................... 11
NET PRESENT VALUE (NPV): ............................................................................................................. 11
PROFITABILITY INDEX (PI): ............................................................................................................... 12
References ............................................................................................................................................ 14

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ELEMENT (The Rolex Dealership)

Mission of ELEMENT:

“It drives us to deliver our clientele, the products with most prestige”.

“Everyone looks at your watch and it represents who you are, your values and your personal
style”.

-Kobe Bryant

There are limited names that resonate in our memory when the world luxury comes into the
mind and out of these few hold, the prestige like Rolex holds in the luxury market. The
quintessential timepiece has become the symbol of success over time.

Brief History of Brand:

The year was 1905 and the place was London, England. Hans Wilsdorf and his brother-in-law
Alfred Davis founded "Wilsdorf & Davis" and began importing high-quality Swiss watch
movements, produced by Hermann Aegler, and placing them in good-quality cases made by
Dennison and others. These early watches were sold to jewelers who marketed them with
their own names on the dial. The earliest known examples of Wilsdorf & Davis watches are
signed "W&D" inside the case back. Contrary to popular belief, Wilsdorf was neither Swiss
nor a watchmaker. Wilsdorf was a German national, and Davis was British.

The "Rolex" trademark was registered in 1908, and the firm opened an office in La Chaux-
de-Fonds, Switzerland, the world's center for high-quality watchmaking. There is some
debate as to the origins of the Rolex name. Wilsdorf was said to want an easily recognizable
name that could be pronounced in any language and would fit easily on the dial of a watch.
Some suggest that the name came from the French phrase horlogerie exquise, meaning
"exquisite horology". J.P. Hess and James Dowling, in their book The Best of Time: Rolex
Wristwatches, An Unauthorized History, clam that the name was just made up. "Rolex" was
first registered as a company name on November 15, 1915. The Rolex name did not appear
on the watch dial until 1926.

In 1919, the company's headquarters was moved to Geneva, Switzerland, because taxes and
export duties in the United Kingdom were driving up costs. The company was first
established in Geneva as the Rolex Watch Company. Subsequently, the name was changed to
Montres Rolex, SA and finally just Rolex, SA.

One of the most important developments in the history of Rolex watches came when
Wilsdorf purchased the patent for a revolutionary moisture-proof winding stem and crown
from its inventors, George Peret and Paul Perregaux. The result of this acquisition was the

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development of the world's first truly waterproof case, which was given the name "Oyster" in
1926. In an effort to market the new Oyster watch, Wilsdorf hired a young London typist
named Mercedes Glietz, the first woman to swim the English Channel. In 1927, prior to
Glietz' second attempt to swim the Channel, Wilsdorf announced to the world that she would
be wearing his water-proof Rolex Oyster watch and that she would emerge from the water
and his watch would be running and on time, something which had never been previously
accomplished. Though Miss Glietz did not complete this second crossing, which occurred
under much more difficult conditions than her first swim, the watch performed beautifully.
She and her Rolex Oyster made headlines around the world. Today, the Rolex brand is
recognized throughout the world as a symbol of prestige and quality. Rolex is by far the

single largest luxury watch brand, producing about 2000 watches per day, and is certainly one
of the top watch brands in the world.

Our Offerings:
As the dealership of the Rolex SA will offer all products that the watchmaker offers along
with the services of acting as broker for vintage timepieces, selling and purchasing services
for used timepieces and service of the timepieces.

Luxury goods:
Luxury goods are defined as “products that increase in demand as income gets higher. In
short, they are goods that are not necessary but desirable”.

Why the luxury watch market?

The luxury watch market has the potential to grow by USD 1.78 billion during 2021-2025,
and the market’s growth momentum will accelerate at a CAGR of 1.15%.

• Status Consumption: “Status consumption can be summarized as the acquisition of

products by consumers for the value of "status" that they may provide”. Luxury
watches are purchased due to following reasons:
• Basic Human Motivation: Luxury goods are purchased based on instincts and
individual expression.

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• Societal Group Motivations: A person's social group (within society) will impact
upon their perception of luxury, and that their social group will entail motivation to
purchase luxury products.
A stable market:
The luxury watch market is always a stable marketplace, because it does not work like other
markets where commodities are sold and they lose value. This market works as market like
arts market the older and prestigious brands and timepieces not only hold their value, their
value grow day by day.

The Covid- Impact:

The market of luxury watches has also suffered much in the wake of Covid-19. The decline is
sales comes from the shortage of timepieces in the market due to supply issues. It has also
worked wonders in disguise for the retail market as the prices of Rolexes has quadrupled and
new ones have a waiting list for over 3 years and in some models the wait can even rise to 5
years.

The Revenue Model for the Elements:

Sales of New Timepieces

Revenue
Sales of Old Timepieces

Service of Timepieces

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ESTIMATION OF CASHFLOWS

ASSUMPTIONS:

1. We are estimating the Cash flows of our business for 5 years. We are assuming to sell
all inventories at the end of 5th year.

2. We are assuming tax rate as 40%

3. Expected Annual Expenditures:

• Purchases: 100 watches in year 2,3 & 150 and 122 watches in year 4 and 5
respectively
• Office Rent: 500000 per month
• Salaries: 35000 per month (5 employees)
• Utility Bills: 100000 per month
• Maintenance: 50000 per annum

4. Annual Revenue:

• We are expecting and assuming sale of 10 watches per month in first two
years and increase in sales by 20% in next three years.
• Price retail of one wrist watch is 1200000 rupees approx.
5. Depreciation:

Calculated depreciation by Straight-line Method which is 46000000

6. Initial Working Capital Requirement: 40000000 rupees

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INITIAL CASHFLOWS:

Initial investment is the amount required to start a business or a project. It is also called initial
investment outlay or simply initial outlay. It equals capital expenditures plus working capital
requirement plus after-tax proceeds from assets disposed off or available for use elsewhere.

1. Cost of Assets:

We have different models of Rolex wrist watches. One wrist watch of Rolex is
costing 800000 and has almost 40 to 60% retail margin.

2. Working Capital:

Basic working capital requirement of our business to run day to day activities is
40000000 rupees

3. Capitalized Expenditures:

Capital expenditures are one-time costs for purchases like inventory, equipment,
property, vehicles, security deposits, bank accounts, and more.These are all the
expenses that has to bear at the start of the business

Calculated Capitalized Expenditures of our store is as follow:

WORKING CAPITALIZED EXPENDITURES

CAPITALIZED EXPENDITURES AMOUNT

Land and building Lease 3000000

Advance Tax 150000
Wood work 150000
Office Equipment 500000
Store Fixture 2000000
Technical Support 200000
Licensing 60000000
Power backup 250000
Electrical work 130000
Other expenses 3620000

Total Capitalized Expenditure 70000000

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INITIAL CASHFLOWS:

Following are the initial cash out flow figures:

INITIAL CASHFLOWS
Distribution of Cash flows

Cost of Asset 160000000

Capitalized Expenditure 70000000
Working Capital 40000000
TOTAL INITIAL CASHFLOWS 270000000

ESTMATED REVENUES:
We estimated our revenues that the will be generate. These revenues are based on Rolex watches
retail margin and purchasing price. Following are the estimated revenues of 5 years:

ESTIMATED REVENUES
Year 1 2 3 4 5
Revenue 144000000 144000000 172800000 172800000 172800000

ESTIMATED ANNUAL EXPENSES:

After this revenue estimated, we estimated our annual expenses. These are mentioned below

ESTEMATED EXPENSES
Year 1 2 3 4 5

Purchases 0 80000000 80000000 120000000 0

Rent 6000000 6000000 6000000 6000000 6000000
Salaries 2100000 2100000 2100000 2100000 2100000
U.Bills 1200000 1200000 1200000 1200000 1200000
Mainatinence 50000 50000 50000 50000 50000
Total 9350000 89350000 89350000 129350000 9350000

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INCREMENTAL CASHFLOWS:

Incremental cash flow is the additional operating cash flow that an organization receives from
taking on a new project. ... A positive incremental cash flow is a good indication that an
organization should invest in a project.

Incremental cash flow analysis can be an excellent tool for businesses that need to decide
whether to invest in certain assets. If you have a cash surplus and can’t work out whether it’s
a better idea to expand an existing product line or invest in a new one, whichever option has
the highest incremental cash flow may be your best bet.

So we have calculated the future cash flows of our business which are as given:

INCREMENTAL CASH INFLOWS

YEAR 1 2 3 4 5
Revenue 144000000 144000000 172800000 172800000 172800000
Less Expenditures 9350000 89350000 89350000 129350000 9350000
Net Operating Income 134650000 54650000 83450000 43450000 163450000
Less Depreciation 46000000 46000000 46000000 46000000 46000000
Earning Before Tax 88650000 8650000 37450000 -2550000 117450000
Less Tax (30%) 62055000 6055000 26215000 -1785000 82215000
Earning After Tax 26595000 2595000 11235000 -765000 35235000
Add Depreciation 46000000 46000000 46000000 46000000 46000000

Total Cash-Flows 72595000 48595000 57235000 45235000 81235000

These are the future cash flows of our store at the end of terminal year with all inventory
being sold out.

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CAPITAL STRUCTURE:
Capital structure is the particular combination of debt and equity used by a company to
finance its overall operations and growth. We are planning to decide our capital structure
decision as given below:

• Weight of Equity (We)= 40%

• Weight of Debt (Wd) = 60%

There is a cost associated with both called as:

• Cost of equity (ke) =20%

• Cost of debt (Kd)=13%

Ke 20%
Kd 13%
Wd 60%
We 40%
Tax 40%

The weighted average cost of capital (WACC) represents a firm's average cost of capital from
all sources, including common stock, preferred stock, bonds, and other forms of debt.

The weighted average cost of capital is a common way to determine required rate of return
because it expresses, in a single number, the return that both bondholders and shareholders
demand in order to provide the company with capital.

Weighted Average Cost of Capital = Ke (we) + { (kd(1-t)} (wd)

WACC= (0.20) (0.40) + {(0.13) (1-0.40)} (0.60)
WACC= 0.1268
= 12.68%

The weighted average cost of capital (WACC) tells us the return that lenders and
shareholders expect to receive in return for providing capital to a company. ... WACC is
useful in determining whether a company is building or shedding value. Its return on invested
capital should be higher than its WACC.

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CAPITAL BUDGETING TECHNIQUES:

Capital budgeting is important because it creates accountability and measurability. Any
business that seeks to invest its resources in a project without understanding the risks and
returns involved would be held as irresponsible by its owners or shareholders. When a firm is
presented with a capital budgeting decision, one of its first tasks is to determine whether or
not the project will prove to be profitable. The payback period (PB), internal rate of return
(IRR) and net present value (NPV) methods are the most common approaches to project
selection.

NET PRESENT VALUE (NPV):

Net Present Value (NPV) is the difference between the present value of cash inflows and the present
value of cash outflows over a period of time.

NPV = PVFCF− 𝐼𝐶𝑂

Following are the calculation based of formula mention above:

NPV
TIME CASHFLOWS 12.68%
0 (70000000)
1 72595000 64425807
2 48595000 38273476
3 57235000 40005635
4 45235000 28059972
5 81235000 44720741
215485631
NPV 145485631

Note: A positive NPV indicates that the projected earnings generated by a project exceeds
the anticipated costs. It is assumed that an investment with a positive NPV will be profitable,
so is our business because the NVP is POSITIVE.

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PROFITABILITY INDEX (PI):

The profitability index (PI) is a measure of a project's or investment's attractiveness. The PI is

calculated by dividing the present value of future expected cash flows by the initial
investment amount in the project.

NPV = PVFCF/ 𝐼𝐶𝑂

Following are the calculation based of formula mention above:

PROFITABILITY INDEX
TIME CASHFLOWS 12.68%
0 (70000000)
1 72595000 64425807
2 48595000 38273476
3 57235000 40005635
4 45235000 28059972
5 81235000 44720741
215485631
PI 3.078366157

Note: The index itself is a calculation of the potential profit of the proposed project. The rule
is that a profitability index or ratio greater than 1 indicates that the project should proceed. A
profitability index or ratio below 1 indicates that the project should be abandoned. PI of our
business clear indicates that we should go for this business.

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INTERNAL RATE OF RETURN (IRR):

The internal rate of return (IRR) is a metric used in financial analysis to estimate the
profitability of potential investments. IRR is a discount rate that makes the net present value
(NPV) of all cash flows equal to zero in a discounted cash flow analysis.

Excel's IRR function calculates the internal rate of return for a series of cash flows, assuming
equal-size payment periods. Using the example data shown above, the IRR formula would be

=IRR(B3:B8,12.86%)

IRR
TIME CASHFLOWS 12.68%
0 -70000000
1 72595000 64425807
2 48595000 38273476
3 57235000 40005635
4 45235000 28059972
5 81235000 44720741
215485631

Note: If a project is expected to have an IRR greater than the rate used to discount the cash
flows, then the project adds value to the business. If the IRR is less than the discount rate, it
destroys value. The decision process to accept or reject a project is known as the IRR rule.
Our irr is way more than discount rate.

PROJECT FEASIBILITY: We have got a clear idea of how NPV and IRR will help
in the financial feasibility of a project. As can be seen from the above calculations, the NPV,
IRR, and Profitability Index are all positive, thus we can infer that the project is acceptable
based on the preceding assumptions.

JUSTIFICATION: If upon calculating a project’s NPV, the value is positive, then

the PV of the future cash flows exceeds the PV of the investment. In this case, value is being
created and the project is worthy of further investigation. If on the other hand the NPV is
negative, the investment is projected to lose value and should not be pursued, based on
rational investment grounds.

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References
finance.yahoo. (2021). Luxury Watch Market. Retrieved from finance.yahoo.com:
https://finance.yahoo.com/news/luxury-watch-market-size-increase-020000425.html
Rhee, S. Y. (2012). A Study on Why Luxury Goods Sell and their Effects on the Economy.
International Proceedings of Economics Development and Research, 48-53. doi:DOI:
10.7763/IPEDR. 2012. V46. 10
Rolex. (2022). Behind the Crown. Retrieved from Rolex.org: https://www.rolex.com/rolex-
org.html

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