Investigation of a business development proposal for a centre store in Essay

Investigation of a business development proposal for a centre store in the business - Essay Example earned from the newly rented premises Expected income: these are the actual earning that are expected to be generated from the new premises Build up factor: it is the percentage of the maximum possible income that the managers of the business hope to make in the first few years after start up Cost of sales: these are the expenses that incurred in order for the business make sales and may include cost of raw materials and transportation cost among other costs. Net cash flow: this is the difference between the total expenses and the total income that the business generated; it is the money that the business was left with after paying its expense (Day, 2012, p26). Discount factor: this is the rate at which the management of the business depreciates the capital goods in the premise; the depreciation rate is done on an annual nominal rate Present value of net cash flow: this is the cash flow of the business that has been adjusted for depreciation. The purpose of this report is to analyse the financial viability of expanding the business by renting additional floor space and setting up branded boutiques for brand name such as Maine and Gucci, Principles, Miss Selfridge, Warehouse, Timberland and Calvin Klein among others. Initial conclusion The net present value of the business expansion of Bristol stalls is 1, 399, 500 US dollars for the first three years after start up while the estimated cost of investments in terms of fitting and design total to 900, 000 US dollars. This shows that there is a difference of 499, 500 US dollars, this means that the business will have repaid the start up costs fully and made some significant profit margins despite not operating at the full capacity. According to calculations in the net cash flows that have not been adjusted for depreciation, the figures shows an upward trend which is encouraging as it shows the business will be able to increase its capacity to generate revenue if the trend continues. This will happen despite the inc rease in most of the other related costs apart from the miscellaneous costs, which are estimated to remain constant throughout the first three years after start up. Therefore, using the financial information generated by the cash flow, it is financially viable for the business to expand its operations by renting adjacent spaces in Bristol store. Sensitivity analysis One of the reasons that informed the above decision is the total costs that would be incurred in running the new business premises, these costs are relatively low as compared to the expected income that the new floor space will generate. The total expenses per quarter in the first year are 433, 375 US dollars, this is below the expected income of 540, 000 US dollars, subtracting these two figures one gets 106, 625 US dollars, which is the residue that remains after the basic expenses have been deducted. If the value of total costs was any figure above 540, 000 US dollars, then the business would have been left with a neg ative residue. For instance if the total costs were 600, 000 US dollars per quarter, then the residue would have