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Executive Summary

At this stage of the feasibility study PantSaloon has already proven to be of attractive
demand and doable production. This is now the section of our study where we push that further
into determining the financial feasibility of this whole business.

To arrive at the decision of whether to go or not to go with this business the group did a
financial analysis starting of with calculating the total investment needed to start it all up. This
amounted to Php 1,948,965. This figure already includes all the necessary registration expenses,
fixed assets like sewing machines, initial marketing expenditure and as well as the initial
working capital needed for operation.

EBIT-EPS

Looking at the financial statements yearly projections, most importantly PantSaloon’s


Income Statement, the group can expect to earn _____________. This alone signals that,
despite the additional cost of the 12% VAT and corporate taxes, the business can stand to
gain more as it continues its operations.

In addition, computing the net present value with the use of the projected operating
cash flows for Years 1 to 10 showed to be _____________. Aside from that, the internal rate
of return resulted to 29%, and the payback period for the business is 4.56 years. Given such
parameters, it is determined that the company would earn a return ________, communicating
an attractive market value to the investors and increased wealth for the owners.

On the other hand, to assess the performance of PantSaloon financial ratios were
calculated. Based from the resulting liquidity, activity, debt, and profitability ratios,
PantSaloon’s business operations would indeed deem to be efficient and effective.

A sensitivity analysis
It can be concluded from all of these that PantSaloon is a promising business venture
to pursue.

Financial Study

Initial Investment (see Exhibit 1)

Total initial investment required to start the business is estimated to be Php 1,948,965.
This amount includes registration fees, fixed assets, pre-operating/promotion expenses, as
well as initial working capital requirements necessary to start up the business.

As a requirement to any other business like PantSaloon payments for legal


transactions with the SEC, BIR, DTI and Local City Government before operation are
needed to be settled as part of the registration fees. All purchases of equipments, machines,
furnitures and fixtures for the office and the store are also included in the initial investment.
Construction works and any possible renovations of both the office and store are well
accounted for. Lastly, included in the total PantSaloon investment was the company vehicle’s
acquisition cost.

The pre-operating costs consist of expenditures for marketing expenses. This is


mostly the initial promotional materials necessary to advertise and the expenses for the
launching of the store to the target market. The required initial working capital would be
primarily allocated to the initial production runs which is further comprised of payments for
supplies, purchases of direct materials, and payments for indirect labor. A month’s worth of
salary payments and a 6-month rent deposit for the store will also form part of the initial
investment. Set at Php 500,000, other pre-operating expenses may arise prior to the start of
business and thus the need for the cash on hand.
Exhibit1
PROJECT COST- INITIAL INVESTMENT
EALA Incorporated
Projected Cost - Initial Investment

Registration Fees Cost


SEC 3,189
BIR 500
DTI 515
Business Permit 7,472
Total Registration Fees 11,676

Fixed Assets
Office
Equipment
4 in 1 machine 12,000
Computer Set 60,000
Furniture and Fixtures
Cabinets 2,500
chairs and table 29,000
sofa 4,000
fire extinguisher 1,700
Leasehold Improvements 15,000
Total Office Assets 124,200
Store
Equipment
sewing machine 30,000
edging machines 15,000
buttonholers 5,000
jeans software 20,000
computer set 30,000
chairs and worktables 5,710
phone 2,000
safety deposit box 1,700
Furniture and Fixtures
display materials 15,000
2-seater sofa 6,000
chair 2,000
centertable 4,000
floorlamp 1,500
lighting system 8,000
fire extinguisher 1,700
airconditioning unit 17,000
Leasehold Improvements 293,629
Vehicle 300,000
Total Store Assets 758,239
Total Fixed Assets 882,439

Initial Advertising Costs


Print Materials 80,500
Ribbon Cutting 30,000
Total Initial Advertising Costs 110,500

Initial Working Capital


Current Assets
Cash on Hand 500,000
Supplies 53,500
Materials 39,885
Prepaid Rent 75,000
Total Current Assets 668,385
Production Costs
Variable
Indirect Labor (Washing: 15,000
Outsource)
Total Variable Costs 15,000
Fixed
Direct Labor (wages) 48,000
Indirect Labor (Designer) 20,000
Rent Expense 12,500
Utilities 9,090
Transportation 3,000
Repair and Maintenance 0
Total Fixed Costs 92,590
Total Production Costs 107,590
Administrative Costs
Office Supplies 1,000
Salaries 162,000
Insurance 1,875
Communications 1,500
Utilities 2,000
Total Administrative Costs 168,375
Total Initial Working Capital 944,350

TOTAL INITIAL INVESTMENT COST 1,948,965

EBIT-EPS Analysis (see Exhibit 2)


Part of this feasibility study, especially this financial section, is to find capital to
finance the business. And, breaking down capital we know that we have two sources, which
are equity and debt. With this in mind, the next step would be determining the optimal capital
structure suitable for PantSaloon and EBIT-EPS Analysis is one approach to determine this.

EBIT-EPS Analysis puts emphasis on the firm’s profits before income and taxes. The
EBIT-EPS approach allows for the use of different options to choose the mix of capital
structure that yields the highest EPS.

From the EBIT-EPS table


EXHIBIT 2
EBIT-EPS ANALYSIS

Assumptions for Financial Projections


Rates

Growth rate
The group will assume an annual 2 percent growth rate on sales based on a
professional opinion of Mr. Victorino Caluza, the owner of Viktor Jeans.

Corporate income tax rate


Income tax is set at a constant rate of 32 percenti.

Cost of debt
For this study, we used the following as the cost of debt:

Cost of debt = 15%

Direct from the PNB loan application for start-up businesses, the lending rate would
range from 13% - 15% depending on how risky is the proposed business. In the case of
PantSaloon a pessimistic standpoint was taken and therefore would be applying the 15% rate
on the loan.

Cost of equity
The group used the following formula to determine the cost of equity:

Cost of Equity = Cost of Debt + Risk-free Rate


= 15% + 7%
= 22%

The cost of equity is estimated to be higher than the cost of debt due to the increased
required return desired by investors. As such, to determine the cost of equity, risk-free rate is
added to the after-tax cost of debt. Risk-free rate is found by averaging the 90-day T-bill rates
for the past five years (2001-2005).ii

Cost of Capital
The cost of capital is computed through the weighted average of the firm’s debt and
equity capital costs, using the optimal capital structure of 70% debt and 30% equity. The
weighted average cost of capital is computed as follows:

WACC = x% (cost of debt) + y% (cost of equity)


= 70% (15%) + 30% (22%)
= z%
Inflation rate
For selected items in the financial statements, the projected national inflation rate of
7.5%iii is used; the inflation rate of the clothing industry, pegged at 1.02% is also used.

Dividend policies
i
In General – Except as otherwise provided in this code, a corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the
Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%) and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
- Section 28, paragraphs (A)(4) of the National Internal Revenue Code
http://www.chanrobles.com/republicactno9294.html

ii

20012002200320042005T-bill rate (91 days)9.86%5.43%6.03%7.34%6.45%


iii
“Economic Statistics.” [Online] Available
http://www.philippinebusiness.com.ph/economic_stats/economy.htm, August 2005

Projected Financial Statements

A. Income Statement Accounts (see Appendix 1 for the Pro-forma Income Statements)
1. Sales

On the average, a pair of PantSaloon jeans would sell for Php ________. But it
should be noted that this is an average price because with customization price is a function
of the complexity and intricacy of the design that the customer specifies. This was
determined from the numerous survey conducted to take a peek to the target market’s tastes
and preferences.

Net sales is computed by deducting VAT Output Tax of 12%.

2. Sales Forecast (see Appendix 11 )

The sales forecast is based on the estimated production capacity that PantSaloon has
and the concluded market demand for the product, the percentages of which was shown in
the Market Study. The percentage of the effective demand that will be targeted will be kept
at a constant rate as well.

EALA Inc. estimates that ____% of the items offered for sale at regular price will be
sold. The remaining unsold items shall be __________. It is estimated that _____% of
these will be sold within the year.
Unsold items will be ______________.

All sales are made on a cash basis. And, it is also assumed that there will be no sales
returns.

3. Cost of Goods Sold (see Exhibit 12)

4. Advertising Expenses

5. Depreciation Expense (see Exhibit 5)

The straight-line method of depreciation was used to depreciate each fixed asset
owned by PantSaloon. It was assumed that all of these very fixed assets have a salvage
value equal to zero.

The estimated useful life of the fixed assets are based on information provided on-
line sources and vendors of the corresponding fixed assets.

6. Repair & Maintenance

Annual Repair and Maintenance cost shall be set at PhP 10,000 for both store and
office annually. This assumption was approved or calculated _____________.

7. Rent Expense (see Exhibit 9)

This cost will only include the rental fees charged by the owners of the building to
its tenants. Incorporated in the ten-year projections of this account is the national economy’s
inflation (pegged at 7.5%).

8. Administrative Expense (see Exhibit 6)

Due to the varying level of responsibilities that each job description entails, the
salaries and wages for each employee and manager to one another differ as well. However,
all employees and managers will receive their pay every 15th and 30th of the month.

In addition, to compensate for the expected national inflation or price increase for
the basic goods PantSaloon will give 3% increase every 2 years on top of the basic pay of
all its employees and managers.

9. SSS Contribution (see Exhibit 6)

PantSaloon will be paying SSS contributions for all its employees and executives.
This contribution will, however, depend on the salary pay grade or bracket each employee
belongs to. Of course, the higher the salary bracket the higher the contribution. And since
PantSaloon will be giving a 3% increase every two years this would mean that SSS
Contributions could increase over the years as well.

10. PhilHealth Contribution (see Exhibit 6 )

PantSaloon Inc. will give PhilHealth benefits to its employees and his/her legal
dependents. Mandated by law, this is given to cover part of hospitalization cost and other
medical expenses. The company’s contribution for each employee is based on Phil Health
Premium Rates.

11. Employee Benefits (see Exhibit 6)


The 13th month pay of all PantSaloon employees will amount to the same monthly
salary they receive. P.D 851 supports this very company policy. It states that employees
shall be entitled to receive 13th month pay which should amount to not less than 1/12 of the
total basic salary he/she receives within a calendar year provided he/she has already worked
in the company for at least one month.

12. Utilities Expense (Exhibit 10)

What comprise this account are those expenses or costs related to PantSaloon’s
annual electricity, water, telephone and gasoline both in the shop and office.

13. Supplies Expense(see Appendix 8)

Other materials, aside from those vital for the creation or production of the very
product, like pens, bond papers, ink, etc fall under this expense or account. These are all
necessary for the company’s day-to-day transactions as a business entity.

14. Miscellaneous Expense (see Appendix 7)

Annual miscellaneous expense will consist of fees paid for renewal of legal permits
from the local government and other regulatory agencies. These are all requisite for the
continuous operation of the business.

B. BALANCE SHEET ACCOUNTS


Current Assets
1. Inventory
The cost of ending inventory for the each succeeding years shall consist of unsold
items from the previous year and purchases made for materials for the beginning of the next
year. The purchase of materials at the end of the year will be good for 250 units and will be
held constant for the ten-year projection.
2. Supplies on Hand. (See Appendix 8)

3. Prepaid Expense.

At the pre-operation period, prepaid expense refers to the payments made for rent
only. There will no longer be pre-payments at the succeeding years because rent will now
be paid at the end of each operating month.

Fixed Assets

4. Office Assets

Office assets include 4-in-1office machine, personal computer, fire extinguishers;


furniture and fixtures such as chairs and tables, and filing cabinets.

5. Store Assets

Store assets include several sewing machines, display materials, mannequins,


lighting system, and fire extinguishers. Leasehold improvements accounts for the
construction and renovation of the store.

7. Vehicle

PantSaloon will use a company vehicle for transportation. This vehicle has a market
value of Php 300,000 and has a usable life of 10 years as well. To depreciate this fixed asset,
a straight-line method will be applied.
8. Intangibles

The cost of leasehold improvements is listed under these Leasehold improvements


account, which takes into account all renovations of the store. This will also be depreciated
over its estimated useful life.

Current Liabilities

1. Rent Payable

The store rent for the last month of the year shall be paid at the beginning of the next
year.

2. Utilities Payable

The amounts under this account at year-end shall carry the electricity, and water
consumed by PantSaloon for the last month.

3. Interest Payable

This accounts for the periodical interest payments for the long-term loan availed
from a bank. PantSaloon will be paying an annual rate of 15% to its ___-year loan
amounting to Php ___________.

4. VAT Output Tax Payable

This account, at year-end consists of the output tax for the last month of the year.

5. Long-term Loan
PantSaloon, aside from having several investors, will be availing a loan from a bank.
This said ____-year loan will have a principal amount of Php ________. Consistent with
our EBIT-EPS analysis, this debt will represent now the ___% of the capital structure mix
of equity and debt.

Stockholder’s Equity

Capital Stock
Total capital stock equals to Php 900,000 with P10 par value per share.

Sources of Financing

NPV Computation
Net Present Value is one of the discounted cash flows methods used to evaluate a particular
investment or project. The underlying concept behind NPV is the time value of money. With the
use of a cost of capital and yearly expected cash flows received from the investment or project, one
can weigh through the NPV whether or not one is pursuing a worthwhile venture.
The NPV is computed by discounting first all the yearly cash flows with the given cost of
capital. Adding all these discounted cash flows gives you now the present value of the investment.
Subtracting now this present value figure to the initial project cost results to the net present value.
A project the yields a positive NPV is a worthwhile investment.

In PantSaloon’s case, the 10 yearly cash flows would be discounted using the 22% cost of
capital that was computed using WACC. Adding these would arise to the present value figure we
would then be subtracting to the initial project cost of Php ________.

IRR Computations
The Internal Rate of Return ( IRR ) is the discount rate that equates the NPV of an
investment opportunity with $0 because the present value of cash inflows equals the project cost or
initial investment.

The IRR computed for PantSaloon, Inc. is ____%. This is the compound annual rate of
return that PantSaloon, Inc. will earn if it invests in the business and receives the given cash
inflows. Since the IRR of _____% is greater than the cost of capital of 20%, PantSaloon,
Incorporated’s business seems to be acceptable.

Payback Period

The payback period is the amount of time required for PantSaloon, Inc. to recover its initial
investment in the business. The yearly cash inflows are accumulated until the initial investment is
recovered. Magnum, Inc.’s payback period is 4.56 years.