BUS1AFB: Janet Fleming Case Study - Cupcakes Franchise Business - Assessment Answer

Internal Code: 1AHDJA Code: BUS1AFB

Janet Fleming Case Study Assessment Answer

Assignment Task: BUS1AFB Janet Fleming Case Study - FACT SET ? Janet Fleming is considering investing in a new cupcakes franchise business. Janet has provided you with the following data on which to estimate the financial viability of the business using an NPV analysis. ? Janet decides to price the cakes at $3.00. She estimates she will be able to sell 70,000 cakes in the first year, 80,000 in the second year and 90,000 in the third year. ? Under the franchise agreement, she will have to pay a royalty payment equal to 8% of sales. ? She will also have to contribute 5% of sales towards the marketing costs of the franchisor. ? Cost of ingredients per cupcake is $0.38. ? Weekly rental $350. Annual outgoings are $3,500. ? Wages: Shop assistant $16 per hour; baker $17 per hour. ? Superannuation: 9.5% of wages. ? Assume that one shop assistant and one baker each work for 8 hours per day, for 252 days of the year. ? Assume no inflation in prices or wages. ? Assume a 30% tax rate. ? The initial investment in fittings and equipment is $200,000. ? You estimate the cost of capital to be 16%. TASKS 1. What is the contribution margin? 2. How many cupcakes must Jane sell in a year in order to break even? 3. If Janet can sell all the cakes the baker can produce in an eight-hour shift (that is, 144 cupcakes) each day for 252 days of the year, what will be the annual profit before tax? 4. Calculate the Net Profit per year, assuming that Janet is able to sell 70,000 cakes in the first year, 80,000 in the second year and 90,000 in the third year. 5. Calculate the Net Present Value of the business, assuming the business is sold at the end of the third year for $150,000. In this Case Study, assume that Net Profit is equivalent to Free Cash Flow. 6. Calculate the Profitability Index, assuming the business is sold at the end of the third year for $150,000. 7. Based on the NPV you have calculated for the investment, would you recommend to Janet that the investment is financially viable? Justify your recommendation.

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