BUS 400 Module 5 Financial Projections Assignment Example

Financial Projections for the Herb and Microgreen Room

[Student Name]

Southern New Hampshire University

BUS 400: Driving Business Opportunities

Module Five Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Financial Projections for the Herb and Microgreen Room

Introduction

The sixty-day pilot met its targets: fourteen restaurants took part, 79 percent reordered after the first month, average weekly orders were $52 and gross margin per pound after metered electricity was 46 percent. The family now needs to know whether the full investment, converting a 6,000-square-foot bay into a dedicated herb and microgreen room, pays for itself. This paper sets out the assumptions, projects revenue, costs and cash flow, calculates payback, NPV and IRR and tests the results against changes in the key assumptions. Figures are in thousands of dollars and before owners' income taxes, since the business is a pass-through entity.

Assumptions

The investment totals $420,000, half of it for racks and watering lines, a little over a third for lights and the remainder for climate equipment and a walk-in cooler, all written off over seven years. Sales ramp from about 65 accounts in the first year to about 150 in the third, at an average of $55 a week, with a summer dip already reflected in the annual figures. Variable costs for seed, growing media, packaging and the delivery share of the Thursday route are 18 percent of sales, from pilot records. Harvest and packing labor rises with volume. Electricity is metered at about 190,000 kilowatt-hours a year at 19 cents, about $36,000, using efficient lights that will replace the pilot's temporary fixtures. A new herb grower costs $62,000 with benefits. The family's son's time is not charged, since his role is being reorganized rather than added. Gitman and Zutter (2015) stress that projections are only as credible as their assumptions, so each figure is tied to the pilot or to a quote.

Projected Results

Projected results for the herb room, in thousands of dollars

The room loses money in its first year because the grower, energy and labor begin immediately while accounts build. It turns cash-positive in the second year and reaches about $148,000 of annual cash flow from the third year. These figures assume no growth after the third year, which is conservative if the distributor channel develops.

Payback

Cumulative cash flow starts at minus $420,000, falls to minus $435,000 after the first year, recovers to minus $359,000 after the second and minus $211,000 after the third, and turns positive during the fifth year. Payback is therefore about four and a half years from the investment, or about two and a half years after the room reaches full sales.

Net Present Value and Return

Brealey et al. (2020) explain that a project creates value when the cash it will return, valued today at the rate the money could earn elsewhere, is worth more than the money put in. The greenhouse would fund the investment from its own cash, which it could otherwise use to pay down its equipment loan at about 7 percent; adding a premium for the risk of a new product line gives a discount rate of 10 percent. Over seven years with no salvage value, the present value of the cash flows is about $513,000, giving a net present value of about $93,000. The internal rate of return, the rate at which net present value would be zero, is about 15 percent. Both measures support the investment, though not by a wide margin.

Sensitivity

Damodaran (2012) warns that a single projection hides uncertainty, so three assumptions were tested one at a time.

Sensitivity of net present value, in thousands of dollars

Volume matters most: if the room reaches only 120 accounts instead of 150, the investment does not earn its required return. That makes customer acquisition and retention the critical tasks in the business case, ahead of cost control. Each additional twenty accounts above the plan adds roughly $100,000 to net present value, so the upside is meaningful too. Price is the second most important variable, which argues against discounting to win accounts. Electricity matters less than the family feared, because efficient lighting keeps it a modest share of costs.

Funding the Investment

The greenhouse has about $400,000 in cash available for investment and could fund most of the room without borrowing. Using its own cash avoids new loan payments during the first year, when the room loses money, but it reduces the cushion the business keeps for a bad growing season or an equipment failure. A modest option would be to draw $150,000 on an existing equipment line for the lighting, which lenders readily finance, keeping about $130,000 of cash in reserve. Either way, the first-year cash flow of minus $15,000 is small enough that the room will not strain the business's operations.

Interpretation

The projections show a worthwhile but not overwhelming investment, positive under the base case and sensitive to volume. Two features of the plan reduce that risk. The sale of herbs through the specialty distributor gives a second route to volume if direct accounts grow slowly, and the bay can return to lettuce if the herb room fails, limiting the loss to the specialized equipment. The family should proceed, but track accounts closely against the plan of about 65 in the first year and 110 in the second.

Conclusion

The herb room loses money in its first year, earns about $148,000 a year in cash from its third, pays back in about four and a half years and returns about 15 percent against a 10 percent requirement. The result depends most on reaching about 150 accounts, which the business case in Project Two must address with a plan for winning and keeping restaurant customers.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley.

Gitman, L. J., & Zutter, C. J. (2015). Principles of managerial finance (14th ed.). Pearson.