Week 3 Discussion 1
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ExampleDiscussionDONOTCOPY.docxcash Flows and Financial Forecast
As someone who already runs a business, it is hard to consider a new platform using an online store since my company is a service-oriented business. In fact, we do not offer any retail product However, as skilled craftsman, we do have the skill sets needed to create custom built wooden furniture for customers. This is a venture I have considered many times, but do not feel it is in our best interest to do so despite the potential earning capacity. I feel that the cannibalism to our niche will have too far an impact to change our operations in this way. For the purpose of this discussion, I will present a hypothetical 5-year financial forecast for the creation and sale of mission style living room furniture through an online marketplace.
To test the viability of the custom furniture market, we will only offer two products that can be purchased together as a set or separately. Coffee tables will sell for a price of $450 each and end tables will sell for a price of $325 each. We anticipate that we can manufacture no more than 2 of each of the products every month, totaling 24 per year. In order to start this project, we will need to invest in a new table saw for $3500. The saw has a salvage value of $500 and a life of 10 years. Using straight-line depreciation, the asset will depreciate at $300 per year during the initial 5-year period. We will assume a 28% tax rate for this venture leaving the after-tax cost of the saw $2520. To construct the tables, there will be an annual cost of $2,500 for lumber and $450 in finishing supplies and materials. Construction of tables will take an increased labor cost of $11,000 annually.
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Projected Revenues and Expenses |
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Revenues |
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Year |
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1 |
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2 |
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3 |
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4 |
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5 |
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End Tables @$325 |
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$7,800.00 |
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$7,800.00 |
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$7,800.00 |
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$7,800.00 |
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$7,800.00 |
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Coff. Tables @ $450 |
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$10,800.00 |
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$10,800.00 |
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$10,800.00 |
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$10,800.00 |
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$10,800.00 |
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Total Revenues |
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$18,600.00 |
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$18,600.00 |
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$18,600.00 |
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$18,600.00 |
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$18,600.00 |
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Expenses |
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Year |
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1 |
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2 |
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3 |
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4 |
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5 |
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Wages |
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$11,000.00 |
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$11,000.00 |
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$11,000.00 |
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$11,000.00 |
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$11,000.00 |
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Equipment |
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$3,500.00 |
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$250.00 |
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$250.00 |
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$250.00 |
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$250.00 |
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Lumber |
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$2,500.00 |
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$2,500.00 |
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$2,500.00 |
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$2,500.00 |
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$2,500.00 |
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Finishing Supplies |
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$450.00 |
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$450.00 |
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$450.00 |
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$450.00 |
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$450.00 |
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Depreciation |
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$300.00 |
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$300.00 |
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$300.00 |
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$300.00 |
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$300.00 |
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Total Expenses |
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$17,750.00 |
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$14,500.00 |
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$14,500.00 |
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$14,500.00 |
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$14,500.00 |
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Taxes, Profits, and Cash Flow |
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Year |
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1 |
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2 |
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3 |
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4 |
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5 |
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Profit |
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$850.00 |
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$4,100.00 |
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$4,100.00 |
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$4,100.00 |
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$4,100.00 |
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Taxes |
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$238.00 |
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$1,148.00 |
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$1,148.00 |
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$1,148.00 |
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$1,148.00 |
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Net Profit |
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$612.00 |
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$2,952.00 |
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$2,952.00 |
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$2,952.00 |
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$2,952.00 |
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Cash Flow |
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$912.00 |
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$3,252.00 |
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$3,252.00 |
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$3,252.00 |
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$3,252.00 |
The table above shows positive cash flows totaling $13,920 over the 5-year period. However, this number does not take into account the future value of present projections. We will assume an inflation rate of 2% to adjust future earnings into today’s value. To do this, I went and found the factor for each value to be .9803 at year 1, .9609 at year 2, .9420 at year 3, .9234 at year 4, and .9053 at year 5. I used these factors to bring all dollar values into today’s terms resulting in the table below.
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Adjusted Revenues and Expenses to Present Value |
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Revenues |
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Year |
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1 |
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2 |
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3 |
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4 |
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5 |
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End Tables @$325 |
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$7,646.34 |
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$7,495.02 |
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$7,347.60 |
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$7,202.52 |
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$7,061.34 |
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Coff. Tables @ $450 |
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$10,587.24 |
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$10,377.72 |
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$10,173.60 |
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$9,972.72 |
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$9,777.24 |
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Total Revenues |
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$18,233.58 |
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$17,872.74 |
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$17,521.20 |
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$17,175.24 |
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$16,838.58 |
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Expenses |
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Year |
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1 |
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2 |
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3 |
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4 |
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5 |
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Wages |
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$10,783.30 |
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$10,569.90 |
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$10,362.00 |
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$10,157.40 |
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$9,958.30 |
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Equipment |
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$3,431.05 |
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$240.23 |
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$235.50 |
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$230.85 |
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$226.33 |
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Lumber |
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$2,450.75 |
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$2,402.25 |
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$2,355.00 |
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$2,308.50 |
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$2,263.25 |
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Finishing Supplies |
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$441.14 |
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$432.41 |
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$423.90 |
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$415.53 |
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$407.39 |
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Depreciation |
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$294.09 |
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$288.27 |
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$282.60 |
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$277.02 |
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$271.59 |
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Total Expenses |
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$17,400.33 |
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$13,933.05 |
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$13,659.00 |
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$13,389.30 |
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$13,126.85 |
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Taxes, Profits, and Cash Flow |
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Year |
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1 |
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2 |
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3 |
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4 |
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5 |
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Profit |
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$833.26 |
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$3,939.69 |
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$3,862.20 |
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$3,785.94 |
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$3,711.73 |
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Taxes |
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$233.31 |
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$1,103.11 |
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$1,081.42 |
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$1,060.06 |
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$1,039.28 |
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Net Profit |
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$599.94 |
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$2,836.58 |
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$2,780.78 |
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$2,725.88 |
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$2,672.45 |
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Cash Flow |
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$894.03 |
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$3,124.85 |
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$3,063.38 |
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$3,002.90 |
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$2,944.04 |
As you can see, the adjusted cash inflow in present dollars is $13,029.20. This is important in financial projecting because the present value of future earnings will always be less than the future value. We see this in the PV formula with the factor of (1(1+r))nwhere n is the point in time we are evaluating, and r is the rate of change. Financially speaking, this would appear to be a great investment opportunity, but the qualatative factors that are in play would still steer me away from pursuing this project for my shop.
