Carribean Internet Cafe

Assignment 1 Caribbean Intern Cafe Date November 14, 2012 1. There be many issues that Mr. soften should consider before proceeding with the CIC. There are several things that Mr. Grant should adjudicate before however looking at the projections given to him. conglomeration capital is $2,250,000, $1,000,000 in investments and $1,250,000 in the underframe of a long-term contribute. $1,573,000 is immediately spent leaving $677,000. If he has no nodes, he push aside cave in to remain open for 3 months.As well, they are not attractive to individuals who seek to practise the mesh for longish periods of time and the customer base that they are attempting to attract is the more(prenominal) affluent and educated of the population. They are as well the most likely to either already own a computer or will be purchasing a computer in the near future. Mr. Grant must nourish a traffic broadcast that is either for the short-term or able to readily adapt to future circumstances as he expects private usage to increase in 3 categorys. Mr. Grant should also examine factors impertinent to his business.These issues include his mention of the relatively low demand for c attainee in Jamaica as well as changes in levels of private net income usage. His management plan should include contingencies to replace coffee if it is not fashioning a remuneration as well as plans for the computer area when future demands for Internet coffee bars start to decrease. A final issue that Mr. Grant should also examine is the terms of agreement for the long-term loan. If CIC is very profitable they may want to pay off the loan as apace as possible instead of incurring unnecessary interest. 2.The fit(p) be remain constant inside a relative range of finished products produced. The fixed be amount to an annual rate of $2,479,400 and the detect down of distributively(prenominal) fixed cost is shown in accessory 1. The fixed costs include the manager, employees, rent, surrou nd and utilities, link to Internet, insurance, advertising, interest on loan and miscellaneous administration and maintenance fees. The start up costs amount to a one-time fee of $1,573,000 and the breakdown of each cost is shown in appendage 2. It should be say that in all cases start-up costs were amortized in the first ear. The multivariate costs are those that are accrued on a per customer basis and are shown in Appendix 3. This amounts to a heavy second-rate Variable Cost of $104 per customer. 3. The costs of the first customer may be calculated by adding the fixed costs, start-up costs and variable costs for the first customer. The variable cost was calculated using a burden average of based on the estimated usage of the Internet. Assuming that the fixed costs are calculated on an annual basis and are set for the entire year then the cost for the first customer will be $4,052,504. . The contribution brink may be calculated for each customer as C/M = R VC. A weighted a verage was used because it is estimated that 40% of the customers will use the computer thitherby increasing variable profit by $60 ($120 taxation, $60 variable cost). A breakdown of the variable costs and revenue are shown in Appendix 4. The contribution perimeter is $144 per customer. 5. In order for the CIC to break even they must cover their fixed costs, variable costs and start-up costs. This stinker be solved using the formula B/E Pt. (Fixed cost + Start-up cost) / contribution delimitation B/E Pt. = (2479400 + 1,573,000) / 144 B/E Pt. = 28,142 Therefore, they will need to have 28,142 customers that at minimal meet their average consumption expectations of computer usage, food and beverages in order to reach their break even pointedness in the first year. 6. Using the same formula as question 5, except that there are no longer any start-up costs but fixed costs ($2479400) and contribution margin ($144) remain the same so Mr. Grant will require 17,219 customers in order t o reach his break-even point for the second year. . Based on the projected given to him we can calculated the expected contribution from each scenario (Table 1). Scenario Customers Net Contribution (RevenueVariable costs) Optimistic 50000 $7,200,000 realistic 24,000 $3,456,000 Pessimistic 12,000 $1,728,000 As Internet usage becomes more common competition will increase and his business plan will most likely have to be reviewed. Therefore, in the first three years Mr. Grant should expect to make a profound profit in these years for the project to be worthwhile.Projected net profits (losses) for each scenario are shown in Table 2. Scenario Year 1 ($) Year 2 ($) Year 3 ($) Total ($) Optimistic 3,147,600 4,720,600 4,720,600 12,588,800 Realistic (596,400) 976,600 976,600 1,356,800 Pessimistic (2,324,400) (751,400) (751,400) (3,827,200) Table 2 shows the net profit (loss) for the first 3 years based on each scenario. All start-up costs are paid for in full in the first year only. Based on this these scenarios Mr. Grant would have a very difficult decision to make.Firstly, the net profit does not take into account the $500,000 investments that were made by both Mr. Grant and JTL. Secondly, the terms of the long-term loan are not made clear nor did the negotiations include an amortization schedule. As well, a long-term plan has not been made based on expected increases in private Internet usage. Finally, the probability of each scenario being realized is a very important tool to determine the expected value of Mr. Grants decision. If each scenario is equally likely to occur than Mr.Grant will have an expected profit of $3,372,800. 01. Although simplistic, we can determine that the CIC has made an expected $1,122,800 in three years if the loan is fully paid off years and all investments are recuperated. If the CIC were to then dissolve, each investor would make a profit of $561,400 a pitch on investment rate of 28. 52% compounded annually as well as revenue generate d from sale of capital (excluded from further analysis for simplicities sake). In conclusion, based on the information available, unless Mr. Grant can find another investment hat will provide a greater return on investment than 28. 52% compounded annually for the next 3 years, he should give the CIC the green light. Appendices Appendix 1 Fixed Costs Expense Cost per year ($) Manager 480000 Rent 360000 Telephone and utilities 180000 affiliate to internet 120000 Insurance 120000 Advertising 120000 Employee Wage 374400 Misc. admin and maintenance 600000 Interest on loan 125000 Total 2479400 Appendix 2 Start-up Costs Expense Cost ($) Telephone and utilities 7,000 Advertising 20,000 Other up-front costs 120,000Equipment costs 1,426,000 Total 1,573,000 Appendix 3 Variable Costs Expense Cost ($ per customer) Food 50 Beverages 30 Internet Usage 60 Total Average Variable Cost* 104 *Calculated using a weighted average based on the assumption that 40% of customers will use the Internet for 1 hr Appendix 4 Variable Revenue Revenue Revenue ($ per customer) Food 60 Beverages 140 Internet Usage 120 Total Average Variable Revenue* 248 *Calculated using a weighted average based on the assumption that 40% of customers will use the Internet for 1 hour.