Maddox Smith Staff asked 4 years ago

Finance

LiliRose Pty Ltd, trading as LiliRose, is a for profit company whose core business is running beauty therapy salons. At present LiliRose has three salons in suburban locations, and now has the opportunity to open a fourth salon in the suburb of Mount Pleasant. LiliRose has undertaken an initial feasibility study, costing $10,000. If LiliRose goes ahead with the new salon, LiliRose has established that it will borrow $100,000. It will be able to borrow these funds at 7.7% per annum, compounding monthly. You are a consulting company. LiliRose has commissioned your consulting company to provide financial analysis of this business opportunity, and to provide a recommendation based on this analysis. As well LiliRose’s management recognize that they have limited understanding of the key ideas involved in such financial analysis, and require an explanation, in simple English, of these ideas. Your explanation of key financial ideas, your analysis and your recommendation are to be presented in a written report. Details of LiliRose present operations. LiliRose presently operates in three locations: Happy Valley, Sunny Hills and Paradise Gardens. At each salon it offers three types of beauty therapy –                    (i) manicures/pedicures, (ii) massage and (iii) skin therapies. Each salon is set up with ‘stations’. There are three types of stations – one for each type of therapy. Each therapy can be carried out only at an appropriate station e.g. massages can only be carried out at a massage station. For the three salons presently held, the set-up of stations is set out in the table immediately below. Suburb Number of stations Manicure/ pedicure stations Massage stations Skin Therapies stations Happy Valley 5 2 1 2 Sunny Hills 6 2 2 2 Paradise Gardens 7 2 2 3   LiliRose has accurate records of patronage of these salons over the past two years, and thus usage statistics for these stations is available. This data is set out below: Suburb Number of stations Manicure/ pedicure stations – % in use Massage stations % in use Skin Therapies stations % in use Happy Valley 5 60% 50% 70% Sunny Hills 6 70% 40% 80% Paradise Gardens 7 80% 50% 65%   The operating hours for each salon are the same and are as set out in the table immediately below. These operating hours are representative of the beauty therapy industry. Monday Closed Tuesday 10am – 6pm Wednesday 10am – 6pm Thursday 9am – 9pm Friday 8am – 9pm Saturday 7am – 4pm Sunday Closed   Staffing: Each of the salons has a manager and an assistant manager, both working 35 hour weeks.  Each of these people carries out some management tasks but also takes on beauty therapy tasks. Details regarding these roles are given below (dollar values are as at 1 January 2015): Suburb Manager salary % manager time on management Assistant manager salary % assistant manager time on management Happy Valley $45,000 20% $42,000 10% Sunny Hills $46,000 25% $42,000 15% Paradise Gardens $46,500 25% $42,500 15%   The salaries quoted do not include the superannuation guarantee levy. Each manager and assistant manager is entitled to 4 weeks annual leave, and 10 days sick leave. All other workers are beauty therapists employed on a casual basis at an hourly rate of $22. These people are not entitled to annual leave or sick leave, but do have to be paid the SGL. Given the nature of the business, it is always possible to employ staff to cover expected demand. It is LiliRose’s policy to always have a manager or an assistant manager in attendance at all times. When either the manager or the assistant manager is on annual leave, one of the beauty therapists employed on a casual basis is asked to act in a management capacity and is paid at the rate of $30 per hour ( 1 January 2015 amount).   Details for business opportunity Information from the feasibility study: Whilst LiliRose has purchased premises for the Happy Valley and the Paradise Gardens salons, it does not wish to purchase any further buildings. There are suitable premises available for rental for this new venture. The rental price per week as at 1 January 2015 is $2,500. These premises are set up to be immediately suitable for a salon with six stations. At least two stations must be manicure /pedicure stations. However some signage and branding would be needed, at an estimated cost of $8,000. The Australian Tax Office (ATO) has ruled that rental and set up costs are to be considered expenses from a tax perspective. LiliRose would need to pay a deposit of $10,000 for this rental property, with the amount being returned at the end of the rental period if the property is in the same condition (less normal wear and tear) as it was at the beginning of the rental period. LiliRose would need to buy furniture and equipment for the salon and for each station. The estimated costs for these items are set out below:   Item type Salon Manicure/ pedicure stations Massage stations Skin Therapies stations Furniture $5,000 $800 $6,000 $3,000 IT equipment $500     $1,500 Beauty therapy equipment   $3,000   $6,000