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Posted on October 5th, 2012, by

The development of modern business is closely intertwined with the efficient business analysis and marketing strategy which contribute to a steady development of the company. The Africatrade plc. is oriented on export of notebooks to countries of the third world that naturally implies the international market expansion of the company. In this respect, it is important to lay emphasis on the fact that the development of business in the third world is accompanied by certain risks, which are quite difficult to forecasts and foresee. For instance, political instability can be a very influential factor that influences economy and business development. In fact, there are a lot of risk factors that can affect the organizational performance and the Africatrade plc. should be aware of possible risks and threats. At the same time, it is important to conduct a detailed business analysis to forecast the development of the company within several years to follow, in order to better understand prospects of the company on international markets.

First of all, it is necessary to develop the cash flow forecast of the project for the next five years. At this point, it is important to remember that the company plans to increase gradually volumes of production and sales, which will naturally influence the cash flow. The cash flow forecasts is shown in the table 1

Table 1

2009 2010 2011 2012 2013
Costs of production 180,000 192,000 192,000 231,000 231,000
Administration costs 20,000 20,000 20,000 20,000 20,000
Amortization 60,000 60,000 60,000 60,000 60,000
Total Out 260,000 272,000 272,000 311,000 311,000
Sales 300,000 320,000 320,000 396,000 396,0000
Total In/Out 40,000 48,000 48,000 85,000 85,000

The cash flow forecast implies that the company will grow steadily proportionally increasing the price of the product and the costs of production. In this respect, it should be said that the company can steadily increase revenues on its investments, although it is important to take into consideration the inflation rate, which may vary depending on a country, where notebooks are sold.

At this point, it is important to dwell upon the cost-volume-profit analysis. Basically, the development of the Africatrade plc. business is supposed to grow steadily because the growth of costs, volume and profit are proportional. What is meant here is the fact that the company will attempt to increase gradually its profit, though in the first year, profit will be the lowest because of the lower volume of production and a relatively low price of products sold by the company. At the same time, the company can count for a relatively low cost of production of notebooks which allows the company to get profit since the first year of operations. To put it more precisely, the cost of production of notebooks during the first year is supposed to be 60 per item that will be 180,000 in total. In addition, the company will have fixed administrations costs, which will constitute 20,000 and 60,000 will be spent on amortization annually. As a result, the company expects to get 40,000 profit in the first year of operations.

Within the five year period the cost-volume-profit balance will change. The company will increase its profit mainly due to the increase of the volume of the production. To put it more precisely, the company will produce and sell 3,200 notebooks in the second year, instead of 3,000 sold the first year. By the end of the five year period the annual production and sales of notebooks will increase to 3,300 items. As a result, the second year, the profit of the company will increase to 48,000 while, by the end of the five year period, the company will have the profit of 85,000 annually. As for costs, it should be said that they will mainly grow because of the costs of production of notebooks which will increase from 60 to 70 per item. However, it is worth mentioning the fact that the administration costs may need to increase under the impact of changes in the business environment.

To calculate net present value (NPV), we will use the formula: , where t the time of cash flow, i discount rate (in our case it is equal to target return rate 25%), and Rt net cash flow (R0 is used to denote initial investment). Table 2 illustrates the process of NPV calculation.

 

 

Year

0

1

2

3

4

5

Cashflow -300000 100000 108000 108000 145000 145000
Expression for calculating present value
Present Value -300000 80000 69120 55296 59392 ~47514

 

Table 2. NPV calculation

The calculation of cashflow is shown in Table 3.

Year

0

1

2

3

4

5

Sales 0 300000 320000 320000 396000 396000
Initial investment 300000 0 0 0 0 0
Administration costs 20000 20000 20000 20000 20000
Production cost 180000 192000 192000 231000 231000
Total cash outflow 300000 200000 212000 212000 251000 251000
Resultant cashflow -300000 100000 108000 108000 145000 145000

 

Table 3. Cashflow calculation

So, taking into account the results of Table 2, we have the value of NPV: . Since NPV value is greater than 0, we can make a conclusion that the project is worth investing.

In order to find the IRR (internal rate of return), we need to find such r, for which NPV value equals to 0, i.e. it is necessary to solve the equation:  (here again Rt is the cashflow, and we need to find i). Using the Excel methods of analysis, we can numerically calculate the IRR value. Table 4 illustrates the results of IRR calculation.

RATE 0,27
Year 0 1 2 3 4 5
Cashflow -300000 100000 108000 108000 145000 145000
(1+RATE)^t 1 1,27 1,61 2,03 2,58 3,26
Present value -300000 78928,28 67280,47 53103,31 56272,80 44415,15
NPV 0,00

 

Table 4. IRR calculation

Thus, IRR ~ 0,27 or 27%. The value of IRR indicates the rate of return produced on each dollar of investments. We can see that the IRR value is greater than expected return rate (and therefore, the project is going to fulfill the demands of the investors) and is greater than capital cost, which means that the project is profitable.

In such a situation, the time of cash payback period will constitute five years. In actuality, this period is sufficient for the company to take its niche in the international markets. In fact, the development of international business is quite complicated in the current situation when the competition is very high. The company cannot ignore this fact and the five year period of cash payback return is worth investing in this business.

On the other hand, it is necessary to assess adequately risks the company may face while developing its business. In this respect, it should be said that one of the major challenges the company is likely to face is the instability of markets in developing countries. In actuality, the major advantage of developed countries compared to developing ones is the stability of markets and economic development. As a result, forecasts made in regard to the company operating in developed countries are more accurate compared to forecasts made for such companies as the Africatrade plc, which operates in developing countries mainly. In practice, this means that the company can face the problem of the unfair competition, the lack of open market principles which may be violated by local authorities of developing countries.

In other words, the company will definitely face higher risks compared to companies operating in developed countries. At the same time, it should be said that the development of business in developing countries can bring substantial profits which will be higher compared to markets of developed countries. In such a way, potentially high profits outweigh relatively high risks the Africatrade plc will face in its development.

Furthermore, the company is focused on the export of high tech products at low price. To put it more precisely, the company is going to sell notebooks to developing countries at the price of 100-120. Obviously, such a price is low, but it is low for developed countries, while in developing countries, especially in Africa, even such a price may be unaffordable for a larger part of the population. However, it is obvious that the larger is the number of customers the more prospects the company has for the further development. At the same time, the company cannot accelerate the production and it does not need to do it because during the first years of operations in developing countries, the company needs to define whether costs outweigh benefits.

In this respect, forecasts concerning potential profits of the company are not reliable because of markets of developing countries are vulnerable to considerable changes. In addition, it should be said that the company does not really take into consideration the possibility of the growth of administration costs. However, such an approach is not correct because the company may need to increase the administration costs because of changing business environment under the impact of political factors and economic instability.

Thus, taking into account all above mentioned, it is possible to conclude that the development of business in developing countries is accompanied by certain risks. In this regard, the decision of the Africatrade plc. to start its business in developing countries may be quite risky, but, taking into consideration the volume of production and sales, the company can develop steadily and profits are likely to outweigh costs. At the same time, it is important to remember that the company needs to develop an efficient marketing strategy on the ground of which it is possible to develop effective approaches to enter new markets. Anyway, it is obvious that the company will face serious difficulties, but it offers quite original product, which is supposed to be sold at a low price that opens good prospects for the company.

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