Cost Reduction
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Financial Projections The following information presents a summary of projections for the first 5 years of operations, beginning in July 1997. AIREX's first year will begin in July 1997 and will finish in June 1998. The detailed financial data is shown in the Annex 3. 8.1 DEMAND This analysis began with our main assumptions (as it is shown in the Annex 3.1), including market demand (e.g. volume of recyclable residues, non-recyclable, services and consulting time), necessity of equipment and man power, labor costs and general expenses. Our forecast for the first five years of operations indicates that AIREX will have 10 customers by the end of the first year, increasing to 20, 30, 45 and 80 respectively in the following years. It is important to mention that the consulting revenues will start only in the second year and will represent approximately 11% of the total sales. |
The learning curve and the experience in this market will bring benefits especially after the third year, as can be seen in the next graph:
Cost Reduction
8.2 FINANCIAL STATEMENTS
The income statement, cash flow statement (per year and detailed for the first two years) and balance sheet for the first five years are shown in Annex 3. It is important to mention that all the expenses and investments in the first year of operation will be absorbed by the shareholders' capital and by the positive cash flow generated.
Income statement
The projected income statement for the first five years is shown below. The decrease in costs is mainly due to the increased learning curve and will result in a strong increase in the net income. We will start with a loss of US$40,313 in the first year, which will be converted to a gain in the second of US$219,016, reaching US$979,358 in the fifth year. A more detailed year end income statement is presented in the Annex 3.2.
Year Income Statement
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| REVENUES | |||||
| Total of sales | 649,380 | 2,424,600 | 3,646,900 | 5,470,350 | 9,758,400 |
| COST OF GOODS SOLD | |||||
| Total | 604,357 | 1,777,683 | 2,789,095 | 4,085,313 | 7,063,264 |
| GROSS PROFIT | 45,023 | 646,917 | 857,805 | 1,385,037 | 2,695,136 |
| EXPENSES | |||||
| Total | 85,337 | 225,733 | 326,477 | 475,615 | 811,755 |
| OPERATIONAL PROFIT | -40,313 | 421,184 | 531,328 | 909,422 | 1,883,381 |
| INCOME BEFORE TAXES | -40,313 | 421,184 | 531,328 | 909,422 | 1,883,381 |
| Taxes on income | 0 | 147,414 | 185,965 | 318,298 | 659,183 |
| NET INCOME AFTER TAXES | -40,313 | 273,770 | 345,363 | 591,124 | 1,224,198 |
| Dividends | 0 | 54,754 | 69,073 | 118,225 | 244,840 |
| NET INCOME | -40,313 | 219,016 | 276,290 | 472,900 | 979,358 |
Cash Flow
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Beginning Cash Balance | - | 38,432 | 45,617 | 234,836 | 600,445 |
| Total Cash Receipts | 649,380 | 2,463,032 | 3,692,517 | 5,705,186 | 10,358,845 |
| Total Cash Disbursements | 636,948 | 2,019,415 | 3,110,927 | 4,603,168 | 8,068,659 |
| Net Cash from Operations | 12,432 | 443,617 | 581,590 | 1,102,017 | 2,290,186 |
| Total of non-operational expenditures | 274,000 | 398,000 | 346,754 | 501,573 | 1,085,725 |
| Total of non-operational income | 300,000 | - | - | - | - |
| Net Cash Balance | 38,432 | 45,617 | 234,836 | 600,445 | 1,204,461 |
The cash flow statement for the first five years is presented above. It is possible to see a positive net cash balance beginning in the first year and increasing gradually to US$1,204,461 in the fifth year. More details can be seen in the Annexes 3.3 and 3.4.
Balance Sheet
According to the pro forma balance sheet it is possible to see beginning assets of US$259,687 supported only by the capital invested. These assets will increase to US$2,452,090 in the fifth year supported by capital and retained earnings.
A general overview of the balance sheet is presented below. A more detailed version is shown in the Annex 3.5.
Balance Sheet
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
| ASSETS | ||||||
| Current Assets | 38,432 | 45,617 | 234,836 | 600,445 | 1,204,461 | |
| Fixed Assets | 221,255 | 487,840 | 589,230 | 745,673 | 1,247,630 | |
| TOTAL ASSETS | 259,687 | 533,457 | 824,066 | 1,346,118 | 2,452,091 | |
| LIABILITIES & EQUITY | ||||||
| Current Liabilities | 0 | 54,754 | 69,073 | 118,225 | 244,840 | |
| Equity | 259,687 | 478,702 | 754,993 | 1,227,892 | 2,207,251 | |
| TOTAL LIABILITIES & EQUITY | 259,687 | 533,456 | 824,066 | 1,346,117 | 2,452,090 | |
8.3 FINANCIAL RATIOS AND INVESTMENT RETURN
The investment projections for the first five years is shown below. A detailed list of investment items is presented in the Annex 3.6.
Investments
| Unit | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||
| Total | Total value | US$ | 322,855 | 322,495 | 518,070 | 836,005 | 1,575,003 |
| Equipment | Investment per period | US$ | 66,800 | 189,200 | 395,000 | 662,300 | 1,327,600 |
Pay Back Analysis
The graph above shows the pay-back analysis. It can be noticed that with an investment of US$300,000, the pay-back will be approximately 3.2 years. It is relevant to mention that the discounted pay-back is 4.1 years, the net present value (NPV) is US$179,901 using a conservative discount rate of 25%, and the internal rate of return (IRR) is 40.9%.
The table below summarizes the main financial ratios projected for the first five years of the company:
Financial Ratios
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
| Return on Equity (ROE) | -15.5% | 51.3% | 41.9% | 43.9% | 49.9% |
| Return on Total Assets | -15.5% | 41.1% | 33.5% | 35.1% | 39.9% |
| Total Assets Turnover | 2.50 | 4.55 | 4.43 | 4.06 | 3.98 |
| Gross Profit Margin | 6.9% | 26.7% | 23.5% | 25.3% | 27.6% |
| Operating Profit Margin | -6.2% | 17.4% | 14.6% | 16.6% | 19.3% |
| Net Profit Margin (after dividends) | -6.2% | 9.0% | 7.6% | 8.6% | 10.0% |
| Net Present Value | US$179,901 |
| Internal Rate of Return | 40.90% |
| Pay Back | 3.2 years |
| Discounted Pay Back | 4.1 years |
| Discount rate | 25% |
| AIREX | ||
| Table of Contents | Appendices | |
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1. Executive Summary 2. Business Description 3. Products and Services 4. Marketing Plan 5. Operational Plan 6. Management and Organization 7. Capital Structure 8. Financial Projections 9. Conclusion |
Depreciation Schedule Letters of Reference Resumes of Management General Assumptions Detailed Cash Flow Investments | |