The innovation and technology have changed the face of business and its operations. In fact the change has become the mantra for success in business world. An organization or business irrespective of the sector must accept and move in line with technology or if possible stay one step ahead of technological innovation to be relevant in the market.
In this case IFACE, a company operating in medical aesthetic, dermatology and consumer beauty have decided to use advanced technology to achieve massive growth in a booming and rapidly growing industry in all across the globe. With a perfect mix of innovation, technology and medical science, IFACE will allow the customers to be the doctor of their own skin and beauty by using the advanced technology platform of the company (Kirzner, 2015)
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Mode of operation |
Supplier |
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Growth Model |
Expansion of operations to new geographical locations |
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At present the company provides |
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Current geographical areas in which services are provided |
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North America |
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Expansion strategy to include expansion operations to: |
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China |
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India |
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Logic: |
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The company is proposing to use breakthrough technology to combine medical science and aesthetic beauty |
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Hence, two of the most populated and beauty conscious countries present huge potential to increase the revenue |
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China |
Most populated country in the world |
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India |
Second most populated country in the world |
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People of both the countries are quite conscious about beauty and health (Hitt & Duane 2017) |
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It is expected that expansion of operations would help the company to grow the revenue by 100% per annum for next 3 years |
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Year |
2019-12 |
2020-12 |
2021-12 |
2022-12 |
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Revenue |
4,500,000.00 |
9,000,000.00 |
18,000,000.00 |
36,000,000.00 |
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Less: Cost of revenue |
1,800,000.00 |
3,600,000.00 |
7,200,000.00 |
14,400,000.00 |
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(A) Gross profit |
2,700,000.00 |
5,400,000.00 |
10,800,000.00 |
21,600,000.00 |
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Operating expenditures |
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Salaries of employees |
225,000.00 |
450,000.00 |
900,000.00 |
1,800,000.00 |
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Administrative and general expenditures |
180,000.00 |
360,000.00 |
720,000.00 |
1,440,000.00 |
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Depreciation |
450,000.00 |
900,000.00 |
1,800,000.00 |
2,700,000.00 |
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(B) Total operating expenditures |
855,000.00 |
1,710,000.00 |
3,420,000.00 |
5,940,000.00 |
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Earnings before interest and tax |
1,845,000.00 |
3,690,000.00 |
7,380,000.00 |
15,660,000.00 |
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Less: Interest |
461,250.00 |
415,125.00 |
373,612.50 |
560,418.75 |
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Earnings before tax |
1,383,750.00 |
3,274,875.00 |
7,006,387.50 |
15,099,581.25 |
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Less: Tax @25% |
345,937.50 |
818,718.75 |
1,751,596.88 |
3,774,895.31 |
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Profit after tax |
1,037,812.50 |
2,456,156.25 |
5,254,790.63 |
11,324,685.94 |
In 2019 the organization will start operations in North America and the goal is to spread the services to different parts of the world with specific focus on India and the Republic of China. The expansion will be started at the end of 2019 and will be fully operational in India and China by the start of 2020.
The expansion model to start operating in China and India apart from the existing markets in North America and other parts of the world.
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Expected cost of expansion |
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Particulars |
Amount ($) |
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Cost of investing in new and advanced technology |
3,000,000.00 |
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Cost of setting up operations in China and India |
1,500,000.00 |
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Initial marketing costs |
750,000.00 |
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Working capital required |
850,000.00 |
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Initial capital outlay for expansion |
6,100,000.00 |
Financial revenue and net cash flow from business operations in India and China:
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Values for investment in India and China |
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Year |
2020-12 |
2021-12 |
2022-12 |
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Revenue |
4,500,000.00 |
9,000,000.00 |
18,000,000.00 |
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Less: Cost of revenue |
1,800,000.00 |
3,600,000.00 |
7,200,000.00 |
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(A) Gross profit |
2,700,000.00 |
5,400,000.00 |
10,800,000.00 |
|
Operating expenditures |
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|
Salaries of employees |
225,000.00 |
450,000.00 |
900,000.00 |
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Administrative and general expenditures |
180,000.00 |
360,000.00 |
720,000.00 |
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Depreciation |
450,000.00 |
900,000.00 |
1,800,000.00 |
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(B) Total operating expenditures |
855,000.00 |
1,710,000.00 |
3,420,000.00 |
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Earnings before interest and tax |
1,845,000.00 |
3,690,000.00 |
7,380,000.00 |
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Less: Interest |
461,250.00 |
415,125.00 |
373,612.50 |
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Earnings before tax |
1,383,750.00 |
3,274,875.00 |
7,006,387.50 |
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Less: Tax @30% |
415,125.00 |
982,462.50 |
2,101,916.25 |
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Profit after tax |
968,625.00 |
2,292,412.50 |
4,904,471.25 |
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Add: Depreciation |
450,000.00 |
900,000.00 |
1,800,000.00 |
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Cash flow from business operations |
1,418,625.00 |
3,192,412.50 |
6,704,471.25 |
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Particulars |
Amount ($) |
Amount ($) |
Amount ($) |
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Cash flow from business operations |
1,418,625.00 |
3,192,412.50 |
6,704,471.25 |
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Present value factor @10% per annum |
0.91 |
0.83 |
0.75 |
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Present value of cash inflows |
1,289,659.09 |
2,638,357.44 |
5,037,168.48 |
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Particulars |
Amount ($) |
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Present value of total cash inflows |
8,965,185.01 |
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Add: Present value of working capital to be recovered (850,000 x 0.751) |
638,617.58 |
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Present value of total cash inflows |
9,603,802.59 |
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Less: Initial capital outlay |
6,100,000.00 |
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Net present value. |
3,503,802.59 |
With expected net present value of the growth model is $3,503,802.59 IFACE should proceed with its expansion strategy of business operations to India and Republic of China. Investors will be able to earn significant return from the growth model as the NPV is quite encouraging for the investors and shareholders of the organization (Drucker, 2014).
References:
Drucker, P. (2014). Innovation and entrepreneurship. Routledge.
Hitt, M., & Duane Ireland, R. (2017). The intersection of entrepreneurship and strategic management research. The Blackwell handbook of entrepreneurship, 45-63.
Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.
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