Tips on projections - IRR, capital budgeting, Free cashflow

Question 1

Incremental / changes
ITC June 2023
Other factors to consider when launching a new software

Answer 1

This what we need eg
Revenue from existing
customers - non incremental

Always do Tax Calculation

Question 2

Provide a recommendation on the best investment option for Sun
Food, taking into consideration your calculations in part (a) and
(b), as well as any relevant strategic factors.
a) had 16%
b) had 46%

Answer 2

Structure

Option 1
Key word preferred***

The dark kitchen project will involve the creation of a software app, which
may not be preferred over existing food delivery apps, especially since the
latter are well-established in the market.

Question 3

option a

Answer 3

Sun Food is unlikely to have the expertise of a software specialist required
to monitor and manage the operations of the app and the establishment of
a helpdesk for customer support (e.g. incorrect deliveries) and has not
included this additional aspect of work in their financial projections or
operational plans

Question 4

Responsibility over the app

Answer 4

It is also not clear who will ultimately be responsible if there are any issues
during the delivery of meals from the virtual kitchen to the customer – will
it be Sun Food or CC? Should there be issues, customers could hold Sun
Food responsible, potentially resulting in a loss of reputation and payment
of legal costs.

Question 5

Logistics of this in the cashflow

Answer 5

Sun Food does not seem to have considered the vetting of drivers before
they are loaded onto the app or any regulatory issues related to the
services they provide to the company, given the level of trust placed on
them to deliver the meals on time and in good condition. Sun Food has not
considered the number of drivers required to service the customers who
order via the app. Failure to get drivers onboard will result in delivery
delays and customers turning to competitor apps.

Question 6

new app testing?

Answer 6

The app will need to be tested in a pilot environment before it is launched
to the public. Any issues may result in delays with the project.

Question 7

Variable costs

Answer 7

Sun Food does not seem to have factored variable cost (e.g. delivery fee)
associated with the use of the app and delivery into their projections as
the gross profit margin remains unchanged in the estimates. Have all
applicable costs been considered? (E.g., there are no costs for servers for
the software application or maintenance thereof / potential staff training /
legal expert / higher electricity & utility bills.)

Question 8

Technology advancements- Compatibility

Answer 8

Existing customers may not have access to mobile phones or internet
connectivity required for the app. They may not have credit cards for
electronic payment. These customers will be lost to competitors if
takeaway branches close.

Question 9

Change?

Answer 9

Many branches of the same franchise brand will be closed. Will existing
customers download the new app to order their food or will it be easier to
go to competitor branches that have similar menus?

Question 10

morale

Answer 10

Given the closure of branches, this could impact overall franchisee morale
and their employees who will be losing their jobs

Question 11

recommend

Answer 11

Both branches are in close proximity so it makes sense to consolidate their
offering but Sun Food should consider keeping one branch open to serve
customers in the area.

Question 12

operating leverage

Answer 12

The closure of Pizza Pronto and Great Burgers branches will reduce
operating leverage, although the opening of a dark kitchen will partially
offset the full impact of this

Question 13

Covid-19 impact

Answer 13

Now that Covid-19 restrictions have been lifted and the hospitalisation rate
decreases, more diners may want to go to restaurants instead of ordering
via a delivery app OR there may be a decrease in persons working from
home, which could impact demand for the dark kitchen offerings.

Question 14

any point with forex

Answer 14

Sun Food is exposed to exchange rate risk – ZAR on payment for the
investment in the development of the app which could weaken more
dramatically than forecast, reducing returns.

Question 15

working capital

Answer 15

What are the working capital implications of the dark kitchen opportunity?
These do not seem to have been factored in.

Question 16

Impact on Cash flow

Answer 16

What is the impact on returns (and cash flows) beyond the forecast period?
This could impact the probability that the dark kitchen operating model will
be expanded post the first phase of implementation.

Question 17

Management

Answer 17

Will the investment in the dark kitchens potentially distract management
from the core offering? This could cause revenues from existing
operations to decline.

Question 18

Load Shedding everywhere

Answer 18

Given the electricity supply issues in the country, Sun Food needs to
consider how energy intensive the dark kitchens will be and if additional
support is needed to cope with load shedding, as secure supply is likely to
be critical.

Question 19

Option 2
Acquiring significant influences
Other factors to consider

Answer 19

Returns Driven by Dividends and Final Sales Price
Dividends: These are payouts made by EatWell to its sharehol

The returns from the EatWell investment will be driven by the dividends
and final sales price. It is critical that the demand for EatWell meals does
not fade until 2025 (how accurate are these forecasts?).

Question 20

reliability of the demand forecasts

Company strategy -

Answer 20

This might involve looking at factors like consumer trends, competitive analysis, and broader economic indicators.

to sustain or grow demand, such as marketing initiatives, product development, and customer engagement practices

Question 21

If a question has a fixed multiple

Answer 21

Furthermore, the exit multiple of 6 in 2025 needs to be compared to similar
multiples for businesses of a similar operational nature and size to assess
reasonability of pursuing an exit at this point or whether it is worth waiting.
The business could be more valuable if the market has grown and
investors want exposure to this segment.- The multiple of 6 in 2025 needs
to be compared to the entry multiple when the initial investment was made,
as an increase in the multiple would increase the returns on the EatWell
investment.

Question 22

pre-packed meals consideration

Answer 22

The meals sold to Sun Food franchises will be pre-cooked and packed.
Sun Food should consider whether the proposed distribution model will be
suitable for maintaining the quality of the meals from EatWell. Customers
may not want EatWell’s meals if they are not fresh, especially since they
are likely to be health conscious.

Question 23

Securing a buyer

Answer 23

If EatWell does not perform well in the next three years, Sun Food may
want to sell their stake in the company. If the company is performing
poorly, it is likely that the existing owners may not have sufficient resources
to pay the value agreed in the purchase agreement. Sun Food may then
find it difficult to secure a buyer in the open market.

Question 24

Having a main player in the business

Answer 24

Cookie plays a key role in the success of the business because she is the
director of product development. If she leaves, EatWell may lose its
competitive advantage and demand for its products may decrease.

Question 25

sustainability credentials

Answer 25

The investment in Eatwell potentially positions the business in a new
category with strong sustainability credentials. This could be valuable in
targeting customers who desire healthier meals with less environmental
impact.

Question 26

whenever there is a merger

Answer 26

the potential synergies of combining the business with Sun Food’s
distribution capabilities do not seem to have been taken into account.