Franchising Group 3 Report

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FRANCHISING BUSINESS PLAN Created by Group 3

International University

National University – HCMC

FRANCHISING BUSINESS PLAN

PROJECT: DIPPING DOTS DIPPING DOTS DIPPING DOTS DIPPING DOTS

---- ICE CREAM OF THE FUTURE ICE CREAM OF THE FUTURE ICE CREAM OF THE FUTURE ICE CREAM OF THE FUTURE

Group 3

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OUTLINE Executive summary …………………………………………1

Company overview …………………………………………2

Legal procedures …………………………………………4

Legal Basic

Subjects addressed

Dossiers and procedures for franchise operations

Processing time records

Announcement transfer registration of franchise

Management strategy …………………………………6

Management team

Human Resources management

Product quality management

Marketing strategy …………………………………………..12

SWOT analysis

Market segmentation

Competition analysis

Marketing mix

Marketing measurement

Situational control

Financial section ……………………………………………..22

Important assumption

Start-up expense

Revenue and cost

Operation budget

Provisional balance sheet

Project evaluation

Conclusion ……………………………………………………..31

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SECTION I: EXECUTIVE SUMMARY With the desire to become a well-known franchised Ice-cream in Vietnam, we are all eager

preparing our business plan to persuade the franchisor Dippin Dots Group from US about

our potential success in the future. The main sections of this business plan include:

Company overview

This section provides a complete description of Dipping Dots Group: company history, the

Dipping Dots ice-cream concept and reason to choose this project.

Legal section

We will support all necessary procedures and notes to make franchise business in Vietnam

Management Section

This is one of the main factors Dippin Dots Group focuses on when choosing their

franchisees. It also provides the description of the key management roles in our new business.

By creating a professional management system as well as a friendly culture, we expect to

deliver a whole new way enjoying ice-cream in Vietnam! We’ll follow the strict quality

control, storage and transportation of Dipping Dots Group.

Marketing Section

Marketing plays a key role for any business. Through it, we analyze a lot of things about our

mission & vision, target market, examination of the value equation related to the product or

service as it relates to potential customers and, of course, detailed marketing and advertising

plans for our business.

Financial section

This section includes start-up expense, forecasted revenue and cost, operations budget,

provisional balance sheet and finally justifying the investment for the investor

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SECTION II: COMPANY OVERVIEW

I. History

In 1988, Dippin' Dots Founder and Chairman Curt Jones

changed the way the world enjoys ice cream. Jones, a

microbiologist, pioneered the process of cryogenic

encapsulation...a scientific way of saying he used super-cold

freezing methods to make little beads of ice cream. Not only

were the ice cream beads delicious and fun to eat, Jones

knew that flash-freezing the ice cream ingredients would

lock in flavor and freshness. With those qualities

established, Dippin' Dots were ready to take on the world!

A retail store in Lexington, Kentucky...gatherings of friends and family in Jones' hometown in

Pulaski County, IL...and locations inside one of the nation's premiere amusement parks,

Opryland USA, helped form what Dippin' Dots is today. The ice cream now has a home in

thousands of locations worldwide in theme parks, fairs & festivals and franchised store

locations.

II. New ice-cream concept

So what exactly are Dippin' Dots? Actually, it's fun

to watch "first-timers" expressions when they take

their first bite. After overcoming the sight of their ice

cream beads "pouring" into a cup there's the look of

amazement that ice cream can be "tingly and almost

crunchy" (their words!). When the smooth, creamy

ice begins to melt in their mouth...a fan is born! It's

truly a treat for kids of all ages. And finally, to

answer the question, Dippin' Dots are made from fresh dairy ingredients flavored with fun,

fruity, enticing and even exotic flavors. The mixture is frozen almost instantly in liquid

nitrogen, a common element in the atmosphere used commercially for flash freezing. After

production, Dippin' Dots are packaged and shipped worldwide.

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III. Reasons to choose:

• Dippin' Dots originated the "beaded" ice cream

concept

• Almost 20 years of brand recognition

• Attractive store & kiosk designs

• Multiple product offerings (ice cream, yogurt, flavored ices, ice cream cakes, iced

drinks, shakes and more!)

• Simple ordering and inventory control

• Transports easily for cross promotion at school fundraisers, party catering or

community events

• International exposure and brand awareness

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SECTION III: LEGAL PROCEDURES

I. Legal basis:

- Commercial Law in 2005.

- Decree 35/2006/ND-CP dated 31/03/2006 of the Government.

- 09/2006/TT-BTM Circular dated 25/05/2006 of the Ministry of Commerce.

II. Subjects addressed:

- Traders have its head office located in Ho Chi Minh City.

- Traders are expected to operate franchises in the country except for transfer

activities across the boundaries of export processing zones, non-tariff zone or

separate customs areas in accordance with the laws of Vietnam.

III. Dossiers and procedures for franchise operations:

1. Profile first registration:

a. Application for registration of franchise operations (MD-2 form attached);

b. Written introduction of franchising (form attached);

c. A notarized copy of certificate of business registration or certificate of

investment;

d. A notarized copy of the protection of industrial property rights in Vietnam or in

foreign countries in case of transfer of rights to use objects of industrial property

have been granted protection titles.

e. Papers proving consent to allow the franchise's original franchise (in the case

of registered traders is franchising franchise secondary);

(Note: If the papers in the d and e are shown in foreign languages must be

translated into Vietnamese and notarized by the notary in the country)

2. Profile of re-registration procedure:

(Applies to the case of traders moving its head office in Ho Chi Minh City)

include:

a. The papers referred to in Section 3.1;

b. Informed consent franchise registration of the registered office before.

IV. Processing time records:

- Time resolved records: 5 working days after receipt and validation.

- For the records are incomplete or invalid: Within two working days the

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Department will respond in writing require the trader added.

- Time resolved records added: 5 working days after receipt and validation.

V. Announcement transfer registration of franchise:

Where traders relocating their headquarters to the provincial / city, merchants

are responsible for re-registration of franchise operations at the registry office

where they move to. Within 05 working days after completion of registration

procedures franchise at the new place, the trader shall notify in writing to the

Department of Trade Ho Chi Minh City to announce that registration transfer

Register.

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SECTION IV:MANAGEMENT STRATEGY

I. Management team

Each of 5 owners contributed 20% of the investment. As the result of the election, we decide

to establish our business following this management structure. Our director is Ms Huyen

Hoang. Everyone here is respected and treated by trust and fairness:

In our business, the management team has specific responsibilities to follow and finish

helping us achieves long term goals. These are:

1. Operational management:

It’s kept track by Operational Director, including establishing management system under

regulations, guidelines, requirement of Dipping Dots from franchisor; building standard for

products’ quality & inventory methods; creating plans for weekly, monthly, quarterly and

yearly objectives; controlling and evaluating the whole process, ensuring the performance

and the balance of relationship among managers; solving internal as well as external

troubles; keeping contact with franchisor to update any change and submit report in certain

periods.

2. Human resource management:

It’s also be supervised by Operational Director, including recruiting and training employees

basing on franchisor’s standard; evaluating performance of managers as well as employees;

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implementing regulations & policies efficiently, solve internal argument and create more and

more motivation,…

3. Marketing management:

It’s managed by marketing manager, including finding potential customer for Dipping Dots;

establishing strong awareness of brand in Ho Chi Minh City; building and controlling

promotion programs to achieve target customer; indentify to retain important and close

customers, checking and evaluating sale activities, solving problems which involved in

customers…

4. Financial management:

It’s responsibility of financial manager, including managing assets of company; controlling

levels of inventory as well as repairing, buying and selling equipments; taking care of

financial statement to guarantee given sale targets; making contracts which has relation to

finance such as contract with suppliers; collecting profit and paying salary for employees

following certain regulations,…

5. Sale management:

Sale management also plays a vital role with our business. It’s kept track by sale manager

who will train, control and evaluate employees in our store directly. Sale manager has

responsibility to take care of customers to ensure they come and go with high satisfaction

(then increase amount of customers). Moreover, he will keep very close relationship with

marketing manager to inform about sale situation � to design suitable changes in

management.

�� We can see that all these management tasks are important and relevant.

If they can be implemented efficient ly, our company can large profit and

cover capital in short period. Now, in the next part, we wil l show more

detailed description about human resource with key employees, recruitment

and training as well as our main culture.

II. HUMAN RESOURCE MANAGEMENT

As we know, big or small, all businesses can not develop without good human resource.

That’s reason why we try to build enthusiastic and excellent staffs from kiosk to store basing

on following special conditions (there will be at least one store and two kiosks first):

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1. Recruitment conditions:

� Store manager: We only need one manager for our store. He/she must have ability of

supervising and supporting; at least three years of managing stores or restaurants; be

good at communication skills as well as solving problems skills; be responsible for works

and employees. Because our store manager is also sale manager so he/she should

understand clearly about finance and standard of inventory methods. Of course, store

manager can receive certain salary which is suitable with his/her ability. (Start point is

$300/ month). This position will be recruited two month before opening ceremony.

� For employees: We need total 10 employees:

o 4 employees for our kiosks ( 1 employees/shift/ kiosk * 2 shifts/ day* 2 kiosks)

o 6 employees for stores (3 employees/shift/store* 2 shifts/day* 1 store).

� These employees will be recruited mainly from 18 to 25 year old people who are

young, friendly and active. They also have ability of creating good impression and

high satisfaction for customers. Employees can choose to work part time or full time

with the start salary from $75/ employees/ shift. Addition to that, they can have

opportunity bonus or monthly and yearly reward if they work hard with high

performance.

� For all: Managers and employees, all staffs will be recruited directly by operational

director. After recruitment, they will experience important training programs

(following franchisor’s requirement) before working formally under certain policies

and regulations. To understand how we train our staff, let’s go to the next part-

training conditions

2. Training conditions:

� Right of trainees:

To ensure the professional style, we will apply Basic Management Training – the

common training program from franchisor’s requirement. Following section 6 of Dipping’

Dot Franchise Agreement, franchisor will provide instructors, facilities, training

materials, technical training tools… and we - franchisee will be responsible for all

expenses for our trainees incurred in attending Basic Management Training including,

without limitation, all travel, lodging, wage and meal expenses. The trainees can learn a

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lot of knowledge as well as skills from training course which is not only useful for their

current jobs but also helpful in future.

� Responsibility of trainees:

After training, trainees must satisfactorily pass the Basic Management Training test with

a score at least 75%. In addition to written test, Basic Management Training including

food preparation and service, equipment usage…

Trainees must be willing to attend additional, seminars, and others training programs as

franchisor may reasonably require from time to time, but not more often than twice per

year.

3. Regulations

In order to protect the reputation and good will of Franchisor and to maintain high

standards of operation under the system, we shall operate our business in accordance with

the standards, methods, policies and procedures specified in Franchisor’s Confidential

Operating Manual. Besides, our company also has additional regulations to establish our

special and friendly culture, for example:

� All employees must come early at least 30 minutes before their shift and leave after

finish their tasks. At peak hour, number employees will be double to share work.

Any absence must be informed before 02 days to arrange schedule.

� All employees must wear uniform during shift. The bright smile must be always on

their lips to create friendly atmosphere for stores/kiosks.

� Saturday is seemed to be our “Happy day” which is not only give discount and

interesting shows for customer but also accept 01 to 02 relatives of employees enjoy

our ice cream free.

� Every month we will give reward for “Best employee of the month” with bonus equals

500,000 VND. Besides, at the end of year, we also have bonus for employees which

equals 10% revenue of company…So on.

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III.PRODUCT QUALITY MANAGEMENT

1. Checking quali ty:

Because Dipping Dots is the special product which needs checking quality frequently then

we will strictly follow the standard of franchisor’s requirement. The normal methods of

testing products are “Seven point quality check” and “Self checking”.

� Seven point quality check: Taking regular samples from seven points along the

production lines. A sample is taken and tested:

1> Upon receipt of the bulk tankers of raw ice cream mix.

2> From the mix stores in Dipping Dots silos

3> When the mix is pumped into the flavoring holding tanks for the silo

4> After the flavoring is added

5> As the flavor mix goes into the cryogenic process

6> If the run is more than 1,500 gallons at a mid process - point

7> After it emerges as finished dots

Samples are transferred to gel plates and standard plate counts are taken such as

coliform as well as yeast counts if the run is designate as international.

� Self checking: Despite the increased challenges, the characteristics of the dots do

provide it with an innate seft-check – a quality on which the company is still

educating inspectors and its retail outlets: “ If the dots are free-flowing, the

temperature is OK”, Once the dots warm above -20 F, they will begin to stick

together. Once stuck together, they don’t unstick- even if returned to lower

temperature. If only slightly stuck together during handling, the dots can be

“massaged “apart. If a complete meltdown occurs, the ice cream will not be used.

� Transportation: Our products are delivery to local accounts in insulated

containers that utilized liquid CO2 for refrigeration. The units are built onto

stainless steel pallets and hold up to 360 gallons ice cream. Until recently,

Dipping Dots international shipments (from Korea to Vietnam) were kept cold

during transportation with layers of dry ice and CO2 snow. With the advances of

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technology, though, the company is now able to use refrigerated containers which

can achieve the low temperatures needs. 3.3 Storage

� How to store products is also another challenge. To deal with this, we decide to purchase

customized equipment and built our own storage system. This system will be supported from

master franchisee following contracts.

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SECTION V: MARKETING STRATEGY

I. SWOT ANALYSIS

STRENGTH OPPORTUNITIES

- Supported by franchisor, include :

+ Format, design.

+ Equipment.

+ Brand name.

+ Advertising campaigns & strategy

+ Promotion supports.

- New technology to create a

new kind of ice cream.

- Have no direct competitor.

- First dippin’ dot ice cream in

Vietnam.

� New & attractive product.

- First franchisee of Dippin’ Dot

in Vietnam

◊ Get a lot supports from franchisor.

WEAKNESSES THREATENS

- Lack of experiences about Vietnam

market.

� Need more budget for market

research & training staff.

- New brand with Vietnamese

customers.

� Need a lot of effort advertising

afford

- Different business culture.

- Replacing products can create

competition.

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II. MARKET SEGMENTATION

We define 2 principle segments based on ages. (Focusing in Ho Chi Minh City

only) Our target customers are people from 8 y/o to 25 y/o (belong to middle class)

which is divided into two main groups:

• 8 – 16 year olds: Children and tweens who love ice cream and

sweet taste. They haven’t had income yet but are strong

“influencers” in buying decision.

• 16- 25 year olds: Young and active, they have new

relationships � take a lot time to hang out or go to specific places such as milk

tea shop, coffee shop… to chat with their friends.

III . Competition analysis

Since we are totally new kind of ice cream in Vietnam so we meet no direct

competitor. Therefore, to locate our brand, we compare Dippin’ Dots with some

indirect competitors.

Brand Competitors (similar features,

benefits to the same customers at similar

price)

No, Dippin’ Dot is unique; this is the first

time it comes to Vietnam, there is no type

of cream like Dippin’ Dot.

Product Competitor (Same product class

but different benefits, features and prices)

Bud’s, Goody, Pinky, New Zealand, X-

cream, Bach Dang and other ice cream

shops, etc.

ex: Dippin’ Dots has competitive price

compare to other ice cream like Bud’s,

Bach Dang, etc.

Generic Competitors (Very different

products that solve the same needs)

Yogurt Space, Frozen Yogurt, Tutti

Fruity, Fruit Juice, Coffee Shops, etc.

Total Budget Competitors (Compete for

the limited financial resources of the

same customers)

Cinema, Drama Theatre,…

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IV. Marketing mix

1. Products

a. Brand Identity

b. Product Category

Dippin’ Dot by the Cup

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Dippin’ Dot Coffee

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Dot Delicias

Soft drinks

2. Place

- We’ll set up one store and two kiosks.

+ The store is on 3/2 Street.

+ Two kiosks are located in front of Dam Sen Park and Hoa Binh Cinemar.

Store Design

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Kiosk Design

3. Pricing strategy

•• WWee ddeecciiddee ttoo uussee ““ MMaarrkkeett iinnttrroodduuccttiioonn ssttrraatteeggyy-- ppeenneettrraattiioonn pprr iicciinngg”” ..

•• WWhhyy aappppllyy::

�� TThhee pprroodduucctt ddooeess nnoott hhaavvee aann iiddeennttii ffiiaabbllee pprr iiccee--mmaarrkkeett sseeggmmeenntt

�� II tt hhaass eellaassttiiccii ttyy ooff ddeemmaanndd

�� TThhee mmaarrkkeett iiss llaarrggee eennoouugghh ttoo ssuussttaaiinn rreellaattiivveellyy llooww pprrooffii tt mmaarrggiinnss

TThhuuss,, oouurr mmeennuu aanndd pprr iiccee aarree pprreesseenntteedd iinn tthhee ffooll lloowwiinngg ttaabbllee::

MMeennuu PPrr iiccee

IIccee--ccrreeaamm $$11..0000 // 110000ggrr

CCooffffeeee >> $$22..55 // ccuupp ((33 ssiizzeess ((ssmmaall ll ,,

mmeeddiiuumm aanndd llaarrggee))

CCookkee,, DDiieett CCookkee,, SSpprr ii ttee,, AAqquuaaffiinnaa,, eettcc $$11..2255 // bboottttllee

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AAss oouurr oobbsseerrvvaattiioonnss aatt YYoogguurrtt SSppaaccee,, eeaacchh ttiimmee yyoouu ppuull ll tthhee yyoogguurrtt mmaacchhiinnee,, ii tt ggiivveess aatt lleeaasstt

110000ggrr.. AAllmmoosstt eevveerryy oonnee ppuull llss 22 ttiimmeess iinn oorrddeerr ttoo mmiixx tthheeii rr ccuuppss..

Thus, we assume that averagely, 1 customer will spend about $2 (~40,000VND) every time

they come to enjoy ice cream, coffee, soft drinks, etc.

44.. Promotion strategies

a. Communication objective

• To create our advertising awareness to target customers and build up our brand

personality in customer’s mind.

• To focus communication on building Dippin’ Dots as the new & so cool ice cream in

Vietnam

• To show our strong points.

• Build up credit and interesting (goodwill) in customer’s mind by PR events.

• Create “stand out“ at point of sale.

b. Communication strategy:

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An example about Print Advertising

5. Marketing measurement (time & budget) for 1st year

x1000USD

J

..

F M A M J J A S O N D $

News paper x x xx x X x x 1

Print advertising x x xx X x 0.2

Online x x X xx x .3

Marketing event (context) xx Xx xx xx N/A

Coupons xx xx xx x 1

Trials xx xx .5

Vip card xx Xx xx xx 1.1

Contingencies .2

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6. Situational control

- If the business can develop more than expectation, we will import 2 Dippin’ Dots Ice

Cream machine for 24hours service automatically.

- If the business is not good as our plan. We will reduce 2 staff who serve at kiosks

and reduce selling time of kiosks from 8 to 4hours per days ( only selling in rush

hours) to save 300$ per month.

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SECTION VI: FINANCIAL EVALUATION I. Important Assumptions

We are projecting profit based on the performance of other competitors and our own

judgment based on the following:

• We assume by using marketing strategies, sales strategies, good customer

relationships, fresh food, and good management practices, we will succeed.

• Our forecast is based on an average. Some months will increase and others decrease.

We do not predict any major decreases in sales, as district 1, Đầm Sen Park, Galaxy

cinema areas are busy all year round.

II. Start-up expense

Start-up expense (in USD)

Initial Franchise Fee $12,500

Grand Opening Advertising Expenditure $2,288

Credit Card and Gift Card Processing $755

Office and Store Supplies $100

Opening Inventory $3,024

Printing and Signage $499

Equipment / Built-Out $42,300

Travel, Lodging, Meals, Ect for Initial Training $1,750

Security deposits and prepaid rent $500

Miscellaneous Start-up Cost $5,000

Additional Funds (6 months) $13,000

Totals $81,176

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Those expenses above are information we got when contacting the master franchisee –

BARONG Co.,Ltd.. Although, it costs only $81,176 to open a Dippin’ Dots franchisee, the

franchisor requires:

- Liquid Capital Required: $80,428 and Net Worth Required: $250,000

� It means that you need to come up with 80,248$ of cash and that along with that you have

to have another 169,572$ of equity in other investments, your home, autos, cash value of your

life insurance, etc.

III. Revenue and Cost

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This is how we came up with those assumptions:

- We are going to increase the price by 5% each year as discussed in the Marketing

part.

- Seat turnover

o Ice-cream: at the store and Forecasted sale in 2 kiosks were decided based on

the market analysis, locations, target market (refer to Marketing part) and our

own observations at Yogurt Space and Yogen Fruz.

o Coffee and soft drinks are not our key product, but we’ll offer them for better

serving needs of wide ranges customers. For example: When parents take

their child to Dippin’ Dots, they still can enjoy the coffee or simply Coke if

they don’t enjoy the sweetness of ice –cream.

- Average check:

o Store:: AAss oouurr oobbsseerrvvaattiioonnss aatt YYoogguurrtt SSppaaccee,, eeaacchh ttiimmee yyoouu ppuull ll tthhee yyoogguurrtt

mmaacchhiinnee,, ii tt ggiivveess aatt lleeaasstt 110000ggrr.. AAllmmoosstt eevveerryy oonnee ppuull llss 22 ttiimmeess iinn oorrddeerr ttoo mmiixx

tthheeii rr ccuuppss.. TThhuuss,, wwee aassssuummee tthhaatt aavveerraaggeellyy,, 11 ccuussttoommeerr wwii ll ll ssppeenndd aabboouutt $$22

((~~4400,,000000VVNNDD)) eevveerryy ttiimmee tthheeyy ccoommee ttoo eennjjooyy iiccee ccrreeaamm,, ccooffffeeee,, ssoofftt ddrr iinnkkss,,

eettcc..

o Kiosk: For easy management, we’ll set the price of every cup as $1 –

equivalent to 100gr. And kiosk will sell only ice-cream.

- Average cost of

o Ice–cream: equals 34% of the ice-cream revenue. This information was

provided by an industry trade journal, Ice Cream News.

o Coffee: For a $2.5 cup of coffee, the cost for coffee, syrup, milk, whipping

cream is $0.75

o Soft Drinks: Retail price of 1 can is easily found. Here we decided average

cost regarding our price.

III. Operations Budget

As the Operations Budget table shows, the company expects to continue its steady growth in

profitability over the next 5 years.

- Royalty fee is 4% of the Gross profit

- Insurance: $2000 as law required

- Amortization: 10% of pre-opening cost

- Depreciation of Equipment and Built-out in 5 years.

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0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

Year 1 Year 2 Year 3 Year 4 Year 5

Operation Budget

Total Costs

Total Revenue

Net Income

0

50000

100000

150000

200000

250000

300000

350000

Year 1 Year 2 Year 3 Year 4 Year 5

Gross Margin Yearly

Here we can recognize the stable increase in revenue each year with the Profit margin at

30.34% in the 1st year of operation. At the end of year 5, the margin would increase to

38.46%.

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IV. Provisional Balance Sheet

As this is only the proposed investment, all information is forecasted, we use Provisional

Balance Sheet. The balance sheet is quite solid. We do not project any real trouble meeting

our debt obligations--as long as we can achieve our specific sales objectives.

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V. Project evaluation

1. Break even analysis

Breakeven

Contribution Margin=total revenue -variable costs 109517

CMRw= CM/revenue 0.37

Revenue at Breakeven point=(Fixed cost+net income)/CMRw 71187.07

Estimated revenue per day= Total revenue/360 823.75

Days to breakeven= Revenue at BP/ER 86.41829

The breakeven analysis is the tool to calculate the amount of sales that we need to achieve in

order to cover costs. After the breakeven point, we can make the profit.

According to the figure, the Dipping Dots franchisee can have break-even in the day 88 at the

revenue $71,187.07. Therefore, we can make the profit in the day 89.

� As you see, the objective that we set for the next few years is based on the market research

as well as the environmental research and competitor’s research. Our system also considers

many contemporary issues as well as the internal and external factors to be able to achieve

the objective to get the breakeven point and the profit. We also have the backup plan in case

that our business can’t achieve the objective. Besides, we also take account into the

marketing plan to promote our product and offer other package to the customers to increase

the revenue and make sure the well being of our business

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2. Payback period

Payback

Investment=250000 Year 1 Year 2 Year 3 Year 4

Net Cash Flow 102369.10 139311.56 159478.89 176928.41

Cumulative 147630.90 8319.34

-

151159.55

Payback 2.052

= 2 years and nearly 18 days.

- Net Cash Flow: take from the Operation Budget

- Cumulative in year 1= Investment cost- net cash flow year 1.

- In next 5 years, cumulative= cumulative of previous year – net cash flow

- Pay back: when the number of cumulative of previous year –net cash flow < the number of

cash flow of the following year (cannot subtract anymore). Get the cumulative of this year

divided net cash flow of the following year, which plus with the number of years till the year

we can’t subtract the anymore

3. Net Present Value & Internal rate of return

a. Discount rate

Since we are debt free company, the Cost of equity is also the discount rate. We calculated

the cost of equity based on CAPM model:

When:

• Market risk premium = 13.3% (Source: Survey MRP used in 2010 by Analyst and

Companies)

• Equity Beta = 0.3

• Risk-less rate (Risk free rate) = 3.25% (Source: What is the risk free rate? A Search

for the Basic Building Block)

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� Discount rate = 7.24%

� For more precise justify, we take another discount rate of 13% - interest rate at bank to

compare this investment to others and 15% which is higher than the interest rate to show the

project profitability.

b. Calculation

Net present value & Internal rate of return

Cost ($250,000)

Discount rate 7.24%

CF1 102369.10

CF2 139311.56

CF3 159478.89

CF4 176928.41

CF5 196618.45

NPV 7.24% $368,302.40 >0: positive

NPV 13% $275,450.51 >0: positive

NPV at 15% $248,129.64 >0: positive

IRR 0.47

� For all discount rates, we get back positive outcome. That means this project is accepted.

� We also got the internal rate of return at 47%. Look promising!

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SECTION VII: CONCLUSION With the investment $250,000 in year 1, according to the well being of the business that we

predict and assume above, we can payback for the investors in approximately 2 years and 18

days. Within this industry, the pay back that we calculate above is very good and positive

project to be invested.

Moreover, to be more accurate, we analyze our business with the calculation of the NPV. The

result indicates that from year 2 to year 5, we not only can pay back for the investor but also

can get the health net cash flow. These figures are already considered the impact of the

inflation of the money. For sure, the money that the investors invest today will not be the

same value in 5 years later because of many factors including the inflation. However,

according to the NPV value, our business still can get the positive number (>0) even at the

NPV factor at 7.24%, 13% or 15%.

Therefore, we believe that the investing to our franchisee is the potential way for you to have

more profit and many benefits. Since our franchisee not just only brings back to you the

profit, it also brings the goodwill and other benefits for the investors.

By calculating many formulas in order to assess the well being of the investment and predict

the health value for this opportunity, we are proved that investing to us is the right decision

to get more benefits than other investments..

Documents

Franchising Group 3 Report