Valuation at a glance
Most of the base option's value sits after year 5; over the study period it does not cover the cost of capital. For reference, the client's plan as submitted (no management, no installation crew) shows a five-year NPV of $70,236 and an IRR of 28.6%.
The five years alone are just above zero. Almost all of the $882,633 comes from the value after year 5 (terminal value with 3% growth), so we read the five-year figure as the test.
Projected income statement
| USD | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Revenue: fitted projects | 308,568 | 740,563 | 740,563 | 740,563 | 740,563 |
| Revenue: online catalogue | 6,760 | 27,943 | 44,777 | 51,868 | 59,648 |
| Total revenue | 315,328 | 768,506 | 785,340 | 792,431 | 800,212 |
| Materials | (108,394) | (264,174) | (269,961) | (272,398) | (275,073) |
| Direct labour (operators and helpers) | (53,346) | (96,375) | (111,783) | (118,273) | (125,394) |
| Depreciation | (27,825) | (37,100) | (37,100) | (37,100) | (37,100) |
| Gross profit | 125,763 | 370,857 | 366,497 | 364,660 | 362,645 |
| Gross margin (%) | 39.9% | 48.3% | 46.7% | 46.0% | 45.3% |
| Selling costs (payment fees, returns, marketing) | (744) | (3,074) | (4,925) | (5,706) | (6,561) |
| Salaries: designers; management and one installation crew (our estimate) | (80,400) | (80,400) | (80,400) | (80,400) | (80,400) |
| Electricity and diesel | (19,500) | (24,419) | (24,852) | (25,301) | (25,765) |
| Website | (4,500) | (6,000) | (6,000) | (6,000) | (6,000) |
| Machine maintenance | (9,000) | (12,000) | (12,000) | (12,000) | (12,000) |
| Rent | (40,320) | (40,320) | (40,320) | (48,000) | (48,000) |
| Pre-opening expenses | (7,500) | 0 | 0 | 0 | 0 |
| Operating profit | (36,200) | 204,645 | 197,999 | 187,254 | 183,919 |
| Tax (25%) | 0 | (42,111) | (49,500) | (46,813) | (45,980) |
| Net profit | (36,200) | 162,533 | 148,499 | 140,440 | 137,939 |
| Net margin (%) | (11.5%) | 21.1% | 18.9% | 17.7% | 17.2% |
Cost of sales includes direct labour and depreciation. Salaries include our estimate for management and one installation crew; insurance, vans and accounting are not in the client's case. Losses carry forward against tax.
| USD | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Revenue: fitted projects | 301,522 | 745,363 | 767,724 | 790,756 | 814,479 |
| Revenue: online catalogue | 58,278 | 140,246 | 220,337 | 308,645 | 408,799 |
| Revenue: B2B room packages | 38,560 | 158,869 | 163,635 | 224,725 | 289,334 |
| Revenue: installation fees | 19,200 | 49,440 | 50,923 | 54,199 | 57,626 |
| Total revenue | 417,561 | 1,093,919 | 1,202,620 | 1,378,325 | 1,570,238 |
| Materials (cost of sales) | (170,715) | (442,602) | (485,114) | (550,581) | (622,164) |
| Margin after materials | 246,846 | 651,317 | 717,506 | 827,744 | 948,074 |
| Margin after materials (%) | 59.1% | 59.5% | 59.7% | 60.1% | 60.4% |
| Factory salaries | (52,200) | (90,720) | (95,256) | (100,019) | (105,020) |
| Installation crews | (16,200) | (37,800) | (39,690) | (41,674) | (43,758) |
| Depreciation | (32,325) | (43,100) | (43,100) | (43,100) | (43,100) |
| Production margin | 146,121 | 479,697 | 539,460 | 642,951 | 756,196 |
| Production margin (%) | 35.0% | 43.9% | 44.9% | 46.7% | 48.2% |
| Management salaries | (74,400) | (81,840) | (97,284) | (107,012) | (117,714) |
| Rent | (40,320) | (40,320) | (40,320) | (48,000) | (48,000) |
| Utilities | (20,700) | (25,655) | (26,125) | (26,612) | (27,116) |
| Insurance | (3,000) | (3,090) | (3,183) | (3,278) | (3,377) |
| Marketing | (13,050) | (19,800) | (24,600) | (27,925) | (31,500) |
| Other operating costs | (37,095) | (48,792) | (52,661) | (55,901) | (59,361) |
| Operating profit | (42,444) | 260,200 | 295,287 | 374,222 | 469,129 |
| Tax (25%) | 0 | (65,050) | (73,822) | (93,556) | (117,282) |
| Net profit | (42,444) | 195,150 | 221,465 | 280,667 | 351,846 |
| Net margin (%) | (10.2%) | 17.8% | 18.4% | 20.4% | 22.4% |
Fixed factory labour, installation crews and depreciation come after the margin on materials, so the production margin rises as the plant fills. Prices and materials rise 3% a year; management salaries 10%, factory wages 5%.
Cash flow, payback and the equity plan
Cumulative cash flow before funding, USD
| Year | Value |
|---|---|
| Y1 | ($522,069) |
| Y2 | ($282,116) |
| Y3 | ($56,197) |
| Y4 | $25,344 |
| Y5 | $248,383 |
Cumulative cash before funding turns positive in year 4. Year 4 adds less because the lease renewal is paid upfront again at month 36.
Base needs $641,313 of equity in two instalments; the lowest cash balance in year 1 is $39,260 in month 2.
| Equity instalments | USD |
|---|---|
| At lease signing (month 0) | 560,320 |
| At production start (month 3) | 80,993 |
| Total | 641,313 |
More detail Cash flow statement and month-by-month cash in year 1
| USD | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|
| Operating cash flow | 31,945 | 239,953 | 225,919 | 225,540 | 223,039 |
| Rent paid (36 months in advance) | (120,960) | 0 | 0 | (144,000) | 0 |
| Working capital | (62,054) | 0 | 0 | 0 | 0 |
| Equipment and fit-out | (371,000) | 0 | 0 | 0 | 0 |
| Net cash flow before funding | (522,069) | 239,953 | 225,919 | 81,540 | 223,039 |
| Cumulative, before funding | (522,069) | (282,116) | (56,197) | 25,344 | 248,383 |
| Equity paid in | 641,313 | 0 | 0 | 0 | 0 |
| Closing cash | 119,243 | 359,197 | 585,116 | 666,657 | 889,696 |
Cash balance at month end, months 0–12 (USD)
| Month | Value |
|---|---|
| Month 0 | $53,660 |
| Month 1 | $46,460 |
| Month 2 | $39,260 |
| Month 3 | $48,780 |
| Month 4 | $41,783 |
| Month 5 | $39,260 |
| Month 6 | $41,349 |
| Month 7 | $48,325 |
| Month 8 | $59,775 |
| Month 9 | $75,520 |
| Month 10 | $95,343 |
| Month 11 | $119,243 |
| Month 12 | $143,054 |
The lowest point is $39,260 in month 2 (highlighted). Month 0 is lease signing.
Cumulative cash flow before funding, USD
| Year | Value |
|---|---|
| Y0 | ($658,185) |
| Y1 | ($623,850) |
| Y2 | ($349,034) |
| Y3 | ($52,166) |
| Y4 | $260,094 |
| Y5 | $642,265 |
Cumulative cash before funding turns positive in year 4. Year 0 is the start-up investment.
We recommend an equity commitment of $850,000 in three instalments: $690,000 at lease signing; $80,000 at month 3 or production start, whichever is first; and an $80,000 reserve in months 6–9, only if needed and the red flags are green. The plan itself needs $718,405; with the first two instalments, cash bottoms at $11,671 in month 2, so the reserve is not used in the base case.
| Equity instalments | USD |
|---|---|
| At lease signing | 690,000 |
| Month 3 or production start, whichever is first | 80,000 |
| Reserve, months 6–9, only if needed and red flags are green | 80,000 |
| Total | 850,000 |
More detail Cash flow statement and month-by-month cash in year 1
| USD | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
|---|---|---|---|---|---|---|
| Net profit | 0 | (42,444) | 195,150 | 221,465 | 280,667 | 351,846 |
| Depreciation added back | 0 | 32,325 | 43,100 | 43,100 | 43,100 | 43,100 |
| Prepaid rent added back | 0 | 40,320 | 40,320 | 40,320 | 0 | 0 |
| Cash from operations | 0 | 30,201 | 278,570 | 304,885 | 323,767 | 394,946 |
| Investment and working capital | (658,185) | 4,134 | (3,754) | (8,018) | (11,506) | (12,776) |
| Net cash flow | (658,185) | 34,335 | 274,816 | 296,868 | 312,261 | 382,171 |
| Cumulative | (658,185) | (623,850) | (349,034) | (52,166) | 260,094 | 642,265 |
| Discounted at the cost of capital | (658,185) | 28,360 | 187,486 | 167,283 | 145,335 | 146,918 |
Terminal value at the end of year 5: $2,251,217 (3% growth), discounted with the year-5 factor.
Cash balance at month end, months 0–12 (USD)
| Month | Value |
|---|---|
| Month 0 | $31,815 |
| Month 1 | $21,743 |
| Month 2 | $11,671 |
| Month 3 | $81,599 |
| Month 4 | $67,040 |
| Month 5 | $57,187 |
| Month 6 | $52,038 |
| Month 7 | $51,595 |
| Month 8 | $75,138 |
| Month 9 | $84,105 |
| Month 10 | $97,778 |
| Month 11 | $123,067 |
| Month 12 | $146,150 |
The lowest point is $11,671 in month 2 (highlighted). Month 0 is lease signing.
All cases side by side
| Base | Recommended | Scenario 2 before improvements | |
|---|---|---|---|
| Revenue, year 1 | $315,328 | $417,561 | $417,561 |
| Revenue, year 5 | $800,212 | $1,570,238 | $1,570,238 |
| Net profit, year 5 | $137,939 | $351,846 | $324,314 |
| Net margin, year 5 | 17.2% | 22.4% | 20.6% |
| NPV, 5 years | ($74,658) | $17,197 | ($93,671) |
| NPV including value after year 5 | $246,072 | $882,633 | $711,434 |
| IRR, 5 years | 15.1% | 22.0% | 15.9% |
| Payback | Month 44 | Year 4 | Year 4 |
| Equity needed | $641,313 | $718,405 | $730,241 |
| Lowest cash in year 1 | $39,260 (month 2) | $11,671 (month 2) | $12,835 (month 2) |
Scenario 2 before improvements is a reference: the recommended prices and volumes without the four improvements. The improvements are worth about $110,868 of five-year NPV and 6.2 points of IRR.
More detail Method: why we discount at 21.1%
Both options use the same cost of equity, built up step by step: the US risk-free rate, a business risk premium, Ghana's country risk and a start-up premium. The plant is a single-country start-up funded by equity, so all four apply.
| Component | Rate |
|---|---|
| Risk-free rate (Rf) | 4.91% |
| Beta (β), unlevered | 0.65 |
| Mature-market equity risk premium (ERP) | 4.23% |
| Business risk premium = β × ERP | 2.75% |
| Ghana country risk premium (CRP) | 8.41% |
| Exposure to Ghana (λ, lambda) | 1.00 |
| Country premium applied = λ × CRP | 8.41% |
| Start-up, size and illiquidity premium | 5.00% |
| Cost of equity = 1 + 4 + 7 + 8 (the discount rate) | 21.07% |