Introduction
Beef Global Company is set to be an animal product value addition company. Its main activities include the addition of value to meat from authorized slaughterhouses. The company is set to open up a processing plant in a suitable selected place. Considering four places in the United States of America has previously produced the highest quantity of meat for consumption.
Location analysis
The four chosen areas are Lowa, Kansas, Nebraska, and Texas. The most available and most in-demand type of meat is red meat. The four selected areas account for almost 40% of the beef produced in the United States. All these areas also have many slaughterhouses. There is an essential factor to consider since the availability of raw materials is crucial to the determination of the location of the plant (Lipsey et al., 2007).
The cost of meat per kilo in Lowa is $4.50, $4.80 in Kansas, $4.75 in Nebraska, and $4.20 in Texas. The cost of labour in Lowa per unit is $6.70, $4.50 in Kansas, $5.90 in Nebraska, and $6.20 in Texas. The license fees are $2,500, $1,800, $2,200, $2,430 in Lowa, Kansas, Nebraska and Texas respectively. The company is set to process about 50000 kilograms of meat products and then proceed to market the products to the customers.
The total cost of operating the meat processing plant in Lowa is $752,500, $641,800 in Kansas, $709700 in Nebraska, and $702430 in Texas. The least-cost location is determined to be Kansas when all factors are put into consideration. Kansas is also a suitable location for the meat processing plant as it has a high population, which not only acts as the labour but also can be a potential market (Kates, 2011). After value addition to the meat, different products will be produced for sale to the market.
Products that the company aims to produce include beef sausages minces packed meat, canned meat, dog meals, and other products. BGC aims to supply its products to retailers while also doing marketing activities.
Costs and Benefits
BGC will require to lease some land in Kansas City to set up the plant. The plant will also host BG main offices. The cost of leasing land in Kansas City is $120000. On the leased land, BGC intends to build a modern processing firm that will cost around $175,000. BGC will also require licenses. Food product processing is a very restricted area and requires licensing. It is so because the food produced if for direct human consumption. The license costs for a meat processing and packaging plant is $1,800. These licenses also include the licenses for the opening up of the offices.
The rate at which technology is changing describes as the escalation rate is at 3%. The number of processing equipment suitable for processing the 50,000 kilograms is six. For delivery purposes, the company will also require to purchase delivery vans. These vans also require fittings. These fittings are special as they should also include coolers for the meat. The vans also incur fuel and maintenance costs. The fuel and maintenance costs of a single van in Kansas City is $10,000. The vans also require to be installed with modern technology, which is to be leased. This technology may include Geographical Location Services and radio services. Technology leasing per van is $8,000.
The company also require to be insured. Insurance helps a company spread risk. Insurance for the company’s vans, the premises and the equipment per year is $25,000. The drivers also require to be compensated. The total amount to be spent on driver compensation and motivation is $55,000. For the company to run, it requires human resources. Some of the professionals needed include a placement specialist for the recruitment of the workers. BGC will also require a director who will be compensated $90,000. An assistant who is compensated $50,000 is employed. The director and assistant director will be responsible for running the company on an official level. The plant will also require a supervisor and an assistant supervisor. A supervisor is compensated for at$75,000 and $45,000. The supervisor and assistant supervisor run the technical aspect of the company. For the finances of the company, BGC requires a budget analyst. The budget analyst is paid $70,000. The budget analyst is contacted per year since funds require to be analyzed to determine the progress of the company.
The company also requires manual labourers to work in the plant. The welfare of these workers is important, and they have to be compensated and awarded bonuses (PICIU, 2016). They also require planning into their retirement package as provided by federal law. A labourer’s minimal salary per year is $100,000 coupled with bonuses of $30,000 and a retirement scheme costing $25,000. These costs are incurred for the purpose of worker motivation.
The costs above are divided into one-time costs and recurring costs. The one-time costs are costs that are incurred only once in a company cycle (Kates, 2011). Recurring costs are incurred in the company from the beginning to the end, although not at a constant rate. One-time costs for the company include land lease and construction costs. Recurring costs include interests on loans, salaries, and license fees. Other one-time costs that are incurred in the business include the cash required for acquiring items for the functioning and running of the business. These costs include money for office furniture, computers, office decorations, stationery, computers, and computer software. Two sets of office furniture are to be purchased in order to better the working conditions of the employees. Furniture is to be purchased at a total cost of $2,500. Computers and computer software are also expected to be purchased. The total cost of purchasing computers is $3,000, and the total software costs are $5,000. Computer software to be purchased include windows operating system, Microsoft products, ERP software, and accounting software. Stationery such as pens, is also to be purchased at a total cost of $400.
For the company to begin, there requires to be capital invested. The company should get a bank loan for the purposes of covering costs in the first year (Kohler, 2017). The first year is the transition year. This year, the company is not fully operational and hence cannot sustain itself. The loan will cover the purchase of fixed assets, i.e., land, delivery vans, and providing liquid money for the day to day operation of the company. The bank loan has a fixed interest rate of 5%. A bank loan is the most suitable for this kind of startup, as it promises to be a high return investment. Other options for financing included outsourcing for a partner who is willing to fund the startup (Magretta, 2012). Trying to get a partner is disadvantageous. It is difficult to convince investors to fund a startup, and it may also be tough to get an investor who is willing to provide the whole loan. The loan also has an annual repayment amount. The amount is set at $200,000. The land that is leased will be used as security for the loan. The company will also require additional funds that are expected to be covered by capital from the company accounts and owners’ savings.
The total cost of operation in the transition year is $2,577,800. In the first year, the company has running costs of $3,103,930, $3,188,009 in the second year, $3,274,610 in the third year, $3,363,809 in the fourth year and $3,255,685 in the fifth year. By the fifth year, with a repayment of $200,000 annually, the repayment of the loan will be complete.
The company is also set to enjoy a discount rate of 5%. The company also received a seed grant of $400,000 in the transition year, $206,000 in operational year one, $212,000 in operational year two,$218,545 in operational year three, $225,102 in operational year four and $231,000 in operational year five. The company set to earn mainly through sales activities. The sales are to be done through retailer units such as supermarkets and malls. Sales in the transition year are projected to be at $900,000, $1,500,000 in operational year one $3,900,000 in operational year two, $4,500,000 in operational year three, $4,700,00 in operational year four and $4,600,000 in operational year five. The sales are very low in the transition year since the company is still in its initial phases. After the first year sales pick up and increase gradually up to a point where they become constant. Unlike other startups that do not make sales in the transition year, BGC does earn from sales. The sales are for the products that are made in the initial phases.
The company is also set to earn from employee benefits. These earnings will be secondary income to the company. The company receives six employment benefits. Employment benefits are set at $21,840 in the transitional year or years and $87,360 in the operation years. In the transition, year employment benefits are $131,040, $539,885 in the first operational year, $556,081 in the second operational year, $572,764 in the second operational year, $589,947 in the third operational year, $607,645 in the fourth year and $607,645 in the fifth year. All these benefits take into account the escalation factor.
BGC will also earn from residual labourer employment benefits. Residual benefits are benefits from retaining a certain number of workers from previous operational years (Magretta, 2012). The benefit per year for residual employment is $1,638 annually for every transactional year. The residual employee benefit for the first transactional year is $539,885, $874,861 in the second operation year, $1,002,337 in the third operational year, $1,106,150 in the fourth operation year and $1,177,312 in the fifth year. The residual benefits are not available in the first year, which is the transition year. The missing benefits are due to the fact that the company is just starting; therefore, all employees are new, and none are retained (Collins, 2016).
BGC will also have an outlet in its premises in Kansa city. The outlet will mainly serve the local people of Kansas. In the transition year, the sales made from the outlet are accounted for at $2,000, $10,500 in the first operational year, $13,000 in the second operational year, $12,000 in the third operational year, $10,000 in the fourth operation year and $15,000 in the fifth operation year.
The total benefits that are expected to be received in the transition year account to $1,433,040, $2,663,114 in the first operational year, $5,002,615 in the second operational year, $5,447,084 in the third year, $5,455,548 in the fourth transactional year and $5,196,249 in the fifth transactional years.
Present value and break-even point analysis
It is important to get the present value of the company. The present value shows the general progression of the company, i.e., is it able to reach its objectives and how profitable it is (Bowles, 2009). The present value is also important for the calculation of net present value and, in turn, the break-even point of the company. The break-even point in a company is the point where the business is able to take care of its running costs through the current assets. Taking care of itself means that it can sustain itself without the injection of external funds or acquiring a loan. The present value in the transition year is ($1,144,760), (293,010) in transactional year one, $2,110,997 in transactional year two, 2,618,353 in transactional year three, $2,688,134 in transactional year four and 2,645,335 in the fifth transactional year. This present value is calculated without the inclusion of taxes; hence it is not the comprehensive net present value but a rough estimation.
In the beginning, the present value is negative. The negativity means that in its initial phases, the company will need external funds to run its day to day activities. In the first years, the main source of income, which is sales has not picked up. The not picking up may be due to various reasons such as small market share when the company is relatively new. However, by the second operational year, the deficits are cleared, and the business can sustain itself. The point where the deficits from the transition year are covered, and the present value is no longer negative, and then the company will be said to have reached its break-even point.
Net Present Value
The company is expected to reach its break-even point in the middle of the second operational year. Three years is a relatively short period. The short period is indicative of how profitable the company is set to be. Funding for this kind of startups from financial institutions such as banks is an easy process (Bowles, 2009). This is because this project requires a huge investment. The project also takes a short time to be able to sustain itself. It is also a company with a clear outline of the staffing required i.e., laborers and office employees. In the years after the break-even point, where the net present value is positive, the company is making large profits.
Beef Global Company is also expected to be paying taxes to the government. The tax rate by the government is 10% on the annual net present value of the company. IN the first year the transitional year the company is expected to pay taxes amounting to $114,476, in the first year the company is expected to pay $29,301, $211,100 in the second transactional year, $261,835 in the third transactional year, $268,813 in the fourth transactional year and $264,534 in the fifth transactional year.
After taxes, then we find the genuine net present value of the company. This is the cumulative net present value for the company. In the transition year the cumulative net present value after tax is $1,259,236 in the transactional year, $1,467,071 in the first operational year, $462,128 in the second operational year, $3,029,745 in the third operational year, $5,710,900 in operation year four and $8,360,515.
Return on investment (ROI)
The total cost of this investment is about $3,000,000. $1,000,000 is outsourced from the bank, and the rest is already catered for. The return on investment ratio at the end of the five years is 2.7868 or 278.68%. The ratio is very high. This implies that this is a high potential venture, and the return on capital is high (Soros, 2015). This implies that total benefits over the course of the six five transactional years and one transitional year will be greater than the total costs incurred for running the company.
The company incomes increase terrifically in the third year. This is after deficits from the first year are repaid.
Sensitivity analysis
The projections for Global Beef Company are estimations and may require sensitivity analysis since not all the factors can be held constant over time. The sensitivity analysis allows us to cater for unseen future events that may affect the company. Such factors include the increase in license fees for the company, an increase in worker wage rates in the region, diseases to cattle, which are the main source of meat for the company (Press, 2015).
If the land rates for the company went up to $300,000, this increases the value of one-time costs to be incurred up to 382,900, causing a significant change in the net present value. This change is too small to impact the break-even point. The change in the break-even point cannot be seen as it is still reached in the middle of the second operational year.
Conclusion
The company promises to be a very profitable franchise in the short term. The food processing industry is very competitive. To increase profit margins, the company should open up branches for sales (Soros, 2015). The company should also consider the expansion of its plants to other areas. The four different areas used during the location analysis is also a viable area for the opening up of more meat processing plants. These will increase the profit margins significantly (Bernstein, 2002). The company should also keep updating the technology and machinery after the projected period of five years. If technology is not updated, then the firm will be placed at a disadvantage. Expanding the company and other features are meant to ensure that the company is thriving even in the future. Updating technology will ensure that the company has an advantage over its competitors. In the future, due to growth in sales, the company will also need to broaden its transport network. Adapting may involve the purchase of customized trucks and the purchase of larger meat freezers.
References
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