Brissy is a proficient beauty therapist living in District 7 of the Ho Chi Minh City. She currently works for a famous beauty Salon in District 1 and also provides her service through home visits for her customers living in District 7 during her spare time. With her long-term experience in working in successful and popular beauty salons in the city, she has gathered a good knowledge on how to conduct this business and the importance of providing an excellent customer service. As she has a significant personal customer base in District 7, she realised that it is the right time for her to start her own business in District 7. After much thought, Brissy decided to invest in a women’s beauty salon in Phu My Hung area. This salon will provide both hairdressing services such as cutting, styling and coloring, beauty therapy services including facials, manicures and pedicures, and massages. She already holds some formal qualifications in beauty therapy and hair dressing that she can showcase to gain her customer confidence. However, she has not received any formal education on business management. She is confident that she will be able to start her business with her regular home visit customers in District 7 and her current customers in District 7 loved the idea of getting both hair services and beauty therapy services at one place.

Question 1: Evaluating the investment project (100 marks)

Brissy is considering setting up her new salon with state-of-the-art equipment to provide best services to customers. She is planning to rent a space for the salon. She would sell some of the existing equipment and furniture and replace them with new equipment furniture. You have worked with Brissy and identified the following cash flows and other information.

Start-up costs:

Cost of new equipment and furniture: $ 150,000

Interior decorations and renovations: $60,000

Annual operating activities are estimated as follows.

Projected Revenue: $80,000 in year 1, $ 100,000 in year 2, $150,000 from year 3 – 10

Projected cost of labour: 25% of the annual revenue

Annual rent: $20,000

Other annual operating costs (including utilities but excluding rent and depreciation): 15% of the annual revenue

Depreciation: Building improvements, equipment and furniture will be depreciated under straight-line method for 10 years

Tax: 20% (losses can be carried forward and deducted from taxable income in the future)

Estimated discount rate: 14%/year

Before handing over the shop space, the building owner requires you to revert the interior changes you made, restoring it to its original state. This will cost an additional $10,000 on restoration process.

Calculate net present value (NPV) and internal rate of return (IRR) for the project.