For the exclusive use of J. Azevedo, 2020. IIVEy | Publishing W19378 uMUNCH: MOBILE FOOD-DELIVERY APP FEASIBILITY ANALYSIS Jessica Welsh wrote this case under the supervision of tan Dunn solely to provide material for class discussion. The authors do not intend to illustrate either eti'ective or ineti'ective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect condentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request pennission to reproduce materials, contact lire y Publishing, lvey Business School, Western Unhiersity, London, Ontario, Canada, N66 0N1; (t) 519.661.3208; (e) cases@ivey.ca,' www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. Copyright 2019 hrey Business School Foundation Version: 2019-10-03 On April 15, 2018, Amir Rezvani and Arvind Rajah were completing an application for a government grant to raise funds in order to launch uMunch, a new food-delivery service mobile software application (app). The idea was developed while the two were working on a group project in a business class at Western University. After completing the class project, they wondered if the app could actually become a feasible business. Over the next two years, they saved CA$87,3001 that they intended to infuse into the company in exchange for common shares. Looking for other sources of funding to help get them started, they discovered that they could apply for a government grant worth $5,000. The application for the grant required them to submit three years of nancial statements, including projected cash budgets, statements of earnings, and statements of nancial position. THE VENTURE Rezvani and Rajah had recently graduated from Western University studying medical sciences and management and organization studies, respectively. The pair had been iends since high school, and they had lived together with three other roommates throughout their university years. The ve roommates regularly ate dinner together and often found themselves ordering take-out as a group. Instead of each roommate paying his own delivery costs, typically one person would order and then the roommates would all pay that person back for the amount of each of their meals plus their share of the delivery fee. This method, while cheaper for the ve roommates, was often inconvenient. Thus, an idea for a new and affordable food-ordering app was born. Rezvani and Rajah had a vision to create an app that encouraged people to eat and order together while also allowing them to save money. As recent graduates, they understood that in order to be competitive in the market, they needed to offer students something that other food-delivery services lackedsavings directed at the end consumer. And, unlike the other food-delivery services, uMunch would be primarily focused on the student demographic. The app allowed consumers to order meals from local restaurants, alcohol from the Liquor Control Board of Ontario (LCBO), and snacks from local convenience stores. When consumers logged into the app they were able to view the available restaurants and menus, and the options available for alcohol and snack delivery. Once consumers decided which restaurant food, and alcohol or snack options they were interested 1 All currency in Canadian dollars unless specied otherwise. This document is authorized for use only by Julia Azwedo in Financial Accounting and Reporting Spring 2020 taught by KATHRYN HANSEN. California State University - Loe Angeles from Jan 2020 to May 2020. Page 4 9B19B009 Other Costs A small office space in London had been located for Rezvani and Rajah to begin running their operations. Rent was $1,000 per month with no deposit for last month's rent required. To launch operations, the office would require $3,000 for furniture, $4,500 for office electronics (computers and printers), and $300 for office supplies.* The office furniture was estimated to have a useful life of eight years and the office electronics four years. Both would be depreciated using the straight-line method with no residual value. Utilities, Internet, and phone would cost $65, $128, and $135 per month, respectively, paid for the following month. Annual insurance would amount to $600 and would be paid in full each September. The initial app development and recurring maintenance would need to be outsourced. Rezvani and Rajah contacted a local developer who was willing and able to take on the project. Initial development would cost $85,000," and recurring maintenance would total $12,000 annually. The initial development fee would be paid in full in September, 2018, while the recurring maintenance charges would be paid for in equal monthly installments, beginning in September 2018. During the first three years of operations, Rezvani and Rajah would each need to draw a $1,500 per month salary to cover their living expenses. After the first three years, they would either increase this wage or need to find other employment to supplement their income. During year one, the two owners intended to manage all operations of the business. In addition, uMunch would incur $2,300 in legal fees and $200 of server maintenance fees each September. A $30,000 line of credit had been secured by Rezvani and Rajah to be used in the event that they incurred any cash shortages. The line of credit had an annual interest rate of eight per cent with interest payments due on the first of the following month. After discussions with the bank, the founders understood that it was unlikely that the line of credit would be extended beyond $30,000. Taxes would be paid the following October of each fiscal year at a tax rate of 15 per cent. CONCLUSION After projecting three years of financial statements, Rezvani and Rajah intended to analyze the results and assess the risk of the new business by looking at their margin of safety and return on investment, which would also help with their government grant application. The two planned to launch uMunch in September 2018, and they wondered if it would be possible to launch at all if their grant application were not approved. 4 Throughout each fiscal year, an additional $540 would be spent on office supplies. Office supplies would be replenished on an as-needed basis. It was estimated that each month's office supplies expenditure would be approximately equal. The app would be amortized over a useful life of five years.Page 5 9B19B009 EXHIBIT 1: AVERAGE ORDER PRICING Type of Order Number of Customers Average Total Order ($)* Restaurant Alcohol Snacks** N- N - N 20 30 40 65 11 18 Note: *Average total order includes the cost of delivery; **Snacks cost uMunch an average of $4 per person. Source: Company files EXHIBIT 2: PROJECTED TOTAL MONTHLY APP ORDERS 2019 2020 2021 September 200 2,560 4,240 October 400 2,800 4,400 November 800 3,040 4,560 December 1,600 3,280 4,720 January 1,840 3,520 4,880 February 2,080 3,760 5,040 March 2,320 4,000 5,200 April 2,560 4,240 5,360 May 640 1,060 0 1,340 June $40 1,060 1,340 July 1,060 1,340 August 640 1,060 1,340 Source: Company files