Big O Tires is a large retail tire franchise with over 480 independently owned and operated locations in 20 states. This company was founded in 1962 when the market for tire manufacturers was booming. There is now a location of the franchise for sale in Wyoming. The asking price for the company is $298,125 and the property is about two acres. They specialize in tire service and repair, but they perform other services such as oil, lube, filters, routine services, fluids, batteries, brakes, alignment, suspension, and front end.
In order to determine the traffic that comes through the town, we had to take into consideration the tourism since Wyoming has a large amount of tourist traffic. The annual number of tourists is 8,670,000 and it grows by about 4% each year. We took 1% of the annual number of tourists for Wyoming and concluded that those tourists would be passing through the location of this franchise. We then concluded that 2%of those who passed through the city would need to stop for various reasons to get their car serviced. This was a safe assumption with the number of people who would be travelling mainly by car.
The revenue assumptions then proceed as an average based on a market share of 25%. We calculated the tourist revenue and the returning customer revenue separately, then added them together to give us more accurate information for the total revenue. To find the prices, we found the average prices using the Big O Tires website. We then determined that our accounts receivables days and inventory days would be 30 and the accounts payable days would be 40.
As you can see on the spreadsheet, the first section that we completed is the income statement. We separated the revenue gained from tire sales and the service revenue, then we used the average cost of goods sold. Our labor expense is based on a percentage of sales because labor correlates directly with the number of services performed. We then determined our expenses based on averages for the industry. We determined that our general and administrative expense would grow annually by 1%. After that, we used the industry average of 25% to calculate the income tax expense and this brought us to our forecasted net income.
On the balance sheet, you can find the forecasted assets, liabilities, and equity. The minimum cash on hand that is required is $2,000. We calculated the accounts receivable by taking the sum of the revenue then dividing it by a year multiplied by the accounts receivable days.
Break-Even Point and Finance Needs
To calculate the number of units or sales required to break even, we need the total variable cost, the contribution margin, the contribution margin per unit, and the total fixed cost. We found these numbers by referring back to our Income Statement and separating the expenses into two groups: fixed and variable. We then took the revenue, subtracted it by the variable costs (summed into one) and divided it by the total number of units to determine the contribution margin per unit. Once we had all of our information, we calculated the break-even point by taking the total fixed costs divided by the contribution margin per unit, resulting in a break-even point of 3,154.86.
Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is our average cost when we raise debt or borrow money. In order to determine this value, we need some industry and market related information. We used beta, the treasury bill rate, the Standard and Poor 500 rate, the average required return, as well as the interest rates from the debt that we currently have (from our mortgage and bank loan) to calculate our WACC. Once we had these numbers, we were able to calculate a WACC of 25.37% which can be seen in the spreadsheet in the light blue box titled WACC.
Free Cash Flows
The last section on this financial forecast is the free cash flows, net present value calculation, and the internal rate of return. We know that this project is forecasted to be profitable if the net present value is positive and the internal rate of return is higher than the WACC. In order to calculate those figures, we need to create our free cash flows. This is done on the spreadsheet by taking the net operating income from operations only, then finding the cash inflow and outflow from the working capital accounts. Once the free cash flows were determined, a net present value of $227,304.94 was calculated as well as an internal rate of return of 44%, meaning that the forecasted spreadsheet is profitable.
“Tires, Big O. “What Is Involved.” Big O Tires. Big O Tires LLC, 01 Jan. 2013. Web. 20 Mar. 2013. <http://www.bigotires.com/What-Is-Involved>”
“Denny, Lee. “Land For Sale.” LandWatch. Data Sphere, 01 Jan. 2011. Web. 20 Mar. 2013. <http://www.landwatch.com/Wyoming_land_for_sale/Afton>”