GB601 Unit 5 Financial Projections Example

Forty Assumptions and Four Futures: Unit 5 Financial Projections for the Brightwater Formalwear Capstone

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Purdue University Global

GB601: MBA Capstone

Unit 5 Financial Projections

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[Date]

Brightwater Formalwear and every figure are composite and illustrative; the methods and sources cited are real.

The Assumption Sheet

The projections rest on forty assumptions, each recorded with its value, where it came from and how far it can be trusted. The most important are summarized here; the full sheet is in the workbook.

Prices and volumes. The average in-store rental package is $189, from FY2026 contract records (high confidence). A shipped rental would be priced at $159 to compete with national online renters, from the Unit 4 audit (medium). Market rentals decline about 1 percent a year, from Unit 3 (medium). Brightwater's share under the status quo falls about 2.5 points a year, continuing the FY2022 to FY2026 trend (medium).

Costs per rental. Garment depreciation and cleaning cost about $41 per rental, from company records (high). Fitting and alterations labor costs about $27 for an in-store rental (high). Round-trip shipping for a shipped rental costs about $34, from carrier quotes (high), and packaging about $7 (high). Losses and damage on shipped rentals are estimated at $12, from the online renters' published policies and industry reports (low). Customer service for shipped rentals costs about $11 (medium), and an exchange shipment for a wrong size averages $10 across all shipped rentals (medium).

Program costs. Two wedding coordinators cost about $110,000 a year including benefits, venue partnership marketing about $40,000 and scheduling software about $15,000 in the first year (high). Backup inventory, remote measurement kits and software setup cost about $120,000 at the start (medium).

Discount rate. Ten percent, defended below.

The Cost of Standing Still

Under the status quo, Brightwater's rentals fall from about 15,800 in FY2026 to about 14,900 in FY2027, 14,000 in FY2028, 13,150 in FY2029, 12,300 in FY2030 and 11,460 in FY2031. At $189 a package, yearly rental revenue drops by roughly $820,000 over the five years, ending near $2.17 million. Because most store costs are fixed, the loss of contribution falls almost entirely on profit. Every alternative must beat this baseline, not zero. Koller et al. (2020) stress that value comes from comparing a decision's cash flows with the cash flows the company would earn without it, and here the comparison case is a business in steady decline.

Doing nothing is not free: it costs Brightwater about $820,000 a year in revenue by FY2031.

Per-Rental Economics

The comparison is driven by contribution per rental. An in-store rental brought in through a wedding party program contributes about $109: the $189 price less $41 for the garment, $27 for fitting and alterations, $9 averaged for shipping suits to out-of-town party members and $3 in card fees. A shipped rental contributes about $41: the $159 price less $41 for the garment, $34 for shipping, $7 for packaging, $12 for losses, $11 for customer service, $10 for exchanges and $3 in card fees. Each shipped rental therefore earns less than two-fifths of a program rental.

Alternative A: A Statewide Online Rental Channel

Brightwater would build an online ordering system, deepen inventory in common sizes and ship rentals across Ohio. Start-up cost is about $380,000 and annual fixed cost about $95,000 for staff and software. Incremental rentals are projected at 1,200 in FY2027, rising to 4,300 in FY2031, because the channel competes directly with national renters. At $41 a rental, cash flow is negative in the first year and modest after: about negative $46,000, then $3,000, $40,000, $65,000 and $81,000. Net present value at 10 percent is about negative $294,000. The channel does not pay back within five years.

Alternative B: A Wedding Party Program

Brightwater would hire two wedding coordinators, build partnerships with venues and planners, measure out-of-town groomsmen by video call and ship their suits to them, keep backup sizes at the store nearest each wedding and offer grooms the option to buy their suit at a credit. It needs about $120,000 to start, then roughly $165,000 of fixed spending in FY2027 and $150,000 in each later year. Recaptured rentals are projected at 1,100 in FY2027, rising to 3,400 in FY2031, drawn from wedding parties that would otherwise split. Suit purchases by grooms add about $120 of margin each on 300 to 600 sales a year from FY2028. Cash flow is about negative $45,000 in FY2027, then $115,000, $209,000, $265,000 and $293,000. Net present value is about $454,000, and cumulative cash turns positive during FY2029.

Alternative C: Fitting Partner for a National Renter

Brightwater would fit and alter suits for a national online renter's customers in its stores, for a fee of about $48 a fitting, with a margin of about 55 percent after labor. Fittings are projected at 1,500 in FY2027 rising to 4,200. Counting only fee income, net present value is about $259,000 on a start-up cost of $40,000. But the arrangement would send Brightwater's own customers to the renter's website: some customers fitted in Brightwater's stores would rent from the partner next time. Estimating those lost rentals at 250 in FY2027 rising to 1,250 by FY2031, at $118 of contribution each, net present value falls to about negative $77,000.

Three Results Side by Side

Measured against the status quo, the wedding party program's net present value is about $454,000, the fitting partnership's about negative $77,000 once its cost to Brightwater's own rentals is counted, and the online channel's about negative $294,000. In FY2030, the program would bring rentals to about 15,500, meeting the Unit 1 target, against about 12,300 if nothing changes.

Sensitivity and Where the Model Is Weakest

The program's result depends most on the number of recaptured rentals. Net present value stays positive as long as recaptured rentals reach about 55 percent of the projection. A tariff increase adding $8 to garment cost per rental and $25 to the cost of each suit sold would reduce net present value to about $347,000. A late launch that missed the first spring would reduce it to about $338,000. The weakest assumption is the recapture rate itself, because it extrapolates from survey answers about why customers left to how many would return. Unit 8 treats the threat to that assumption as the first risk.

Defending the Discount Rate

Brightwater borrows on a bank line at about 7.5 percent. A 10 percent discount rate adds a premium for the risk of a small private company and for the uncertainty of new programs, in line with the practice Brealey et al. (2020) recommend of setting a hurdle rate that reflects a project's risk rather than the firm's borrowing cost alone. Graham and Harvey (2001) found that most companies use net present value for capital decisions, and that small firms often rely on payback as well, so both are reported. At a 12 percent rate, the program's net present value is still about $415,000; the ranking of the alternatives does not change.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.