euro sun tanning salon inc
DESCRIPTION
Case study of Euro sun tanningTRANSCRIPT
EURO SUN TANNING SALON INC. CASE STUDY
Saurabh PrithvijitHitesh goyalUdhai PartapSampreet
INTRODUCTION
EURO SUN TANNING SALON INC. Located in north end of London, Ontario,
population 350,000. Claro purchased it on march , 2002. Certified by international smart network. At Time saloon has five beds Three regular intensity units One high intensity unit One stand up unit
TANNING PROCESS
UV radiation used in this process are of shorter wavelength than visible to human eye.
UVA, UVB, UVC UVA penetrates most deeply into the skin
Human skin, the largest body organ, comprises of two major layers
The innermost dermis Thee outermost epidermis
CONT……
Cells created in innermost skin reached outermost skin in 28 day lifetime.
5% skin cells are Melanocyte, the amount of melanin they produce naturally is genetically determined, leading to different tones.
UVB produces Melanocytes at the base of thee epidermis. The radiation cause Melanocytes to produce more melanin.
UVA exposure oxidizes and darkens the skin providing the protection against the overexposure of UV rays.
PRODUCTS OFFERED
Retail products Australia gold products Swedish beauty products Sunglasses, toe rings Nail polish Lotions Upcoming esthetics business
COMPETITORS
London had over 2 salons Little territorial overlapMain contenders The cottage tanning co. Bronze shop, was located 5 km southwest on
Richmond street. Kokomo’s sun tanning and swimwear about 7
km southwest.(grater name recognition because of its two location in London; kokomo’s also sold swimwear in addition to typical tanning accessories)
CUSTOMERS
Target customer – lived or worked near the street
At the time of purchase in its database. Because euro sun was the only tanning salon in the customer were females typically between 18 to 65.
February to may is busiest time. Most people tanned seasonally or before
going away to a holiday to the south. Euro sun ‘s customer send about 20 to 30
min depending upon tanned bed they chose.
CONT…..
Cleanliness is important as many clients sweat on the bed while tanning/ or tanned nude.
Claro did his best to book clients efficiently so that they would not have to wait long in the reception area…….and so clients could get up appointment on thee bed of their choices as close possible to the time of their choice.
OPERATIONS
From October to may – 7 days a week for 72 hours
Four remaining months – 6 days a week for 62 hours
Salon ran at 85% capacity from October to may and about 55% during thee other months…
55% book appointment 2-7 days in advance 5% booked up to month in advance 30% called salon to book same day
appointment 10% are walk ins
PROCEDURE
For first time customers, thee entire process takes around 20-30 min.
Customer filled out the form and purchase the number of minutes or paid for single tan.
Customer are then sent to tan room and allowed to prepared for the tan.
10 min delay is standard so that customer can get ready.
Then tanning process starts
TANNING UNITS
Regular – It is booked for 30 minutes(tan time = 15-20 minutes)
High intensity – It is booked for 20 minutes(tan time=12 min)
Stand up bed high intensity unit - It is booked for 20 minutes(tan time=12 min)
OPTIONS FOR FUTURE
AFTER TANNING CONSULTANT INSPECTED THE facility, he suggested that claro either UPGRADE all the current traditional units or purchase new one
The stand up bed didn’t require any changes. Claro decide to do business with Uvalux
international Inc. for the supplies.
OPTION 1
A complete overhaul of the current beds which would cost around $18,000.
Prolonging their lives to 3 years and decreasing electricity costs by $200per month.
Current Operating cost of each bed Regular bed – $0.39 High intensity bed- 0.47 Stand unit-0.47
OPTION 2
To replace regular intensity unit in the salon.
Model 1 The first model in consideration is Sunstar 332 Cost =$10,000 Provide with 32 watt lamps in the bed One body cooling fan One foot cooling fan 48-month warranty from manufacturer. Replacing the lamp cost $1500 every year Operating cost $0.16
MODEL2
Sun vision eliteTM series Cost= $8000 32 100 watt light bulb and would cost the
same amount for replacement every year. 24 months warranty Cost of operating is $o.16 peer unit hour.
OPTION 3
For high intensity unit claro has only one option in mind
Star power 248 cost = $28,000 48 month warranty 4,000 charges every year for light bulb
replacement Operating cost $0.21
EXPECTED RATE OF RETURN
Assuming no debt and, as mentioned no equity stock the expected rate of return will be decided on inflation rate and investment risk.
As risk is very implicit in this case and will vary according to the different scenarios.
As of now we will try to evaluate the risk of these proposition qualitatively as no quantitative method is available
THE IMPLICIT RISK
Expected rate of return= risk free rate of return + risk premium
Risk free rate of return itself can be pegged against many securities such 30 day treasury bills or bond yield.
Rf = inflation rate + expected long term GDP growth of an economy.
Inflation rate for CANADA – 1.5% as of February 2013
Growth rate is around 1.8% Let Rf=3.3%
CAPACITY UTILIZATION
COST CALCULATION
ASSUMPTION FOR REVENUE CALCULATIONS
RISK PREMIUM INVESTMENT PROPOSAL “QAZ” RISK PM- 17%
Decrease the operating cost by $200
Insecurity in revenue generation
Incapable of fulfilling the quality needs
Low on competence front.
Less fixed cost Decrease of
operating cost Less repair and
maintenance cost
Complete overhaul cost of current beds = $18,000
It will prolonged the life to three years.
CONT…….
After proper consideration we have come to decision that this is not good proposal as risk is very high and the probability of future returns is very low.
As the competitors might move to new machinery and have first mover advantage in this stiff market.
The new machinery is more user friendly with more luxurious features.
RISK PREMIUM INVESTMENT PROPOSAL 1 RISK PM- 17%
Energy efficiency Less operating cost Higher quality More customer
satisfaction Comparatively less
fixed cost in this environment
Customer retention risk
Slowdown in the market
High unemployment rate
Under utilization of capacity
Fixed cost 58,000
4 year warranty, fixed operating charges $1,500*3+$4,000 annually
CONT……..
After contemplating all the points, this comes out to be very good investment proposal as the new machinery will reduce cost and will enhance customer satisfaction
So we will assign somewhat lower risk premium to this proposal
RISK pre – 17%
RISK PREMIUM INVESTMENT PROPOSAL 2 RISK PM- 20%
Energy efficiency Less operating cost Higher quality More customer
satisfaction Comparatively less
fixed cost in this environment
More capacity Future prospects
Much of the capacity under utilized
High cost initially
Fixed cost 76,000
4 year warranty, fixed operating charges $1,500*2+$4,000*2 annually + construction cost of $1800
CONT……
This proposal is good but risk is high as the capacity is highly underutilized
Risk premium =20%
INVESTMENT PROPOSAL 1 AND INVESTMENT PROPOSAL 2 IS SELECTED FOR QUANTITATIVE ANALYSIS
INVESTMENT PROPOSAL 1
NEW COLLECTION OF TRADTIONAL SYLE UNITS
3 REGULAR INTENSITY
1 HIGH INTENSITY IN PEAK SEASON THE UTILIZATION IS 85% CAPCITY REQUIREMENTS FOR PEAK SEASON IS – 9790
HOURS
QUANTITATIVE RESULTS
CAH FLOW 1 - $230,275.18 2 - $232,577.93 3 - $234,903.71 4 - $237,252.75
NPV = $542,329.35
PAYBACK PERIOD – LESS THAN ONE YEAR
%AGE INCREASE IN PROFIT - $84,047.84
INVESTMENT PROPOSAL 2
REPLACE ALL THE MACHINES WITH 2 HIGH INTENSITY UNITS
2 REGULAR INTENSITY UNIT Capacity requirements for peak season is –
9790 hours Capacity after these installation- 11520
YEAR CASH FLOWS INS2 (RATE OF RETURN 23.30% )
1 $190,306.16 2 $192,209.22 3 $194,131.31 4 $196,072.63
NPV = $391,369.78 PAYBACK PERIOD – LESS THAN ONE YEAR
INCREASE IN PROFIT - $54,000 APPROX
COMPARISON
sun tanning.xlsx
1 2 3 40
50000
100000
150000
200000
250000
300000
350000
TOTAL HOURS IN YEAR*NUMBEER OF MACHINESOPERATING profit
INVESTMENT 2
INVESTMENT 1
85,55 90,70 100, 100$0.00
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
OPERATING profit
OPERATING profit
COMPARISON BETWEEN CASH FLOWS OF INS1&INS2
1 2 3 4$0.00
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
CASH FLOWS INS2YEARCAH FLOW INS2
CONCLUSION
INVESTMENT PROPOSAL 1 IS SELECTED ON THE GROUNDS OF QUALITATIVE AND QUANTITATIVE ANALYSIS
THANK YOU