Peter and John Stewart (the brothers) had a long-term dream of owning a business. They preferred a business suitable to their qualification and experience. Peter Stewart has recently completed his MBA and is working for one of the Australia's largest cinema distribution companies. John Stewart currently works as an advertising executive. They discussed their dream with their friends with a view of getting advice and information. One day a friend who works for the owner of the local shopping complex informed Stewarts that the owner has plans to expand the complex but had no plan for a cinema multiplex. She added that it may be possible to convince the Chief Executive Officer (CEO) of her company to consider including a cinema multiplex because he is very receptive to new ideas. The brothers feel that this is an ideal opportunity to fulfil their dream and set out to do some market research. The purpose of the research was to determine whether there will be a demand for cinema entertainment in the area where the shopping complex is situated. They found out that the cinemas that are attached to shopping complexes are highly patronised particularly by those who fall within the 15-24 year age group. The demographics of the people who live in the area where the shopping complexes are, fall mainly within this age group, and continue to attract young people to relocate there. They also find that if they included the Gold Class concept which has been successful elsewhere, this will attract more patrons. Gold Class will give patrons the opportunity to watch blockbuster movies from the comfort of luxurious, reclining lounge chairs while enjoying food and drinks brought directly to them. It is intended that Peter manages the operational side of the cinema while John concentrates on marketing. Peter and John together would invest $1,000,000 of their own money and take on this project full-time. The owners would borrow any additional capital required to achieve their business objectives and complete all legal and other requirements, to commence their business. The multiplex cinema will comprise altogether four theatres: one Gold class theatre with 50, and three regular class theatres, two each of 100 and one of 150 seating capacity. Also they need to build a kitchen and bar area to cater for the Gold class patrons. The brothers are of opinion that a large marketing budget would not be necessary as the focus would be on offering promotions such as half price tickets during the day and/or two for the price of one deal. These can be offered in conjunction with various local business/newspapers reducing marketing costs substantially. This way the advertising campaign would target local customers to ensure that they remained regulars, as it is unlikely that people travel a long way to attend a cinema. While actual advertising costs will be low, printing and other costs will still need to be considered. The main costs incurred by a cinema relate to the percentage of box office takings that go to the film distribution companies. The intention behind the Gold Class concept, along with offering patrons the ultimate cinema CRICOS # 02571D 2-Jun-15 Page 4 of 11 Version number 2.0 experience, is to try to increase revenue from those areas of the business, which are not subject to distribution company payments (i.e. from food and alcohol). A regular ticket at Cinema Multiplex for the first and second years is expected to be $12 during the day (will increase to $14 in the third year) and $18 in the evening (will increase to $21 in the third year) per person. Gold class tickets will be priced at $24 during the day and $36 in the evening for the first and second years. This will increase to $27 and $40 respectively for the third year. In addition patrons will be able to buy food and drinks that will be brought to them while the movie is playing. The average price of food items and alcoholic drinks will be approximately $25 for the first and second years and $28 for the third year. The number of tickets per day expected to be sold, in the first three years assuming a 360-day year is: Year 1 Year 2 Year 3 Regular- day 130 145 145 Regular – evening 160 175 175 Gold class – day 25 30 30 Gold class – evening 30 35 35 It is expected that only one half of the Gold class patrons will make use of bar sales. The cost of cinema operations comprises payment to film distributors of 40% of takings and wages of $300 000 in the first year increasing each year by 4% of the previous year. The brothers have approached a friend who runs a small restaurant to assist them with estimating the cost of bar operations. The cost of bar operations consists of $70 000 in wages and $50 000 in cost of food and drinks in the first year, wages increasing by 4% and food and drinks by 20% of that in the previous year, in each of the following years. They are also informed that they could sub-contract catering and bar to outsiders for $100 000 for the first year which could be safely increased by 20% on the previous year's amount for the next two years as the bar business is expected to get popular in the future. Income from advertising at the cinema multiplex is expected to be $250 000 in the first year increasing by 10% of that in the previous year. Armed with the idea the brothers arranged a meeting for preliminary discussions with the CEO of the Shopping Complex. At the meeting the brothers were told that the Shopping Complex will provide for only the basic structure in their development plan. It will be the responsibility of the cinema to set up screen and the projection equipment. They are also expected to furnish and decorate the theatres. It is the practice of the Shopping Complex to set a basic monthly rent payable in advance and in addition a percentage of the gross sales over a stipulated sales figure for the year, payable just after the end of the year. The amount received by the Shopping Complex as percentage of rent will have a ceiling set. The CEO indicated that the basic lease rent for the cinema would be $50,000 per month and an additional lease payment of 10% of the Cinema Ticket sales over $2,300,000 per year and would not exceed $50 000 for a year. After this meeting the brothers feel that this cinema multiplex project has an extremely good chance of proceeding and start gathering detailed estimates for this project. General operating expenses for the first year are estimated to consist of Salaries $200,000 (rising each year by 4% of the previous year), Advertising $75,000 (increasing by 10% each year) and other expenses $80,000 (increasing by 10% each year). Interest expenses are estimated to be $56,000; $36,000 and $27,000 for Years 1, 2 and 3 respectively. The capital expenditure comprises $1,500,000 on screens, fixtures and fittings (life expectancy of ten years for both), and motor vehicles (life expectancy of five years) costing $100,000. The brothers would like to use the straight-line method of depreciation for both. With respect to legal requirements, the owners will need a liquor license, building approval from their local authority, a hygiene inspection of their kitchen and advice from a solicitor as to whether or not they are able to trademark the Gold Class name. This set up cost is expected to be $200,000 which will be written off over four years. The brothers estimate that the borrowing will be $700,000 to cover the capital expenditure and other initial operating expenditure. Repayment on the loan is to be $250,000 per year starting from Year 2. Accounts receivable outstanding at the end of each year is expected to be 10% of yearly advertising income. Inventory of food and drinks at the end of a year will be 10% of the cost of the items sold during the year. Accounts payable outstanding at the end of each year is expected to consist of 10% each of the payments to the film distributors, food and drinks purchases and advertising for the year. All other expenses and income are paid and received in the year they are incurred and earned. Given the above scenario, please answer the following questions: a) As part of the proposal to the owners of the Shopping complex the Stewart Brothers need a financial plan. Also this financial plan is to be used for their borrowing from other financial sources. As a financial manager assist them in preparing a projected Income Statement, as part of the financial plan for the three years for the Cinema Multiplex project. (12 marks) hey! i need this assignment on 8th, please make it according to the description provided. thanks