Euro sun tanning salon inc

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Case study of Euro sun tanning

Case study of Euro sun tanning

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  • 1. EURO SUN TANNING SALON INC. CASE STUDY Saurabh Prithvijit Hitesh goyal Udhai Partap Sampreet
  • 2. 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
  • 3. 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
  • 4. 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.
  • 5. PRODUCTS OFFERED  Retail products  Australia gold products  Swedish beauty products  Sunglasses, toe rings  Nail polish  Lotions  Upcoming esthetics business
  • 6. COMPETITORS  London had over 2 salons  Little territorial overlap Main 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)
  • 7. 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.
  • 8. 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.
  • 9. 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
  • 10. 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
  • 11. 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)
  • 12. 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.
  • 13. 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
  • 14. 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
  • 15. 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.
  • 16. 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
  • 17. 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
  • 18. 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%
  • 19. CAPACITY UTILIZATION
  • 20. COST CALCULATION
  • 21. ASSUMPTION FOR REVENUE CALCULATIONS
  • 22. 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.
  • 23. 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.
  • 24. 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
  • 25. 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%
  • 26. 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
  • 27. CONT……  This proposal is good but risk is high as the capacity is highly underutilized  Risk premium =20%
  • 28. INVESTMENT PROPOSAL 1 AND INVESTMENT PROPOSAL 2 IS SELECTED FOR QUANTITATIVE ANALYSIS
  • 29. 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
  • 30. 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
  • 31. 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
  • 32. 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
  • 33. COMPARISON  sun tanning.xlsx
  • 34. 0 50000 100000 150000 200000 250000 300000 350000 1 2 3 4 TOTAL HOURS IN YEAR*NUMBEER OF MACHINES OPERATING profit INVESTMENT 2
  • 35. INVESTMENT 1 $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 $250,000.00 85,55 90,70 100, 100 OPERATING profit OPERATING profit
  • 36. COMPARISON BETWEEN CASH FLOWS OF INS1&INS2 $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 $250,000.00 1 2 3 4 CASH FLOWS INS2 YEAR CAH FLOW INS2
  • 37. CONCLUSION  INVESTMENT PROPOSAL 1 IS SELECTED ON THE GROUNDS OF QUALITATIVE AND QUANTITATIVE ANALYSIS
  • 38. THANK YOU