Fabric Manufacturing Company

Business case

Revenues

The main source of revenue of DFI-Xpander is the sale of six types of fabric to clothes manufacturers. The fabrics will be used to make shirts and tops.

Expected Quantities

It is expected that each piece of clothing requires an average of 1 m² of fabric. DFI expects that manufacturers adhere progressively to DFI-Xpander and that the size of the orders grows every year. The company will go through an experimental period, selling only to national manufacturers in 2021 and 2022, to collect information on how well the product is received. In 2023, it plans to open to the worldwide market; therefore it expects to supply more manufacturers.

Expected Prices

The prices were based on the costs of production, as well as on the R&D costs. In 2023, as production grows, it is expected that the cost of production becomes cheaper, allowing the company to reduce the price of the fabric.

Raw Materials and Consumables

The raw materials and consumables include

• Natural fibers for each type of fabric: an average of 0.30€ / m² in case of cotton fibers, 4.50€ / m² in case of wool fibers (solid color), 4.00€ / m² in 2021 and 2022 and 4.50€ / m² from 2023 on,  in case of wool fibers (pattern) and 1.30€ / m2 in case of silk fibers.
• Dye to attribute color to the fabrics: an average of 1.30€ / m² in case of solid color and 2.60€ / m² in case of pattern
• Compound that attributes the expanding characteristic: an average of 5€ / m² in the first two years of production.

The cost of production of the compound will be reduced from 5€ to 4.5€ per m² in 2023, reducing the overall cost of production of each type of fabric by 0.5€.

Operating Expenses

The operating expenses were divided into the following categories:

• Cost of Goods Sold
• General and Administration
• Sales and Marketing
• Research and Development.

Cost of Goods Sold

• Subcontracting: while still producing to sell on a national basis, the company will use the factory that Dutch Fabric Innovations already owns (where it produces the stain repelling fabric). This will cost DFI-Xpander 27.000€ in 2021 and 55.000€ in 2022.
• Rent of the new factory: from 2023 on, DFI-Xpander will have its own factory and the rent will be of 35.000€ per year.

Other COGS include insurance for the new factory, the rent of the new offices, machinery maintenance, utilities, packing material, distribution and cleaning services.

General and Administration

• Communications: internet, telephone, and other communications’ services.
• Insurance for all workers.
• IT programmes: programmes, such as Microsoft Office.
• Accounting Services,
• Legal, Financial and Technological Advisory.
• Office materials and amenities, and Security.

Sales and Marketing

• Marketing and Design Services: marketing and design specialists hired to help the company stand out and grow; the value spent on these services is bigger in 2020, when the company is still trying to form its own Marketing team, decreasing afterwards.
• Communication Services: costs related with advertising; the value spent is bigger in 2020 and 2022, when the company is preparing to start selling abroad.

Research and Development

• Purchase of laboratory supplies needed for investigation. The needs are expected to decrease over the years.

Employees

DFI-Xpander company will have to hire the following employees categories:

The salary for each category is an average. The exceptions are the Executive Director, the Receptionist, the International Relations Manager and the Sales Manager (only in 2020) since there is only one employee for each of these functions.

Some categories have zero employees in 2020: since in this year there will be no production, it does not make sense to have workers for the categories related with the production of the fabrics. The same happens with the international relations manager (DFI-Xpander only goes international in 2022).

Apart from the salary, each worker receives prizes, as well as other subsidies that are not subject to Social Security, such as Food Subsidies. These prizes and subsidies, and even the salaries, are expected to stay constant in the first 4 years of activity.

The number of workers is not constant since the company will hire new employees through time.

Others

Investment and Operational Grants

Being the Netherlands a member of the European Union, DFI-Xpander expects to receive an EU-funded operational grant to for the investigation and developmnet of the new product and to encourage the entry in the market. The company expects to receive a grant of 400.000€ in 2020 and of 150.000€ in 2021.

Investment

DFI-Xpander will have a total investment of 469.800€. The first investment (178.720€) corresponds to 2020, period in which the company will not be operating yet. The other part of the investment will be made in 2022 and 2023, when the company intends to go international and will need more production capacity.

As previously said, DFI-Xpander will only build its own factory from 2023 onwards. Therefore, all the machinery necessary is only going to be bought in 2022.

Financing

Issued Capital

In 2020, DFI-Xpander will raise 100.000€ in exchange for shares as a way of financing the beginning of its activity. In the following two years, it repeated the process, raising 100.000€ in both years.

In 2024, however, it expects to buy back some of its shares, reducing the issued capital by 200.000€ with the goal of increasing distributable reserves to enable future dividends to be paid to the shareholders of the company.

Other Equity Instruments

In 2020, the shareholders decide to attribute more financing to the company through other equity instruments, with the value of 100.000€. Nevertheless, they reduced this exact financing by 50.000€ both in 2021 and 2022.

Feasibility Analysis

The 10-year Dutch Government Bonds were considered as the risk-free asset for this project. They have been presenting a decreasing behavior for some time, being around -0.2% at the moment. After such a decrease, it is expected that they start increasing and a rate of 1% was then considered as risk free rate. Following the same rationale for the Market Portfolio and for the Market Risk Premium, these were estimated to have the values of 8% and 7%, respectively.

As for the Beta, it was obtained from the estimation of the Beta of the respective industry, considering a group of 50 companies and reaching a value of 0.95. From this procedure, we also got a debt-to-equity ratio of around 36%, allowing us to establish an equity weight of 74%.

Finally, and after a careful research, we found that the Dutch interest rates were recorded at 3%.

Taking all of the above into consideration, we were able to get

• Cost of Equity = 7.65%
• Cost of Debt = 2.25%
• WACC = 6.25%
• Perpetuity growth = 3,53%