Monkey Ranch

8 funding a monkey empire...

It’s now Dec. 31st of year 5 and things have gone even better than expected…

Selling 50 monkeys per month is simpler than peeling a banana—a feat you can now do with
record speed, behind your back, on the phone, while driving with your knees or while trying to
pull a monkey off the chandelier. Yep. Monkeys are your life. And monkeys have become THE
pet to have. School kids, rock stars, elderly in nursing homes, and your average Joe all want
monkeys. You could probably sell 100—even 200 monkeys a month right now! But you only
have room for 60 in your current space.

It’s time for some serious growth.

The place you’re renting has a fair amount of undeveloped land around it. The folks who own the
place stopped ranching long ago and the city has built up. While the owners aren’t willing to sell,
they’ve become very fond of the monkeys and appreciate the conscientious way you’ve cared for
the animals and the facilities.

One evening, they call you over for iced tea on the front porch. “Looks like you’ve just about
outgrown that old barn down there. I’m guessing you might be looking around for a new place
soon. And that’d be a real shame. It just wouldn’t be the same without the sound of all those
happy chattering monkeys. And so the Missus and I got to talking and we’d like you to stay.
We’re willing to write up one of those long-term leases with you. That way you can build
whatever you need for those critters right here.”

Perfect! You’d been dreading having to move. Everything you’d looked at had been enormously
expensive—so expensive that there had been no way you could consider moving forward with
your master plan: a much larger “cageless” habitat, with lots of room for happy, healthy monkeys
to run around and interact. You think the improvement will also be a good PR move. With the

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12/2010
increase in monkey pet popularity has come increasing scrutiny by animal advocates to ensure
what they perceive as appropriate treatment. You don’t want to be caught in unfavorable publicity
due to your current reasonable—but far from ideal—monkey accommodations.

The first phase of the facility you’ve planned could hold up to 200 monkeys. Once the facility is
built, no additional cages will need to be purchased, until further expansion is needed. The
cages you already have could potentially be used for overflow.

The habitat would be very durable. The zoo architect you’re working with claims that the habitat
should last a good 15 years before any significant repairs are needed.

The new building and facilities will cost you $275,000. But if you’re going to seize this
opportunity, you’re going to need to take out a loan. Your bank is willing to lend you the amount
you need at a 10% rate, to be repaid over the next five years.

The plans are already drawn up and bids taken, so the new facilities can be built within 6
months—allowing you to continue growing sales by 30% per year.

To check your plan, project forward 7 more years, to year 12 (two years past the point when you
will have paid off your loan).

 Use the historical data from years 1-5 (previous page) to project COGS and SG&A for
years 6-12:

 Assume that working capital intensity remains consistent, at:

o AR = 36 days of sales
o Inventory = 90 days of monkeys
o AP = 60 days of bananas

 Regardless of your decision to take out the bank loan in the morning, you still need to
buy 10 more cages at $200 each to get you through the next 6 months, based on your
forecasted sales growth rate. Keep in mind that you can continue to depreciate the cages
you’ve already bought.

 Depreciate the cost of the new facilities over a 15-year period. Assume a salvage value of
$68,750 at that point in time.

 For the bank loan, assume the following terms:

o Loan amount = $275,000.
o Loan taken on Jan 1, year 6.
o Repayment over five years with five equal annual payments made at the end of
each year.
o 10% interest rate, compounded annually.

Monkey Ranch 8: funding a monkey empire 2

 time to work those numbers....
Forecast the next 7 years, assuming you build the new facility with the
proceeds of the loan. Can you pay back the loan with your equity free
cash flows?

Under what sales growth might you default? Be specific.

The decision of whether or not to take on debt is the same

decision to acquire any asset in a business.

Should you take out the loan tomorrow morning?

wwhat
wh
h do you think?
Excel Topics

• Conditional formatting
o Use conditional formatting to check that your monkey capacity is not exceeded
by your projected growth rate.
o Also use conditional formatting to check that your cash balances are positive.

• Goal Seek
o Goal seek is one of the most powerful and useful tools in Excel. In the answer
key for this exercise, be sure to see how Goal Seek was used. Look in the right-
hand margin of the spreadsheet for a description.
o Goal seek is basically a way to run quick “what-if” scenarios in Excel without
creating an entire scenario analysis. For this exercise, the answer key uses goal
seek to determine the maximum loan amount the business could service given the
expense and sales growth assumptions. Certainly something you would want to
know if this was really your business.
o In conjunction with Goal Seek, the Excel function “Min” was used. You can use
Excel to quickly find the minimum and maximum values in a series of numbers.
In this example, the minimum ending cash balance (over the forecasted years)
was an intermediate step in the Goal Seek application above. Review the answer
key to see how this was used.

Monkey Ranch 8: funding a monkey empire 3