The Coffee Shop: An Economics Project

Kathmandu University

Department of Computer Science and Engineering

Dhulikhel, Kavre

 A Mini-Project Report On

“The Coffee Shop: An Economics Project”

[Code No: MGTS 301]

Submitted by:

Priyanshu Sharma

Ishan Panta

Abiral Adhikari

Samir Wagle

Manish Shivabhakti

Submitted to: 

Ramesh Ghimire Sir

                Department of Management Informatics and Communication

  Submission Date:

2024-01-07

Introduction:

Welcome to The Coffee Shop, an innovative and vibrant haven redefining the traditional café experience. Nestled in the heart of the city, our establishment offers more than just exceptional coffee; it provides a destination for those seeking a harmonious blend of tranquility and energy. Meticulously designed to cater to diverse preferences, The Coffee Shop beckons individuals, whether coffee connoisseurs, book enthusiasts, game lovers, or anyone in search of a serene spot to unwind.

Our venture into The Coffee Shop was not merely a business endeavor but also a mini project for our Engineering Economics course. We aimed to bridge the gap between theoretical concepts and practical implementations, making this venture an invaluable learning opportunity. Applying economic formulas became essential as we delved into comparing the best options among various alternatives.Before embarking on this venture, we engaged in crucial economic analyses, such as cost-benefit assessments, calculating rates of return, and determining the timeframe for recouping the invested capital. Understanding fundamental economic factors like interest rates, depreciation rates, and the post-use value of equipment played a pivotal role in evaluating the financial viability of The Coffee Shop.

In the broader context of project management, we recognized the significance of resource allocation, including materials, funds, labor, and time. Engineers leading such endeavors must navigate budget constraints, especially when faced with limited resources. This project has not only allowed us to explore the intricate economic considerations within the business realm but also provided practical insights into effective resource management.

Project Motivation:

The motivation behind The Coffee Shop stems from a desire to create more than just a conventional coffee spot. In our research and observations, we recognized a gap in the market for a space that seamlessly integrates the elegance and class of a premium café with the youthful vibrancy of a social hub. Our vision is to provide a haven for the community, where every sip of coffee is accompanied by a symphony of joy, peace, and the aroma of freshly brewed beans.

Key Elements of Motivation:

• Community Hub: 

The Coffee Shop envisions itself as a community hub, a space where individuals of all ages and backgrounds can gather, connect, and unwind. The café will feature both public areas for socializing and private rooms for a more intimate experience.

• Inclusive Atmosphere:

The café is designed to be inclusive and welcoming to everyone, fostering an environment that caters to the tastes and preferences of the diverse Gen Z audience. The inclusion of books, indoor games, and musical instruments aims to create an atmosphere where everyone can find something to enjoy.

• Affordability and Quality: 

Recognizing the need for a high-quality coffee experience that is also accessible, The Coffee Shop is committed to offering premium coffee at reasonable prices. We believe that exceptional coffee should be enjoyed by all, irrespective of budget constraints.

Inspired Design: 

The design of The Coffee Shop draws inspiration from classic and elegant elements, providing a timeless backdrop for contemporary interactions. The goal is to create an environment that resonates with peace and joy, encouraging patrons to linger and savor the moment.

Design Process:

• Problem Statement:

The lack of affordable, high-quality coffee shops with an elegant and classic vibe in Nepal, particularly catering to the middle class and students, and offering a unique environment with books, indoor games, and musical instruments.

• Development of Alternatives:

Establishing a coffee shop with quality coffee at reasonable prices.

Creating a unique and vibrant ambiance with elements like books, indoor games, and musical instruments.

Offering a combination of public spaces for socializing and private rooms for a cozy and intimate experience.

• Development of Prospective Outcomes:

Increased accessibility to high-quality coffee for the middle class and students.

The creation of a welcoming and distinctive space that attracts a diverse customer base.

Enhanced social and cultural experience through the inclusion of books, games, and music.

• Selection of a Decision Criterion:

The primary decision criterion is to create a coffee shop that is economically viable, socially inclusive, and culturally enriching. This involves balancing the affordability of products with the provision of a unique and pleasant environment.

Analysis and Comparisons of Alternatives:

Alternative 1: Quality Coffee at Reasonable Prices

Pros: Attracts a broader customer base, including students and middle-class individuals.

Cons: Potential challenges in maintaining quality while keeping prices affordable.

Alternative 2: Unique Ambiance with Books, Games, and Music

Pros: Differentiates the coffee shop, providing a unique selling proposition.

Cons: Requires careful curation and management to maintain a cohesive and enjoyable environment.

Alternative 3: Combination of Public and Private Spaces

Pros: Offers versatility to cater to different customer preferences.

Cons: Requires efficient space utilization and management to balance public and private areas.

Selection of the Preferred Alternative:

A combination of Alternative 1 and Alternative 2 is chosen to strike a balance between affordability and uniqueness. This will involve meticulous planning to ensure quality coffee at reasonable prices while creating a distinctive ambiance with books, games, and music.

Performance Monitoring and Post-evaluation of Results:

Ongoing monitoring will be essential to assess customer satisfaction, sales performance, and feedback. Regular evaluations will allow for adjustments to the business model, ensuring it remains aligned with the target audience’s preferences and needs.By combining quality coffee affordability with a unique and lively environment, the coffee shop aims to address the identified problem and create a successful and sustainable business model.

Cost Concepts and Design Economics

Initial investment cost: 

1. Shop Setup –  Nrs. 150,000 (per month)
   1. Area: 1500+ Sq. Ft.
   2. Rent: NPR 1,50,000 per month (Source: Hamrobazar)

2. Interior Decor – Nrs. 12,00,000
   1. Furniture
   2. Sofa
   3. Bar Counter
   4. Tables
   5. Chairs
   6. Lighting Fixtures
   7. Wall Art and Decorations
   8. Plants for Ambiance
   9. Café Signage

3. Equipments – Nrs.15,00,000
   1. Automatic Drip Coffee Makers
   2. High-Quality Espresso Machine
   3. Industrial Coffee Grinder
   4. Commercial Refrigerators (for beverages and perishables)
   5. Freezers (for ice cream and frozen items)
   6. Commercial Oven and Toasters
   7. Industrial Blender
   8. Display Cases for Pastries and Snacks
   9. Cash Register System
   10. Water Filtration System
   11. Air Conditioning and Ventilation System
   12. POS System (Point of Sale)
   13. Music System/Audio Equipment
   14. Security Cameras/Alarm System
   15. Lighting System

4. Initial inventory – Nrs. 10,00,000
5. Coffee Beans:

• Assorted varieties and roast levels

2. Snacks:
   • Pastries, cookies, sandwiches, granola bars
3. Coffee Cups and Lids:
   • Disposable and reusable cups with lids
4. Napkins and Utensils:
   • Paper napkins, disposable forks, knives, and spoons
5. Whipped Cream and Flavorings:
   • Whipped cream, assorted syrups
6. Milk and Dairy Alternatives:
   • Various types of milk, creamers
7. Sugar and Sweeteners:
   • White and brown sugar, artificial sweeteners, honey
8. Cleaning Supplies:
   • Dish soap, sanitizers, cleaning cloths, trash bags
9. Electricity and Kitchen Supplies:
   • Coffee grinders, blenders, ovens, toasters, refrigerators, kitchen utensils
10. Menu Display and Price Tags:
    • Display boards or digital screens, price tags
11. POS System Supplies:
    • Receipt paper rolls, printer ribbons, or ink cartridges
12. Miscellaneous Items:
    • Stirrers, straws, toppings, water bottles, or pitchers
13. Cleaning Supplies:
    • Mops, brooms, dustpans, cleaning solutions

Supplies Details 

Coffee

The cost of 10kg coffee beans is Rs.42000. On average, 1kg of coffee beans can produce 50 to 75 cups of coffee. With that, a 10 kg coffee bean packet can produce an average of  500  cups of coffee.With 60 cups of coffee consumed per day. 1800 cups of coffee are consumed per month. An average of 40 kg of coffee beans is consumed per month. Therefore,the cost of 10kg Coffee is Rs.42000, In similar ways, 40kg coffee costs Rs 1,68,000.

Milk

Milk on average, 250 ml of milk is required to make a cup of tea or coffee on average. The cost of 1 liter of milk is Rs100 so each cup of tea costs rs 25 of milk. With that average of 4500 milk. In a month 135000 rs worth of milk is used. 

Tea

Tea is much cheaper than coffee. 1 kg tea gives 250 cups of tea. It costs 1500-2000 rs per month for tea. 

Coffee Flavor: 7500 Rs for coffee flavor

Chocolates: Rs.5000

Dessert: 67500

Bread Items total cost:5000 per day * 30= 150000 

Sugar: For 150 cups of coffee and non-coffee items. An average of 25 gm of sugar is used. Rs. 3750 worth of sugar is used in tea and coffee. In bakery items and non-coffee. An additional 500 rs of sugar is used a day. Let’s round off to 4300

Dishwashing Equipments: 5000-7000

Merchandise: 50000

Soaps Sanitizers: 10000

Business Cards: 5000

Promo Coupons: Materials

Toilet Paper: 5000

Marketing: 25000

Gas: 5000

Electricity: Rs.7500

Itemized Costs:

Fixed Costs:

1. Rent – Rs.1800000 per year
2. Salary of Staff (per month)
   1. Baristas, Waiters and Receptionist – Rs.35,000*5 ( Per Month)
   2. Security Guard – Rs.40000 (Per Month)
   3. Cleaning Staffs – Rs.20000*2 (Per Month)
3. Business Property Insurance – Rs.1,60,000
4. General liability insurance – Rs.40,000
5. Workers compensation – Rs.80,000
6. Initial Equipment Cost – 
7. Marketing Cost(Per Month)-Rs.25,000
8. Merchandise: Rs.50,000

Variable Costs:

1. Coffee Beans (Assorted varieties) :Rs.168000
2. Milk:75000 
3. Tea(Per Month):2400
4. Snacks(Per Month) (Pastries, Cookies, Sandwiches): Rs.135000
5. Napkins(Per Month): Rs.5000
6. Whipped Cream(Per Month):Rs.2000
7. Syrups and Flavorings(Per Month):Rs.5000
8. Sugar, Sweeteners, and Creamers(Per Month):Rs.134000
9. Cleaning Supplies (Detergent, Sanitizers, etc.):Rs.10000
10. Electricity(Per Month):Rs.7500
11. Gas(Per Month): 5000
12. DishWashing Equipments(Per Month):Rs.6,500

Incremental Costs: 

1. Introduction of New Menu Items
2. Extended Opening Hours
3. Upgrades to Technology
4. Training Programs

Economic factors: 

SWOT(Strength, Weakness, Opportunities and Threats) Analysis

     A. Strengths

1. Unique Concept: The combination of books, indoor games, musical instruments, and a park-like ambiance sets the cafe apart, catering to a niche market.
2. Targeting Diverse Audiences: The cafe targets both the upper and higher middle class, as well as students, creating a broad customer base.
3. Affordable Quality Coffee: Providing quality coffee at reasonable prices addresses the gap in the market, making it accessible to the middle class.
4. Distinctive Environment: The elegant and classic vibe with peace, joy, and the aroma of coffee beans creates a memorable and distinctive atmosphere.
5. Limited Local Competition: With few similar establishments in Nepal, the cafe has the opportunity to become a trendsetter in the local market.

     

     B. Weakness

1. Initial Awareness: Introducing a unique concept may require initial marketing efforts to educate potential customers about the cafe’s offerings.
2. Operational Complexity: Balancing the diverse elements of books, games, and music, along with public and private spaces, may pose operational challenges.
3. Dependence on Local Economy: Economic fluctuations in the local area could impact the spending habits of the target audience.
4. Perception Challenges: Overcoming preconceptions about the affordability and accessibility of quality coffee in Nepal may take time.

     C. Opportunities:

1. Growing Coffee Culture: We are capitalizing on the rising trend of coffee consumption and the potential for the coffee culture to expand in Nepal.
2. Community Engagement: We are creating opportunities for community events, book clubs, and music sessions to foster engagement and loyalty.
3. Collaborations and Partnerships: We are exploring collaborations with local artists, musicians, and book clubs to enhance the cultural appeal.
4. Expanding Menu:We are introducing unique and locally inspired coffee blends and snacks to cater to diverse tastes.

     D. Threats:

1. Competition Entry: Potential entry of new competitors offering similar concepts or established brands expanding their offerings.(Himalayan Java, The Bakery Cafe)
2. Economic Downturn: Economic challenges affecting the disposable income of the target market, impacting spending on leisure activities.
3. Changing Consumer Preferences: Shifts in the preferences of Gen Z consumers affect their interest in traditional coffee shop offerings.
4. Supply Chain Disruptions: Challenges in sourcing quality coffee beans and other ingredients may impact the consistency of offerings.

Considerations:

1. Market Monitoring: Regularly monitor consumer trends, economic indicators, and local competition to adapt strategies accordingly.
2. Operational Efficiency: Streamlining operations to efficiently manage the diverse elements of the cafe while maintaining a cohesive atmosphere.
3. Community Building: Actively engage with the community through events and social media to build a loyal customer base.

Local economic conditions

1. Consumer spending habits
2. Competition
3. Potential market growth.

Money-Time Relationships and Equivalence: 

Capital Investment Calculation

Fixed Costs Calculations

Initial Investment (EOY 0)	Amount
Rent	1800000
Interior Décor	1200000
Equipments	1500000
Initial Inventory	1000000
Total	5500000

Salaries
Salaries of Workers	No of Workers	Salary Per month (NRs)	Total
Barista (Waiter and Receptionist also)	5	35000	175000
Security Guards	1	40000	40000
Cleaning Staff	2	20000	40000
Total	8	95000	255000
Annual Total	3315000

Insurance
Insurance	Annual Payment(NRs)
Business Property Insurance (@ 5%)	96000
General Liability Insurance	40000
Workers Compensation	80000
Total	216000
Total Capital Investment	9031000

No of employees = 8

Baristas, Waiter and Receptionist :5

Security Guard = 1

Cleaning staff = 2

Salaries  = 35,000 * 5 + 40,000 * 1 + 20,000*2 = 255,000 (per month)

Annual = 45,00,000

Value Added Tax (VAT): 13%

Service Type = Self-Service

Fixed Cost (Annual) = 6725000

Variable Cost (Annual) = 5735400

Total cost(Annual)  =12460400

Calculation of the Annual Revenue

Consumption Product	Daily Consumption Quantity	Average Selling Prices (NRs)	Average Cost Price	Daily Expense	Daily Revenue
Cups of Coffee	100	182.5			18250
Cups of Non-Coffee	40	232			9280
Cups of Tea	70	96			6720
Desserts	60	173.75			10425
Bread Items	120	68			8160
Total Daily Revenue	52835
Total Annual Revenue	17699725
Total Annual Revenue (after 13% taxation)	15398760.75

Total Annual Revenue 

We will be considering the categories of the menu rather than individual items. The cost would be an average of individual costs in a category.

Annual Revenue
EOY	Annual Revenue	Net Annual Revenue(CF)	PBP(I)	Discounted PBP(CF)	Discounted(I)
0	-5500000	-5500000	-5500000	-5500000	-5500000
1	13088946.64	628546.6375	-4871453.363	571406.0341	-4928593.966
2	14628822.71	2168422.713	-2703030.65	1792084.886	-3136509.08
3	15398760.75	2938360.75	235330.1	2207633.922	-928875.1577
4	15398760.75	2938360.75	3173690.85	2006939.929	1078064.771
5	15398760.75	2938360.75	6112051.6	1658628.04	2736692.812
6	18478512.9	6018112.9	12130164.5	3736774.624	6473467.436

Category	Cash Outflow (Yearly)	Total Cost EOY 5
Rent	1800000	10989180
Supplies	6989400	42670985.94
Maintenance	40000	200000
Insurance	216000	1080000
Salaries	3315000	20238406.5
Miscellaneous	100000	500000
Total Annual Cost	12460400	75678572.44

Cash flow information:

Yearly Cash Inflows 

Daily Revenue: Rs52835

Yearly Revenue: 17699725

Total Annual Revenue after 13% taxation: Rs 15398760

Yearly Cash Outflows 

Rent = 1,50,000 *12 = 18,00,000

Supplies = 6989400

Annual Insurance Costs =2,16,000

Annual Maintenance Cost = 40,000

Salaries = 33,15,000

Total Annual Cost (Till EOY 5) = 1,24,60,400

Market Value of Equipment at the end of 5 years = 5,00,000

Capital Investment Calculation

In the realm of cost concepts and design economics, the initial investment at the end of year zero (EOY 0) comprises various components essential for establishing and operationalizing a business space. The detailed breakdown of these elements is as follows:

Rent:Amount: NPR1,800,000

Interior Décor: NPR 1,200,000

Equipments: NPR 1,500,000

Initial Inventory: NPR 1,000,000

Total Initial Investment: NPR 5,500,000

This comprehensive investment encompasses expenditures related to leasing the premises, enhancing the aesthetic appeal through interior décor, procuring necessary equipment, and stocking the initial inventory. These components collectively contribute to the capital outlay required to initiate and establish the envisioned business venture.

Cash Flow Diagram

Payback Period

From the graph above, the payback period is 2.91 years, meaning the coffee shop takes 2.91 years to earn enough money to recover the initial investment.

Applications of Money-Time Relationship:

Internal Rate of Return:  

To calculate the Net Present Value (NPV) of a series of cash flows, we need to estimate the timing and amount of future cash flows and pick a discount rate equal to the minimum acceptable rate of return. The formula for NPV of a project with multiple cash flows is as follows:

NPV=t=0∑n​(1+i)tRt​​−C0​

where Rt​ is the net cash inflow-outflows during a single period t, i is the discount rate or return that could be earned in alternative investments, t is the number of periods, and C0​ is the initial investment

Using the given cash flows, we can calculate the NPV of the project as follows:

NPV=(1+0.1)1628546.64​+(1+0.1)22168422.71​+(1+0.1)32938360.75​+(1+0.1)42938360.75​+(1+0.1)52938360.75​+(1+0.1)66318112.90​−5500000.00

CALCULATION OF IRR

NPV = 0

IRR = 35%

Project Duration 

The time over which cash flows will be analyzed is considered to be 6 years.

Cost & Benefit Estimation Techniques:

The Benefit-Cost Ratio (BCR) is a ratio used in a cost-benefit analysis to summarize the overall relationship between the relative costs and benefits of a proposed project. It can be expressed in monetary or qualitative terms.

The formula for calculating the BCR is as follows:

BCR = Total Annual Benefits/ Total Annual Costs​

Using the values you provided, the BCR would be:

BCR = Total Annual Benefits/Total Annual Costs​

= NPR 17,699,725/ NPR 12,460,400

 ​= 1.42

Since the BCR is greater than 1, the project is expected to deliver a positive net present value to the firm and its investors. This suggests that the NPV of the project’s cash flows outweighs the NPV of the costs, and the project should be considered.

Depreciation

Sensitivity analysis: 

Percentage change	Capital Investment	Annual Revenue	Variable Cost	Time
-40%	8499623.456	-20127542.09	16291288.34	8318192.99
-20%	7399623.456	-6913959.319	11295455.9	7263266.458
-10%	6849623.456	-307167.931	8797539.677	6770586.477
0	6299623.456	6299623.456	6299623.456	6299623.456
10%	5749623.456	12906414.84	3801707.234	5854762.586
20%	5199623.456	19513206.23	1303791.013	5418759.943
40%	4099623.456	32726789.01	-3692041.43	4613000.595

Conclusion from Sensitivity Analysis: 

The sensitivity analysis conducted on Capital Investment, Annual Investment, Variable Cost and time reveals that Annual Revenue is the most sensitive to alterations in factors under consideration. Therefore, careful attention and strategic management should be directed toward those elements influencing annual revenue to ensure optimal performance and financial stability.

Conclusion

In a comprehensive examination of the financial prospects for ‘The Coffee Shop’ project, it emerges as a robust and promising venture, affirming its potential for sustainable profitability and a favorable return on investment. The stringent evaluation, guided by a Minimum Acceptable Rate of Return (MARR) of 10%, illuminates the project’s financial strength and resilience. The Internal Rate of Return (IRR) takes center stage as a pivotal metric, standing impressively at 35%. This figure significantly outpaces the MARR, portraying ‘The Coffee Shop’ as an investment that not only meets but surpasses anticipated returns, rendering it an appealing proposition for potential stakeholders. Beyond the compelling IRR, the project’s efficiency in recouping the initial investment is exemplified by a notably short payback period of approximately 2.91 years. This expedited recovery timeline not only underscores the financial stability of ‘The Coffee Shop’ but also positions it as a venture capable of delivering swift and tangible returns. The combination of a robust IRR, a swift payback period, and adherence to the stipulated MARR collectively paints a picture of a meticulously planned and financially sound project. ‘The Coffee Shop’ not only stands as a testament to its economic viability but also positions itself as a beacon of success in the competitive landscape of the coffee industry. With an all-encompassing financial strategy, the project is poised for not just profitability but sustained and thriving success in the dynamic market it aims to serve.