Pre-Feasibility Study
(Internet Café)
Small and Medium Enterprises Development Authority
Table of Contents
1 DISCLAIMER
This information memorandum is to introduce the subject matter and provide a
general idea and information on the subject. Although, the material included in
this document is based on data / information gathered from various reliable
sources; however, it is based upon certain assumptions which may differ from
case to case. The information has been provided on “as is where is basis”
without any warranties or assertions as to the correctness or soundness thereof.
Although, due care and diligence has been taken to compile this document, the
contained information may vary due to any change in any of the concerned
factors, and the actual results may differ substantially from the presented
information. SMEDA, its employees or agents do not assume any liability for any
financial or other loss resulting from this memorandum in consequence of
undertaking this activity. The contained information does not preclude any further
professional advice. The prospective user of this memorandum is encouraged to
carry out additional diligence and gather any information which is necessary for
making an informed decision; including taking professional advice from a
qualified consultant / technical expert before taking any decision to act upon the
information.
For more information on services offered by SMEDA, please contact our website:
www.smeda.org.pk
2 PURPOSE OF THE DOCUMENT
The objective of the pre-feasibility study is primarily to facilitate potential
entrepreneurs in project identification for investment. The project pre-feasibility
may form the basis of an important investment decision and in order to serve this
objective, the document / study covers various aspects of project concept
development, start-up, production, marketing, finance and business
management.
The purpose of this document is to facilitate potential investors in Internet Café
business by providing them with a general understanding of the business with the
intention of supporting potential investors in crucial investment decisions.
The need to come up with pre-feasibility reports for undocumented or minimally
documented sectors attains greater imminence as the research that precedes
such reports reveal certain thumb rules; best practices developed by existing
enterprises by trial and error, and certain industrial norms that become a guiding
source regarding various aspects of business set-up and it’s successful
management.
Apart from carefully studying the whole document one must consider critical
aspects provided later on, which form basis of any Investment Decision.
3 INTRODUCTION TO SMEDA
The Small and Medium Enterprises Development Authority (SMEDA) was
established in October 1998 with an objective to provide fresh impetus to the
economy through development of Small and Medium Enterprises (SMEs).
With a mission "to assist in employment generation and value addition to the
national income, through development of the SME sector, by helping increase
the number, scale and competitiveness of SMEs" , SMEDA has carried out
‘sectoral research’ to identify policy, access to finance, business development
services, strategic initiatives and institutional collaboration and networking
initiatives.
Preparation and dissemination of prefeasibility studies in key areas of investment
has been a successful hallmark of SME facilitation by SMEDA.
Concurrent to the prefeasibility studies, a broad spectrum of business
development services is also offered to the SMEs by SMEDA. These services
include identification of experts and consultants and delivery of need based
capacity building programs of different types in addition to business guidance
through help desk services.
4 INTRODUCTION TO SCHEME
‘Prime Minister’s Youth Business Loan’ program, for young entrepreneurs, with
an allocated budget of Rs. 5.0 Billion for the year 2013-14, is designed to provide
subsidised financing at 8% mark-up per annum for one hundred thousand
(100,000) beneficiaries, through designated financial institutions, initially through
the National Bank of Pakistan (NBP) and the First Women Bank Ltd. (FWBL).
Loans from Rs. 0.1 million to Rs. 2.0 million with tenure up to 8 years inclusive of
1 year grace period, and a debt: equity of 90: 10 will be disbursed to SME
beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwa,
Balochistan, Gilgit Baltistan, Azad Jammu & Kashmir and Federally Administered
Tribal Areas (FATA).
5 EXECUTIVE SUMMARY
In this pre-feasibility study, the Internet cafe is proposed to be located in a
commercial area which is in close proximity of students and business people of
middle income groups. A range of services are to be provided including but not
limited to internet surfing, audio/video chat, printing, scanning and fax services.
Furthermore, projected workings of the business have been based on 16 hours
of operations per day.
The total initial cost for setting up an internet cafe is estimated at Rs. 1.54 million
out of which capital cost is Rs. 1.24 million along with working capital of Rs. 0.30
million. The project will be financed through 90% debt and 10% equity. The NPV
is projected at around Rs. 6.01 million, with an IRR of 49% and payback period of
3.24 years. The legal business status of this project is proposed as sole
proprietorship.
6 BRIEF DESCRIPTION OF PROJECT & PRODUCT
In order to set-up an internet cafe, the entrepreneur needs to get a high
bandwidth internet connection from a renowned service provider. The internet
café is proposed to be established in a location that ensures high visibility and
easy access to students and people belonging to the business community. The
business can be established in any of the major cities of the country.
In this pre-feasibility study, the internet café will be established in rented
premises with an area of around 550 sq. ft, having good speed internet
connection along with electricity & telephone connections with proposed
investment of Rs. 1.54 million. The business is to provide internet, audio / video
chat, printing, scanning, fax and value added services to its clients primarily in
middle income group.
The internet café will remain operational for 16 hours a day. Initial sales volume
is calculated at Rs. 2.14 million in the first year, with an annual growth of 10%,
providing employment to 4 individuals.
The venture is proposed to be established as a sole proprietorship.
7 CRITICAL FACTORS
Some of the key factors for operating a successful internet café are:
• Background, experience and technical qualification of the entrepreneur
and/or key staff.
• Selection of an appropriate location, preferably close to middle income
housing societies and private student hostels.
• Availability of value added services such as video/audio chat, good printer,
scanner & fax machine.
• Uninterrupted power supply with good internet speed.
8 INSTALLED & OPERATIONAL CAPACITIES
The proposed project is based on 10 new computers installed in individual cabins
along with provision of printer, scanner and fax machine to fulfill the requirement
of the users. Additionally, two ACs will be installed in order to keep the
environment comfortable for users so that they can stay for extended hours, as
required, and spend time at the internet café.
Entrepreneur involved in this business would fare better if adequately familiar
with software / hardware installation, computer networking, troubleshooting and
internet usage.
9 POTENTIAL TARGET MARKETS / CITIES
An internet café should be easily accessible and should be near or in a
commercial area, preferably in close proximity of student hostels and business
people belonging primarily to middle income groups. The proposed business can
be opened in any of the cities across Pakistan.
10 PROJECT COST SUMMARY
A detailed financial model has been developed to analyze the commercial
viability of Internet Café under the ‘Prime Minister’s Youth Business Loan’
program. Various costs and revenue related assumptions along with results of
the analysis are outlined in this section.
The projected Income Statement, Cash Flow Statement and Balance Sheet are
attached as annexures.
10.1 Project Economics
Following table shows internal rate of return, payback period and net present
value:
Table 1 - Project Economics
Description
Details
Internal Rate of Return (IRR)
49%
Payback Period (Yrs)
3.24
Net Present Value (NPV)
6,009,309
Returns on investment and its profitability are highly dependent on the
entrepreneur’s practical knowledge about software / hardware installation,
computer networking and information technology.
10.2 Project Financing
Following table provides details of the equity required and variables related to
bank financing;
Table 2 - Project Financing
Description
Details
Total Equity (10%)
Rs. 154,500
Bank Loan (90%.)
Rs. 1,390,500
Markup to the Borrower (%age/annum)
8%
Tenure of the Loan (Years)
8
Grace Period (Year)
1
10.3 Project Cost
Following requirements have been identified for operations of the proposed
business.
Table 3 - Capital Investment for the Project
Capital Investment
Amount (Rs.)
Furniture & Fixtures
361,000
Internet Cafe Equipment
809,000
Pre-operating Cost
75,000
Total Capital Cost
1,245,000
Initial Working Capital
300,000
Total Project Cost
1,545,000
10.4 Space Requirement
Approximately 550 sq. ft. will be required for the Internet Cafe. It is recommended
that the area should be acquired on rent. Rent cost for the proposed areas will be
ranging between Rs. 20,000 to Rs. 30,000. Rent cost incorporated for financial
analysis is Rs. 25,000 per month. One month advance rent along with three
months of security deposit is also to be paid.
10.5 Office Equipment Details
The details of different equipment required for the project is given in the following
tables:
Table 4 – Internet Cafe Equipment Costs
Equipment
Quantity
Cost per
Unit (Rs.)
Total
Cost
(Rs.)
Computer
11
50,000
550,000
Hub
1
8,000
8,000
Computer Camera
11
2,000
22,000
Head Phones
11
1,000
11,000
UPS
1
150,000
150,000
Printer
2
20,000
40,000
Scanner
1
10,000
10,000
DSL Modem
1
8,000
8,000
Networking Cable (ft.)
500
20
10,000
Total Equipment
809,000
Additionally, some backup inventory of hub & DSL modem is recommended.
10.6 Furniture & Fixture
Details of furniture and fixture are as follows:
Table 5 – Furniture & Fixture Costs
Description
Quantity
Unit Cost
(Rs)
Total Cost
(Rs)
Computer Tables and Cabins
11
10,000
110,000
Computer Chairs
11
5,000
55,000
Telephone sets
2
1,500
3,000
Fax machine
1
15,000
15,000
Sign Board
1
25,000
25,000
Ceramic Tiles ( Sq. Ft)
550
60
33,000
Air Conditioners
2
60,000
120,000
Total Furniture & Fixture Cost
361,000
10.7 Human Resource Requirement
Internet café will run for 16 hours a day in two shifts (i.e. 8 hours per shift). Shift
timing will be:
Table 6 - Shift Schedules
Shift 1
9:00 am to 5:00 pm
Shift 2
5:00 pm to mid night
Human resource requirement for the proposed project is as under:
Table 7 - Staff Requirement (2 shifts)
Positions Number Salary/Month
(Rs.)
Annual Salary
(Rs.)
Network Administrator 1 20,000 240,000
Lab Assistant 2 15,000 360,000
Cashier 1 10,000 120,000
Total 4 720,000
Salaries of all employees are estimated to increase at 10% annually.
10.8 Revenue Generation
Expected revenue generation by the Internet Cafe during the first year is given in
the table below:
Table 8 - Expected Revenue Generation during Year-I
Service Category Expected Sales Amount (Rs.)
Internet Rate per Hour 50
Sales from Internet Usage 1,872,000
Sales from Printing 180,000
Sales from Scanning 54,000
Sales from Faxes 36,000
Total Sales for the first year 2,142,000
The annual sales growth rate is estimated at 10%.
Income Statement
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Sales from Internet Hours 1,872,000 2,217,600 2,613,600 3,066,624 3,584,117 4,174,442 4,846,991 5,612,305 6,173,536 6,790,889
Sales from Printing 180,000 198,000 217,800 239,580 263,538 289,892 318,881 350,769 385,846 424,431
Sales from Scanning 54,000 59,400 65,340 71,874 79,061 86,968 95,664 105,231 115,754 127,329
Sales from Faxes 36,000 39,600 43,560 47,916 52,708 57,978 63,776 70,154 77,169 84,886
Total Sales 2,142,000 2,514,600 2,940,300 3,425,994 3,979,424 4,609,280 5,325,312 6,138,459 6,752,305 7,427,535
Cost of sales
Internet Connection 60,000 66,000 72,600 79,860 87,846 96,631 106,294 116,923 128,615 141,477
Printing Charges 54,000 59,400 65,340 71,874 79,061 86,968 95,664 105,231 115,754 127,329
Fax Charges 10,800 11,880 13,068 14,375 15,812 17,394 19,133 21,046 23,151 25,466
Electricity Expense 300,000 330,000 363,000 399,300 439,230 483,153 531,468 584,615 643,077 707,384
Total cost of sales 424,800 467,280 514,008 565,409 621,950 684,145 752,559 827,815 910,597 1,001,656
Gross Profit 1,717,200 2,047,320 2,426,292 2,860,585 3,357,474 3,925,135 4,572,753 5,310,644 5,841,708 6,425,879
General administration & selling expenses
Administration expense 720,000 792,000 871,200 958,320 1,054,152 1,159,567 1,275,524 1,403,076 1,543,384 1,697,722
Rent expense 300,000 330,000 363,000 399,300 439,230 483,153 531,468 584,615 643,077 707,384
Printing & Stationary 60,000 63,000 66,150 69,458 72,930 76,577 80,406 84,426 88,647 93,080
Entertainment 18,000 18,900 19,845 20,837 21,879 22,973 24,122 25,328 26,594 27,924
Promotional expense 25,000 22,500 20,250 18,225 16,403 14,762 13,286 11,957 10,762 9,686
Depreciation expense 341,867 341,867 341,867 384,373 384,373 404,320 453,527 453,527 453,527 510,489
Amortization of pre-operating costs 15,000 15,000 15,000 15,000 15,000 - - - - -
Janitorial Expenses 60,000 66,000 72,600 79,860 87,846 96,631 106,294 116,923 128,615 141,477
Miscellaneous expense 36,000 39,600 43,560 47,916 52,708 57,978 63,776 70,154 77,169 84,886
Subtotal 1,575,867 1,688,867 1,813,472 1,993,289 2,144,520 2,315,962 2,548,402 2,750,006 2,971,775 3,272,648
Operating Income 141,333 358,453 612,820 867,297 1,212,954 1,609,173 2,024,351 2,560,638 2,869,933 3,153,231
Earnings Before Interest & Taxes 141,333 358,453 612,820 867,297 1,212,954 1,609,173 2,024,351 2,560,638 2,869,933 3,153,231
Interest expense on long term debt (Project Loan) 115,411 105,660 92,844 78,964 63,932 47,652 30,022 10,928 - -
Subtotal 115,411 105,660 92,844 78,964 63,932 47,652 30,022 10,928 - -
Earnings Before Tax 25,923 252,794 519,977 788,333 1,149,022 1,561,521 1,994,329 2,549,710 2,869,933 3,153,231
Tax - - 11,998 40,750 94,853 159,804 246,366 359,927 439,983 510,808
NET PROFIT/(LOSS) AFTER TAX 25,923 252,794 507,979 747,583 1,054,169 1,401,717 1,747,964 2,189,783 2,429,950 2,642,424
11 ANNEXUREIncome Statement
Balance Sheet
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Current assets
Cash & Bank 2 75,000 6 55,289 1 ,107,788 1 ,814,378 2 ,817,648 4 ,166,243 5 ,915,639 8 ,129,016 10,878,237 14,196,338 1 7,919,007
Pre-paid building rent 2 5,000 2 7,500 3 0,250 3 3,275 3 6,603 4 0,263 4 4,289 4 8,718 53,590 58,949 -
Total Current Assets 3 00,000 6 82,789 1 ,138,038 1 ,847,653 2 ,854,251 4 ,206,506 5 ,959,928 8 ,177,734 10,931,827 14,255,287 1 7,919,007
Fixed assets
Furniture & fixtures 3 61,000 2 88,800 2 16,600 1 44,400 7 2,200 4 60,738 3 68,590 2 76,443 184,295 92,148 -
Cafe equipment 8 09,000 5 39,333 2 69,667 9 36,519 6 24,346 3 12,173 1 ,084,137 7 22,758 361,379 1,255,025 8 36,683
Total Fixed Assets 1 ,170,000 8 28,133 4 86,267 1 ,080,919 6 96,546 7 72,911 1 ,452,727 9 99,201 545,674 1,347,172 8 36,683
Intangible assets
Total Intangible Assets 7 5,000 6 0,000 4 5,000 3 0,000 1 5,000 - - - - - -
TOTAL ASSETS 1,545,000 1,570,923 1,669,304 2,958,572 3,565,797 4,979,416 7,412,655 9,176,935 11,477,501 15,602,459 18,755,690
Current liabilities
Total Current Liabilities - - - - - - - - - - -
Other liabilities
Deferred tax - - 1 1,998 5 2,747 1 47,601 3 07,404 5 53,770 913,697 1,353,680 1 ,864,488
Long term debt (Project Loan) 1 ,390,500 1 ,390,500 1 ,236,088 1 ,068,860 8 87,752 6 91,613 4 79,194 2 49,144 - - -
Long term debt (Working Capital Loan) - - - - - - - - - - -
Total Long Term Liabilities 1 ,390,500 1 ,390,500 1 ,236,088 1 ,080,858 9 40,500 8 39,213 7 86,598 8 02,914 913,697 1,353,680 1 ,864,488
Shareholders' equity
Paid-up capital 1 54,500 1 54,500 1 54,500 1 ,091,019 1 ,091,019 1 ,551,756 2 ,635,894 2 ,635,894 2,635,894 3,890,918 3 ,890,918
Retained earnings 2 5,923 2 78,716 7 86,695 1 ,534,278 2 ,588,447 3 ,990,164 5 ,738,127 7,927,910 10,357,860 1 3,000,284
Total Equity 1 54,500 1 80,423 4 33,216 1 ,877,714 2 ,625,297 4 ,140,203 6 ,626,057 8 ,374,021 10,563,804 14,248,778 1 6,891,202
TOTAL CAPITAL AND LIABILITIES 1,545,000 1,570,923 1,669,304 2,958,572 3,565,797 4,979,416 7,412,655 9,176,935 11,477,501 15,602,459 18,755,690
Liabilities & Shareholders' Equity
Assets
11.2 Balance Sheet
Cash Flow Statement
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Operating activities
Net profit 25,923 252,794 507,979 747,583 1,054,169 1,401,717 1,747,964 2,189,783 2,429,950 2,642,424
Add: depreciation expense 341,867 341,867 341,867 384,373 384,373 404,320 453,527 453,527 453,527 510,489
amortization of pre-operating costs 15,000 15,000 15,000 15,000 15,000 - - - - -
Deferred income tax - - 11,998 40,750 94,853 159,804 246,366 359,927 439,983 510,808
Pre-paid building rent (25,000) (2,500) (2,750) (3,025) (3,328) (3,660) (4,026) (4,429) (4,872) (5,359) 5 8,949
Cash provided by operations (25,000) 380,289 606,910 873,818 1,184,378 1,544,734 1,961,815 2,443,427 2,998,365 3,318,101 3,722,669
Financing activities
Project Loan - principal repayment - (154,412) (167,228) (181,108) (196,140) (212,419) (230,050) (249,144) - -
Additions to Project Loan 1,390,500 - - - - - - - - - -
Issuance of shares 154,500 - - 936,519 - 4 60,738 1,084,137 - - 1,255,025 -
Cash provided by / (used for) financing activities 1,545,000 - (154,412) 769,291 (181,108) 2 64,598 871,718 (230,050) (249,144) 1,255,025 -
Investing activities
Capital expenditure (1,245,000) - - (936,519) - (460,738) (1,084,137) - - (1,255,025) -
Cash (used for) / provided by investing activities (1,245,000) - - (936,519) - (460,738) (1,084,137) - - (1,255,025) -
NET CASH 275,000 380,289 452,498 706,590 1,003,270 1,348,595 1,749,396 2,213,377 2,749,221 3,318,101 3,722,669
11.3 Cash Flow Statement
11.4 Useful Project Management Tips
Marketing
• Ads & P.O.S. Promotion: Business promotion and dissemination through
banners along with product brochures from good quality service providers is
highly recommended.
• Price - Bulk Discounts, Cost plus Introductory Discounts: Price during
introductory phase may be lower and used as promotional tool. Price cost
estimates should be carefully documented before price setting.
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