Case Solution for Hope Medicals A Retail Pharmacy Treading between Brick and Click

HOPE MEDICALS: A RETAIL PHARMACY TREADING BETWEEN
BRICK AND CLICK CASE STUDY SOLUTION




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SYNOPSIS
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Hope Medicals pharmacy owner, Shiva Aruguman, was considering entering the online pharmacy market.
Hope Medicals was a local pharmacy in Madurai, India’s Tamil Nadu state, and Aruguman was at a
strategic crossroads—he had to decide whether to expand into the online pharmacy market. With the
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challenges (financial and non-financial) of integrating the “brick” and “click” modes of his pharmacy
business, Aruguman had to conduct an analysis based on capital budgeting and run a Monte Carlo
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simulation to determine the potential profitability and risks of such a venture.
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OBJECTIVES

• concept of capital budgeting;
• application of Monte Carlo simulation;
• application of capital budgeting tools—net present value (NPV), internal rate of return (IRR), and
profitability index (PI); and
• key factors in technology integration in the pharmaceutical industry.




The Case Solution Starts From page 5

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ASSIGNMENT QUESTIONS

1. Estimate the project’s cash flows and terminal value.
2. Is the project financially viable?
3. Explain the concept of a Monte Carlo simulation and how Arumugan can make use of it to assess the
project’s risks.
4. What are the challenges in assessing the financial viability of such projects?
5. What are the key factors for technology integration for a small to medium-sized enterprise in the
pharmacy business?




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,ANALYSIS

1. Estimate the project’s cash flows and terminal value.

The future cash flows are estimated for the next ten years, after which perpetual growth at an annual rate
of 10 per cent is assumed. The initial sales estimate provided was ₹350,000, and the sales growth rates are
25 per cent per year for the first five years, 20 per cent for years 6–8, and 15 per cent for years 9–10. Since
the gross margin is 30 per cent, the cost of goods sold is taken to be 70 per cent of sales. Regarding operating
costs, expenses such as fuel (3 per cent), packaging materials (2 per cent), payment gateway charges (2 per
cent), advertisements (1 per cent), and shipping service charges (3 per cent) are proportional to the sales.
Other expenses such as salary costs (5 per cent), app maintenance costs (3 per cent), rent (5 per cent),
utilities (5 per cent), insurance (2 per cent), and other maintenance costs (2 per cent) will grow at their
respective rate year on year. A straight-line depreciation of 10 per cent is assumed for the fixed assets
valued at ₹150,000. The initial increase in working capital is ₹60,000, and a 5 per cent annual growth rate
is used.




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The formula to calculate the total operating cash flow is:




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Operating cash flow = Annual sales revenue – COGS – Operating expenses – Tax + Depreciation –



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Increase in working capital

Beyond the estimation period of ten years, a perpetual growth rate is assumed and the terminal value is
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calculated using the following formula:
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, EXHIBIT -1: ESTIMATED CASH FLOWS AND TERMINAL VALUE OF THE PROJECT (IN ₹)




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The Case Solution Starts From page 5