You have been asked by your 60 year old aunt Beatrice to help her assess a new venture. It is Friday night, and she needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that she will not be able to give you any more information than she already has (and you will be unable to contact her over the weekend), and therefore you may need to rely on your own assumptions and estimates for some of the analysis.
Beatrice lives in Amsterdam, and recently took early retirement (from a company she joined 35 years ago), and left the company with a lump sum (tax paid) payment of Euro 450,000. Surprisingly, rather than being depressed by her new state of independence, she is excitedly contemplating a new career as a retailer of a range of dried flowers and petals. She is confident that she can set up a business to import the products from India and sell them in the Netherlands. Her husband, who she met at business school, is pleased with her passion for this possible new venture, but concerned that it might turn into a financial disaster. He has suggested that she develop a financial plan to evaluate the venture and its viability.
After a couple of hours with Beatrice you have assembled the following information from her:
- IndiaPetal, an established supplier of dried flowers and petals, is prepared to give her exclusive rights to sell their products in the Netherlands for a five year period in exchange for an upfront payment;
- The company has an extensive range of products, covering single flowers, bunches, small bouquets, petals, etc, each of which is packed individually;
- The products retail in India for an average of Rs (India Rupees) 120 per pack, and IndiaPetal is prepared to sell to Beatrice at a 45% discount from this price;
- The packs will be shipped to the Netherlands in boxes of 40 packs;
- IndiaPetal would ship to Beatrice on receipt of payment for each order;
- Beatrice has found out that freight to Amsterdam from India by courier would cost on average Rs 1,500 per box and that the total time from her placing an order to receiving the goods in Amsterdam would be two weeks (including the factory time in India);
- Beatrice plans to order from India every two weeks (to maximise the shelf life in the Netherlands) and intends to maintain a minimum stock of four weeks worth of sales to ensure that she will always be able to supply a suitable range of products to customers;
- She will buy a special temperature controlled cupboard at a cost of € 3,500 to keep the products in good condition, and has found a small industrial room she can rent nearby at a cost of € 1,650 per month (payable monthly in advance, plus an initial three month deposit);
- Beatrice will sell the products throughout the Netherlands by internet only, and is planning to spend € 4,000 with a website designer to develop the site;
- She has already spent € 6,500 on a market study that told her that once established, demand would be about 2,000 “units” a month, although in the first year sales would start at only 200 units in the first month before building up slowly to the full level at the end of the first year;
- The study also indicated that sales would be dramatically above that average in November (5,000 units) due to Christmas;
- The above study assumed that a unit would consist of 10 packs and that the average selling price would be € 15 per unit (ignore any impact of sales tax in your calculations);
- Packaging and shipping in the Netherlands would average € 3.50 per unit, and Beatrice is not intending to charge that to the customer;
- All sales would be by credit card only, with the credit card company taking 0.5% per sale and remitting the monthly balance to Beatrice five days after the end of each calendar month;
- She believes that one person could run the operation at a total cost (including social charges) of € 5,000 per month;
- Beatrice believes that if necessary she could borrow up to an additional € 50,000 at 6% p.a.;
- Beatrice’s marginal tax rate on investment or earned income is 30%, payable one year in arrears; she has also told you that she can invest any available cash at an after tax 3% per annum.
Beatrice also has a friend, Keith, who runs a small chain of gift shops in the Amsterdam area. Keith is interested in the venture and has agreed that if Beatrice can package the products in wooden gift boxes, decorated with views of the Taj Mahal, he would buy fifty boxes (each containing 12 packs) from her per month (which would be in addition to the internet sales outlined above, and would start immediately). Keith would pay Beatrice € 40 each for these boxes. To do this Beatrice would need to buy in the wooden boxes and wrapping paper at a cost of € 5.50 per box and hire a part-time assistant specifically to pack and deliver the boxes, at an additional cost of € 1,000 per month.
Beatrice remembers discussions on discounted cash flow analysis at business school (although she admits that she did not fully understand it, unlike her husband who was a distinction student). She has asked you to prepare an analysis while she is away to help her with the decision, making clear any assumptions that you make; the analysis should not exceed 4,000 words (excluding the content of exhibits, headings, etc), or a total of 30 pages (everything included), and should include:
- A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate;
- A break even analysis;
- A Balance Sheet at start-up (to show the initial capital) and at the end of the first year;
- Monthly cash flow for the first year of operation;
- Annual cash flow thereafter;
- A clear explanation, in plain English, of how much cash the venture will need to get started;
- Any sensitivity analysis that you think would be helpful;
- The most that Beatrice could offer IndiaPetal as an upfront fee for the exclusive rights for the five year period which would leave her no better or worse off than if she did not undertake the venture, and the amount you suggest she should actually offer them;
- Conclusions and recommendations;
- A critical reflection of the analysis that Beatrice has asked you to prepare – what, if anything, would you do differently in a financial analysis of this opportunity, and why?
Beatrice has explained that she is going to be out of town for a wedding so will be unable to provide any assistance at all, but as she pointed out before leaving “you will find this easy with computers and the internet to help”.
Your report should demonstrate skills of critical reflection, effective communication and balanced judgement; note that this is not a market report.
The overall structure should be as follows:
1. Cover Page (1 page)
2. Table of Contents/List of Exhibits (1 page)
3. Executive Summary
4. Main Report (within the 4,000 word limit as above)
5. Exhibits (if any)
6. List of references.
The data in your answer should be clearly laid out in tabular format so that your approach and answer are both plainly evident.
Grading will be based on the following breakdown:
- Assumptions, estimates and sensitivity analysis: 20%
- Cash flow and DCF analysis: 25%
- Other financial details (break even, balance sheet, etc): 25%
- Critical reflection: 20%
- Referencing and presentation: 10%