Financial Management, November 2018 – Final Assessment:
You have been asked by your 57 year old aunt Chiara 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 should rely on your own assumptions and estimates for some of the analysis if necessary.
Chiara lives in Milan, Italy, and recently took early retirement (from a bank she joined 30 years ago), leaving the company with a lump sum (after tax) payment of €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 coated nuts (almonds, brazil, macadamia, pecan, pistachio, etc). She is confident that she can set up a business to import the nuts from the USA and sell them in Italy. 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 Chiara you have assembled the following information from her: – BestNuts Inc, an established US producer of coated nuts with unusual and innovative flavours (owned by one of Chiara’s university colleagues), is prepared to give her exclusive rights to sell their products in Italy for a four-year period in exchange for an upfront payment for those rights;
- The nuts retail in the USA for an average of $27.50 per pound (lb), and BestNuts is prepared to set the selling price to Chiara at a 40% discount to this price;
- BestNuts would ship to Chiara on receipt of payment for each order;
- Chiara has found out that air freight from the USA via courier would cost on average $2.70 per lb and that the time from her placing an order, to receiving the goods in Italy, would be three weeks (including the preparation and packing time in the USA), and she would have to pay that amount to BestNuts;
- Chiara plans to order from the USA monthly (to maximise the shelf life in Italy) and intends to maintain a minimum stock of four weeks’ worth of sales to ensure that she will be able to supply a suitable range of products to customers;
- She will buy a special refrigerator at a cost of €4,750 to keep the nuts in good condition, and has found a small industrial room she can rent nearby at a rental cost of €550 per month (payable monthly in advance, plus an initial three month security deposit, refundable at the end of the tenancy if there is no damage);
- Chiara will sell the nuts throughout Italy by internet, and is planning to spend €8,000 with a website designer to develop the site;
- She has already spent €5,000 on a market study that told her that once established, demand would be about 200 kilogram (kg) a month, although in the first year sales would start at only 40 kg in the first month before building up slowly to the full level at the end of the first year when they would remain constant;
- The above study assumed an average selling price in Italy of €90 per kg of nuts (ignore any impact of sales taxes in your calculations);
- Packaging and shipping in Italy would average €3.00 per kg, and Chiara is not planning to charge that to the customer;
- All internet sales would be by credit card, with the credit card company taking 1.5% per sale and remitting the monthly total to Chiara fifteen days after the end of each calendar month;
- Chiara believes that two part-time people could run the nuts operation, at a total cost to
Chiara (including employer’s social charges) of €11,500 per year each;
- She believes that if necessary she could borrow up to an additional €50,000 at 8% p.a.; – Chiara’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 4% per annum.
Chiara also has a friend, Marco, who runs a small chain of delicatessens in the Milan area. Marco is interested in the venture and has agreed that if Chiara can package the nuts in boxes decorated with picture of American landmarks, he will buy fifty boxes, each containing 600 grammes (gm) of nuts, from her per month. He would pay Chiara €25 cash for each box (to be paid one month after delivery to Marco), and these sales would be in addition to the internet sales outlined above (and would start immediately). To do this Chiara would need to buy in boxes and decorative paper at a cost of €0.80 per box, and hire an assistant specifically to pack and deliver the boxes at an additional cost of €300 per month.
Chiara remembers lectures on discounted cash flow analysis at business school (although she admits that she did not fully understand them, unlike her husband who was a distinction student). She has asked you to prepare a financial analysis while she is away to help her with the decision, making clear any assumptions that you make; the analysis should not exceed 25 pages (everything included), and should include:
The analysis should not exceed a total of 25 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 Profit and Loss Statement for the first year of operations and Balance Sheet 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 Chiara could offer BestNuts as an upfront fee for the exclusive rights for the four year period (which does not include any nut purchases) which would leave her no better or worse off than if she had not undertaken the venture, and the amount you suggest she should actually offer them; – Conclusions and recommendations;
- A critical reflection of the analysis that Chiara has asked you to prepare; how have you evaluated the attractiveness of the venture and what, if anything, would you do differently in a financial analysis of this opportunity, and why?
Chiara 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 judgment; note that this is not a market report. Scripts that are excessively long (i.e. exceeding the page limit) will not be read beyond the point of the limit; there is no minimum word limit. Do not put your name on the paper.
The overall structure (within the 25 page limit as above) should be as follows:
- Cover Page (1 page)
- Table of Contents/List of Exhibits (1 page)
- Executive Summary
- Main Report
- 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.
Submissions should be machine readable in MS-Word format only; submit only one file, and include any Excel analysis as images, not embedded files.
Grading will be based on the following breakdown:
- Assumptions, estimates and sensitivity analysis: 25%
- Cash flow and financial viability analysis: 25%
- Other financial details (P&L Statement, Balance Sheet, break even, etc): 30%
- Critical reflection: 10%
- Referencing and presentation: 10%