FINANCIAL MANAGEMENT
General Instructions - Please read carefully
1. You are required to complete the assessment outlined below and submit your completed final document through the RKC Online Campus by the end of Unit 6. Your grade will be based 100% on this final document, to which you will also receive written feedback.
2. In addition you must upload part of your draft of the above document by the end of Unit 3 (seeInterim Assignment, below). This draft will not be graded, butyou will receive feedback on your submission andit is an important way of monitoring your progress.
3. Please ask any questions about the interim assignment and final assessment in the Forum.
Final Assessment
The final assessment is as follows.
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 inAmsterdam, and recently took early retirement (from acompany she joined 35 years ago), and left the company with a lump sum (tax paid)payment ofEuro 450,000. Surprisingly, rather than being depressed by her new stateof independence, she is excitedly contemplating a new career as a retailer of a rangeofdried flowers and petals. She is confident that she can set up a business to import theproducts fromIndiaand sell them inthe Netherlands. Her husband, who she met atbusiness school, is pleased with her passion for this possible new venture, butconcerned that it might turn into a financial disaster. He has suggested that shedevelop a financial plan to evaluate the venture and its viability.
After a couple of hours with Beatrice you have assembled the following informationfrom her:
• IndiaPetal, an established supplier ofdried flowers and petals, is prepared to give herexclusive rights to sell their products in the Netherlands for a five year period in exchangefor 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 ofRs (India Rupees)120 per pack, andIndiaPetalis prepared to sell toBeatriceat a45% discount from this price;
• Thepacks will be shipped tothe Netherlands inboxes of40packs;
• IndiaPetalwould ship toBeatrice on receipt of payment for each order;
• Beatrice has found out that freight toAmsterdam fromIndia by courier would cost onaverageRs1,500 perbox and that the total time from her placing an order toreceiving the goods inAmsterdamwould be two weeks (including the factory time in India);
• Beatrice plans to order fromIndia every two weeks (to maximise the shelf life in the Netherlands) and intends to maintain a minimum stock of fourweeks worth of sales toensure that she will always be able to supply a suitable range of products tocustomers;
• She will buy a specialtemperature controlled cupboard at a cost of€3,500 to keep the products ingood 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 monthdeposit);
• Beatrice will sell the products throughoutthe Netherlands by internet only, and isplanning 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 onceestablished, demand would be about2,000"units" a month, although in the first yearsales would start at only 200units in the first month before building up slowly to thefull level at the end of the first year;
• The study also indicated that sales would be dramatically above that average inNovember(5,000units) due toChristmas;
• The above study assumedthat a unit would consist of 10 packs and that the average selling pricewould be€25 perunit (ignore anyimpact of sales tax in your calculations);
• Packaging and shipping inthe Netherlands would average€3.50 perunit, andBeatrice isnot intending to charge that to the customer;
• All sales would be by credit card only, with the credit card company taking 0.5% persale and remitting the monthlybalance toBeatrice five days after the end of eachcalendar month;
• She believes that one person could run the operation at a total cost (including socialcharges) of€5,000 per month;
• Beatrice believes that if necessary she could borrow up to an additional€ 50,000at 6% p.a.;
• Beatrice's marginal tax rate on investment or earned income is 30%, payable oneyear in arrears; she has also told you that she can invest any available cash at an aftertax 3% per annum.
Beatrice also has a friend, Keith, who runs a small chain ofgift shops in the Amsterdamarea. Keith is interested in the venture and has agreed that if Beatrice can package theproducts in wooden gift boxes, decorated with views ofthe Taj Mahal, he would buy fifty boxes (each containing 12packs) from her per month (which would be in addition to theinternet sales outlined above, and would start immediately). Keith would payBeatrice€40 each for these boxes. To do thisBeatrice would need to buy inthe woodenboxes andwrapping paper at a cost of€5.50 per box and hire a part-time assistant specifically topack and deliver the boxes, at an additional cost of€ 1,000 per month.
Beatrice remembers discussions on discounted cash flow analysis at business school (althoughshe admits thatshe did not fully understand it, unlikeher husband who was a distinction student). She has asked you to prepare an analysis whileshe is away to help herwith 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 thatBeatrice could offerIndiaPetalas an upfront fee for the exclusive rights for the five year period which would leave her no better or worse off than ifshe did not undertake the venture, and the amount you suggestshe should actually offer them;
Conclusions and recommendations;
• A critical reflection of the analysis thatBeatrice has asked you to prepare - what, if anything, would you do differently in a financial analysis of this opportunity, and why?
Beatrice has explained thatshe is going to be out of town for a wedding so will be unable to provide any assistance at all, but asshe 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.
Scripts that are excessively long (i.e. exceeding the word limit by more than 10%) will not be read beyond the point of the word limit; there is no minimum word limit. Do not put your name on the paper.
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.
Submissions should be machine readable and in MS-Word format only; submit only one file, and include any Excel analysis as images, not embedded files.
Interim Assignment
The Interim Assignment istomake a break even analysis for theventure,which you will see is part of the required content of your final assessment paper.
The Interim Assignmentis not graded, but you will receivefeedback onyour submission. You may, if you wish, make any changes to yourinterim analysis for your final assessment submission.