Final Assessment
You have been asked by your 55 year old aunt Yvonne to help her assess a new venture that she is considering. 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 where appropriate.
Yvonne lives in Lyons, France and recently took early retirement (from a leading retailer that 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 (cashews and others). She is confident that she can set up a business to import the nuts from Vietnam and sell them in France.
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 Yvonne you have assembled the following information:
- Hoang Cashews, an established Vietnamese producer of coated nuts with unusual and innovative flavours (owned by one of Yvonne's university colleagues), is prepared to give her exclusive rights to sell their products in France for a five-year period in exchange for an upfront payment for those rights (that payment would be for the rights only and does not include any nuts);
- The nuts retail in Vietnam for an average of VND (Vietnamese Dong) 220,000 per kilogram (kg), and Hoang Cashews is prepared to set the selling price to Yvonne at a 40% discount to this price;
- Hoang Cashews would ship to Yvonne on receipt of payment for each order;
- Yvonne's husband works for DHL and can organise shipment by air from Vietnam to Lyons at a reduced price of VND 720,000 per 10 kg shipment; the time from her placing an order, to receiving the goods in Lyons, would be two weeks (including the preparation and packing time in Vietnam);
- Yvonne plans to order from Vietnam monthly (to maximise the shelf life in France) and intends to maintain a minimum stock of six 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 €3,500 to keep the nuts in good condition, and has found a small industrial room she can rent nearby at a cost of €550 per month (payable monthly in advance, plus an initial three month security deposit);
- Yvonne will sell the nuts throughout France by internet, and is planning to spend €8,000 with a website designer to develop the site;
- She has already spent €4,500 on a market study that told her that once established, demand would be about 800 kilogram (kg) a month, although in the first year sales would start at only 50 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 France of €22.50 per kg of nuts (ignore any impact of sales taxes in your calculations);
- Packaging and shipping in France would average €4.75 per kg, and Yvonne is not planning to charge that to the customer;
- All internet sales would be by credit card, with the credit card company taking 1.25% per sale and remitting the monthly total to Yvonne two weeks after the end of each calendar month;
- Yvonne plans to hire two part-time students to run the nuts operation at a cost per person (including employer's social charges) of €17,500 per year;
- She believes that if necessary she could borrow up to an additional €50,000 at 4% p.a.;
- Yvonne'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 2% per annum.
Yvonne also has a friend, Albert, who runs a small travel agency in the Lyons area.
Albert is interested in the venture and has agreed that if Yvonne can package the nuts in wooden boxes decorated with a picture of Vietnam, he will buy twenty boxes, each containing 500 grams (gm) of nuts, from her per month.
He would pay Yvonne €15 each box, to be paid one month after delivery to Gustav, and these sales would be in addition to the internet sales outlined above (and would start immediately).
To do this Yvonne would need to buy in boxes and decorative paper at a cost of €2.20 per box, and hire an assistant specifically to pack and deliver the boxes at an additional cost of €200 per month.
Yvonne remembers lectures on discounted cash flow analysis at business school. 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 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 Yvonne could offer Hoang Cashews as an upfront fee for the exclusive rights for the five 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 Yvonne has asked you to prepare; how you have evaluated the attractiveness of the venture and what, if anything, you could do differently in a financial analysis of this opportunity, and why?
Yvonne 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 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 page limit as above)
5. 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.