Final Assessment
You have been asked by your 58 year old aunt Nancy 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.
Nancy lives in Manchester, England, and was recently made redundant (from a company she joined 25 years ago), leaving the company with a lump sum (after tax) payment of £325,000. Surprisingly, rather than being depressed by her new state of independence, she is tired of the corporate life and excitedly contemplating a new career as a retailer of intricately carved wooden ornaments. She is confident that she can set up a business to import the carvings from the USA and sell them in the UK. 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 Nancy you have assembled the following information from her:
– ClearCut, an established supplier of carved wooden ornaments in Oregon, is prepared to give her exclusive rights to sell their products in the UK for a five year period in exchange for an upfront payment for those rights;
– The carvings sell in the USA for an average of $130 each, and ClearCut is prepared to sell them to Nancy at a 53% discount to this price;
– ClearCut would ship to Nancy on receipt of payment for each order;
– Nancy has found out that air freight from Oregon via air courier would cost on average $220 for a shipment of ten carvings, and that the time from her placing an order to receiving the goods in Manchester would be three weeks (including the preparation and packing time in Oregon);
– Nancy plans to order from Oregon monthly 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 racking costing £1,250 to store the carvings, and has found a small industrial room she can rent nearby at a cost of £350 per month (payable monthly in advance, plus an initial three month security deposit);
– Nancy will sell the carvings by internet only, and is planning to spend £3,000 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 375 carvings per month, although in the first year sales would start at only 35 in the first month before building up slowly to the full level at the end of the first year;
– The above study assumed an average selling price of £120 per carving (ignore any impact of sales taxes in your calculations);
– Packaging and shipping in the UK would average £8 per carving, and Nancy is not currently intending to charge that to the customer;
– All sales would be by credit card, with the credit card company taking 1% per sale and remitting the monthly total to Nancy one week after the end of each calendar month;
– She believes that one person could run the operation at a total cost (including employer’s social charges) of £23,000 per year;
– Nancy believes that if necessary she could borrow up to an additional £ 50,000 at 4% p.a.;
– Nancy’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.
Nancy also has a friend, Jeremy, who runs a small chain of gift shops in the Lake District. Jeremy is interested in the venture and has agreed that if Nancy would mount a carving on an engraved wooden plinth (with the name of Jeremy’s shop), he would buy fifty such mounted carvings from Nancy each month (which would be in addition to the internet sales outlined above, and would start immediately), at a price of £85 each. To do this Nancy would need to buy-in plinths costing £3 each and presentation cases costing £4.50 each, and purchase a small automated electric router costing £ 1,900. She would also hire a part-time assistant specifically to assemble these products at an additional cost of £700 per month.
Nancy 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 an 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 Statement 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 Nancy could offer Clear Cut as an upfront fee for the exclusive rights for the five year period (which would not include any carvings) 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 Nancy has asked you to prepare – what, if anything, would you do differently in a financial analysis of this opportunity, and why?
Erik has explained that he is going to be out of town for a wedding so will be unable to provide any assistance at all, but as he 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 or page 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 page limit as above)
5. Exhibits
6. List of references. Harvard style
The data in your answer should be clearly laid out in tabular format so that your approach and answer are both plainly evident.