The assignment is as follows.
You have been asked by your 56 year old Aunt Mary to assist her assess a new venture. It is Friday night and She needs the work done by Sunday so you know which she will not be capable to give you any more information than she already has, and thus that you might need to rely on your own estimates for some of the analysis.
Mary was recently made redundant (from a company she joined 35 years ago) and left the company with a lump total payment of $250,000. Surprisingly, rather than being depressed by her new state of independence, she is excitedly contemplating a new career as a retailer of well chocolate. She is confident that she can set up a business to trade in chocolate from Switzerland and sell it in USA. Her husband, whom she met at the business school, is pleased with her passion for her probable new venture, but concerned that it may turn in a financial disaster. She has suggested that she develops a financial plan to evaluate the venture and its viability.
After a couple of hours with Aunty Mary you have assembled the subsequent information from her:
- Swiss Choc SA (owned by a family friend) is made to give her exclusive rights to sell their products in the USA for a ten year period;
- The products retail in the Europe for an average of CHF 100 per kilogram;
- Swiss Choc would sell products to Mary at a 40% discount to their European price (f.o.b.);
- Swiss Choc would ship to Mary by DHL on receipt of payment for every order;
- Mary has found out that air freight from Switzerland would cost CHF 10 per kg and that shipment from factory to her house would take three days;
- Mary plans to order from Switzerland every two weeks and anticipates holding an average stock of two week worth of sales to ensure that she will be able supply a suitable range of products to customers;
- She will purchase a special refrigerator at a cost of $5,000 to be capable to keep the chocolate in her garage;
- Mary plans to sell by internet, and is planning to spend $1,000 to a website designer;
- She is not sure what price she will be capable to accomplish but is confident that it will be somewhere between $120 and $150 per kg;
- All sales would be by credit card, with the credit card company taking 2% per sale and remitting the balance to Mary once every month;
- Mary estimates that she will be capable to build sales up slowly in the first year, averaging 30kg a week for the year as a whole, and continuing at a steady 50kg a week from the beginning of the second year onwards;
- She thinks that one person could run the operation and hopes to do so herself, paying herself a salary of $5,000 per month in the first year, going up to $7,500 per month thereafter;
- Mary’s marginal tax rate is 30%.
Mary thinks that she could invest her redundancy lump sum at 5% per annum and therefore recommends using 5% as the discount rate for any discounted cash flow analysis.
Mary has asked you to make an analysis to aid her with her decision, making clear any assumptions that you make.
- A summary of all assumptions and estimates which you have made for your analysis, including justifications where appropriate;
- Monthly cash flow in the first year of operation;
- Annual cash flow thereafter;
- A sensitivity analysis that you think would be helpful;
- The amount which you believe Mary should be prepared to offer Swiss Choc as an upfront fee to obtain the exclusive rights for a ten year period;
- Conclusions and recommendations.
Mary has explained which she is going to be out of town for a wedding so will be not capable to make any assistance at all, but as she pointed out before leaving “you business school students have it a lot easier than we did in our day, what with computers and the internet to help”.
The overall structure must be as follows:
1. Cover Page
2. Table of Contents/List of Exhibits
3. Main Report
4. Exhibits (if any)
5. References/Bibliography