You have been asked by your 60 year old uncle Quentin to help him assess a new venture. It is Friday night, and he needs the work finished by Sunday in preparation for an early Monday morning meeting, so you know that he will not be able to give you any more information than he already has (and you will be unable to contact him over the weekend), and therefore you may need to rely on your own assumptions and estimates for some of the analysis.
Quentin lives in Chicago and recently took early retirement (from a company he joined 35 years ago), and left the company with a lump sum payment of $450,000.
Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of a range of flavoured gourmet coffee beans. He is confident that she can set up a business to import coffee from Vietnam and sell it in the USA. His wife, who he met at business school, is pleased with his passion for this possible new venture, but concerned that it might turn into a financial disaster. She has suggested that he develop a financial plan to evaluate the venture and its viability.
After a couple of hours with Uncle Quentin you have assembled the following information from him:
- Vietnam Coffee (VC, owned by a college friend) is prepared to give him exclusive rights to sell their products in the USA for a five year period in exchange for an upfront payment;
- The coffees retail in Vietnam for an average of VND 80,000 per kilogramme (VND = Vietnamese Dong);
- VC would sell products to Quentin at a 30% discount to the price in Vietnam;
- VC would ship to Quentin on receipt of payment for each order;
- Quentin has found out that air freight from Vietnam to the USA via air courier would average VND 60,000 per kg and that the time from him placing an order to receiving the goods in Chicago would be one week;
- Quentin plans to order from Vietnam every four weeks and intends to maintain a minimum stock of four weeks worth of sales to ensure that he will always be able to have sufficient inventory on hand;
- He will buy a special refrigerator at a cost of $9,000 to be able to keep the coffee in good condition, and has found a small industrial room that he can rent nearby at a rental of $300 per month (payable monthly in advance, plus an initial three month deposit);
- Quentin intends to sell by internet only, and has found a designer to set up his website at a cost of $3,500;
- He has already spent $6,000 on a market study that told him that once established, demand will be about 600 kg a month, although in the first year sales would start at only 100 kg in the first month before building up slowly to the full level at the end of the first year;
- The above study assumed a selling price of $13.00 per kg;
- Packaging and shipping to the customer within the USA would cost $1.50 per kg for which Quentin would not charge extra;
- All sales would be by credit card, with the credit card company taking a 1% per sale fee and remitting the monthly net balance to Quentin three days after the month end;
- He believes that one person could run the operation and hopes to do so himself,
paying himself $3,000 per month;
- The study also examined the potential for a deal to supply a small supermarket chain with ground coffee at a price of $12.50 per kg, and concluded that sales at that price could be in addition to the coffee beans, and would represent an extra 30% on top of
the bean volume;
- Based on the study Quentin is confident that he could achieve the sales of ground coffee, but it would need him to use special and better packaging, which would add $3 per kg. This would also require him to purchase special grinding and packaging equipment at a cost of $1,500. If he did this he would need to hire an assistant just to work on ground coffee at a monthly cost of $2,000;
- If necessary, Quentin believes that he could borrow up to $100,000 at 8% p.a.;
- Quentin's marginal tax rate on investment or earned income is 30%, payable one
year in arrears.
Quentin believes that he could invest his redundancy lump sum at 5% per annum and therefore suggests that you use 5% as the after tax discount rate for a discounted cash flow analysis.
Quentin has asked you to prepare an analysis to help him with his decision, making clear any assumptions that you make;
(excluding the content of exhibits, headings, etc), should include:
- A summary of all assumptions and estimates that you have made for your analysis,
including justifications where appropriate;
- Monthly cash flow in the first year of operation;
- Annual cash flow thereafter;
- A DCF analysis;
- Any sensitivity analysis that you think would be helpful;
- The amount which Quentin could offer VC as an upfront fee for the exclusive rights for the five year period which would leave him no better or worse off than if he did not undertake the venture;
- Conclusions and recommendations.
Quentin 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 business school students have it a lot easier now than we did in our day, with
computers and the internet to help".
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Solution file contains the MS word document with having complete analysis part in total 2139 Words count, it includes the references and Excel file which keeps all calculations and computations.