Financial Management – Final Assessment You have been asked by your 59 year old


Financial Management – Final
Assessment
You have been asked by your 59 year old father-in-law Felix 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 should rely
on your own assumptions and estimates for some of the analysis if necessary.
Felix, who was educated in London, now lives in Zurich,
Switzerland, and recently took early retirement (from a chocolate firm he
joined 25 years ago), leaving the company with a lump sum (after tax) payment
of CHF 900,000. Surprisingly, rather than being depressed by his new state of
independence, he is excitedly contemplating a new career as a retailer of
natural pearls. He is confident that he can set up a business to import pearls
from Tahiti and sell them in Zurich. 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 Felix you have assembled the following
information from him: – Orohena Pearls (owned by a business school roommate of
Felix), an established supplier of Tahitian Pearls, located close to Pape’ete
in Tahiti, is prepared to give him exclusive rights to sell their products in
Switzerland for a six-year period in exchange for an upfront payment for those
rights; – Single, undrilled, pearls sell in Tahiti for an average of 14,800 XPF
each and Orohena Pearls (OP) is prepared to sell them to Felix at a 35%
discount to this price (XPF is the international code for CFP francs the
currency used in Tahiti and other parts of French Polynesia) – OP would ship to
Felix on receipt of payment for each order; – Felix has found out that air
freight (including insurance) from OP via courier would cost on average XPF
1,800 per pearl, and that the time from him placing an order to receiving the
goods in Zurich would be three weeks (including the preparation and packing
time in Tahiti); he would also have to pay the courier cost to OP on ordering;
– Felix plans to order from OP monthly and intends to maintain a minimum stock
of four weeks’ worth of sales to ensure that he will be able to supply a
suitable range of pearls to customers; – He will buy racking and a special safe
at a total cost of CHF 5,700 to store the pearls, and has found a small
commercial room nearby that he can rent for CHF 850 per month, payable monthly
in advance, plus a security deposit of three month’s rent (refundable in full
if there is no damage to the premises); – He will also install an alarm system
at an initial cost of CHF 5,500, plus a CHF 100 per month monitoring fee; –
Felix will sell the pearls by internet only, and is planning to spend CHF 8,000
with a website designer to develop the site; – He has already spent CHF 9,000
on a market study that told him that once established, demand would be about
250 pearls per month, although in the first year sales would start at only 30
in the first month before building up slowly to the full level at the end of
the first year, after which they would remain constant; – The above study
assumed an average selling price in Switzerland of CHF 270 per pearl (ignore
any impact of VAT/sales taxes in your calculations); – Packaging and shipping
within Switzerland would average CHF 15 per pearl, and Felix is not currently
intending to charge that to the customer; – All internet sales would be by
credit card, with the credit card company taking 1.2% per sale and remitting
the total monthly to Felix fifteen days after the end of each calendar month; –
Felix believes that two students could run the operation part time at a total
monthly cost to him (including employer’s social charges) of CHF 3,600 each; –
Felix believes that if necessary he could borrow up to an additional CHF 75,000
at 6% p.a.; – The effective overall marginal tax rate on income from a company
set up to undertake this activity would be 40%, payable one year in arrears;
Felix has also told you that he can invest any available cash at an after tax
4% per annum.
Felix also has a friend, Paula, who owns two jewellery shops in the
Zurich area. Paula is interested in the venture and has agreed that if Felix
can incorporate the pearls into pendants, she would give him a one year
contract to purchase 30 pendants per month. She would pay Felix CHF 170 cash
for each pendant (to be paid on delivery to Paula), and these sales would be in
addition to the internet sales outlined above (and would start immediately). To
do this Felix would need to purchase a small drill and jig (costing CHF 550) to
hold the pearl while drilling, as well as silver chains and clasps at a cost of
CHF 25 per set, plus CHF 7.50 for a presentation box for the pendant. He would
also hire an assistant specifically to make and deliver the pendants at an
additional cost of CHF 350 per month.
Felix remembers lectures on discounted cash flow analysis at
business school (although he admits that he does not remember them well, unlike
his wife who was a distinction student). He has asked you to prepare a
financial analysis while he is away to help him with the decision,
making clear any assumptions that you make; the analysis should not
exceed 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 for each further year;
– 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 Felix could offer OP as an upfront fee for the
exclusive rights for the six year period (which does not include any pearl
purchases) which would leave him no better or worse off than if he had not
undertaken the venture, and the amount you suggest he should actually offer
them;
– Conclusions and recommendations;
– A critical reflection of the method you have chosen to decide
whether the venture is attractive or not, and what, if anything, you would do
differently in any future financial analysis of this type, and why?
Felix 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 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 (within the 25 page limit as above) should be
as follows:
1. Cover Page (1 page)
2. Table of Contents/List of Exhibits (1 page)
3. Executive Summary
4. Main Report
5. Critical Reflection
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.
Submissions should be machine
readable in MS-Word format only; submit
only one file, and include any Excel
analysis as images, not embedded files.
– Assumptions, estimates and sensitivity analysis: 25%
– Cash flow and financial viability analysis: 25%
– Other financial details (P&L Statement, Balance Sheet, break
even, etc): 35%
– Critical reflection: 10%
– Referencing and presentation: 5%


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