Reference no: EM13728619 , Length: 3500 Words
You have been asked by your 60 year old aunt Viktoria 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.
Viktoria lives in Zurich, Switzerland, and recently took early retirement (from a company she joined 35 years ago), and left the company with a lump sum (tax paid) payment of CHF 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 herbal products. She is confident that she can set up a business to import the products from Romania and sell them in Switzerland. 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 Viktoria you have assembled the following information from her:
- RomanHerb, an established manufacturer of herbal products, is prepared to give her exclusive rights to sell their products in Switzerland for a five year period in exchange for an upfront payment;
- The products retail in Romania for an average of RON (Romanian New Leu) 60 per jar, and RomanHerb is prepared to sell to Viktoria at a 40% discount from this price;
- The jars weigh 250gm on average, and will be shipped to Switzerland in cartons of 40 jars;
- RomanHerb would ship to Viktoria on receipt of payment for each order;
- Viktoria has found out that freight to Zurich from Romania by courier would cost on average RON 150 per carton and that the total time from her placing an order to receiving the goods in Zurich would be two weeks (including the factory time in Romania);
- Viktoria plans to order from Romania every two weeks (to maximise the shelf life in Switzerland) and intends to maintain a minimum stock of four weeks worth of sales to ensure that she will always be able to supply a suitable range of products to customers;
- She will buy a special refrigerator at a cost of CHF 6,000 to keep the products in good condition, and has found a small industrial room she can rent nearby at a cost of CHF 1,550 per month (payable monthly in advance, plus an initial three month deposit);
- Viktoria will sell the products throughout Switzerland by internet only, and is planning to spend CHF 15,000 with a website designer to develop the site;
- She has already spent CHF 7,500 on a market study that told her that once established, demand would be about 1,500 jars a month, although in the first year sales would start at only 200 jars 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 CHF 25 per jar (ignore any impact of sales tax in your calculations);
- Packaging and shipping in Switzerland would average CHF 5 per jar, and Viktoria is not intending to charge that to the customer;
- All sales would be by credit card only, with the credit card company taking 0.5% per sale and remitting the monthly total to Viktoria five days after the end of each calendar month;
- She believes that one person could run the operation at a total cost (including social charges) of CHF 6,000 per month;
- Viktoria believes that if necessary she could borrow up to an additional CHF 50,000 at 6% p.a.;
- Viktoria'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 3% per annum.
Viktoria also has a friend, Julia, who runs a small chain of pharmacies in the Zurich area. Julia is interested in the venture and has agreed that if Viktoria can package the products in gift boxes, decorated with views of Romania, she would buy one hundred boxes (each containing 8 jars) from her per month (which would be in addition to the internet sales outlined above, and would start immediately). Julia would pay Viktoria CHF 135 each for these boxes. To do this Viktoria would need to buy in boxes and wrapping paper at a cost of CHF 12.50 per box and hire an assistant specifically to pack and deliver the boxes, at an additional cost of CHF 1,000 per month.
Viktoria remembers discussions on discounted cash flow analysis at business school (although she admits that she did not fully understand it, 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 3,000 words (excluding the content of exhibits, headings, etc), or a total of 20 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 contribution and break even analysis;
- Monthly cash flow in 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 Viktoria could offer RomanHerb as an upfront fee for the exclusive rights for the five year period which would leave her no better or worse off than if she did not undertake the venture, and the amount you suggest she should actually offer RomanHerb;
Your report should demonstrate skills of critical reflection, effective communication and balanced judgement; note that this is not a market report. The final assessment will account for 70% of your overall grade for this module. Submission is by the end of Sunday May 24th (Swiss time), despite any other dates that may be shown on the Syllabus.
Scripts that are excessively long (i.e. exceeding the word limit by more than 10%) will not be read beyond the point of the word limit; there is no minimum word limit.