Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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ACC00716 Finance Session 1, 2019
Assessment 3: Business Case Studies 2
Due date: 19 May 2019, 11PM
This assignment has a 25% weighting in your overall mark for this unit and focuses on content from
Weeks 6, 7 and 8. The assignment will be marked out of 25 and marks will be allocated as indicated in
the ru
ic on page 4. Your total assignment submission will consist of a word document and a
spreadsheet.
The assignment is based on the case information below. While the company and financial data in the
case are fictitious1, the context is not. Many companies face similar investment decisions as well as
challenges and opportunities to run more environmentally and socially responsible businesses.
DuoLever Limited operates in the personal care (e.g. skin and hair care products) industry. All its
products are sold in plastic packaging and a significant proportion in multi-layer sachets (or pouches)2.
Managers at DuoLever are acutely aware of the increase in world production of plastic and the
environmental impact of plastic waste ending up in landfills, rivers and oceans. For example, it is
estimated that 8 million metric tons entered the ocean in 2010 and this annual amount is predicted
to more than double by 2025, accumulating as show in the following graph3:
To help develop a closed-loop system related to the company’s products, DuoLever has invested
around $50 million in soft plastic recycling research, development and pilot testing. The outcome is a
new and efficient method for recycling sachet waste. In fact, their recycling method is more energy
efficient than producing virgin sachet plastic, reducing energy usage by 83%. The output plastic is of
1 UniLever and its research and development in the area of multi-layer sachet recycling provides the inspiration for this case
ut all facts related to the financial analysis are fictitious.
2 While not necessary for attempting this case study, you will better understand the plastic packaging in this case context if
you go to https:
www.plasticpackagingfacts.org
log/multi-layer-pouch-packaging-a-sustainable-story-animated/ and watch
the video on multilayer plastic pouches. Although many improvements to this packaging have been made, as pointed out in
the video, there remains much to do in reducing the impacts of waste pouches on the environment.
3 Estimates from Jambeck, J.R., Andrady, A., Geyer, R., Narayan, R., Pe
yman, M., Siegler, T., Wilcox, C., Lavender Law,
K XXXXXXXXXXPlastic waste inputs from land into the ocean, Science, 347, p XXXXXXXXXXand graph reproduced from p. 770. If you
are interested, see see https:
jambeck.engr.uga.edu/landplasticinput for further details and an infographic.
https:
www.plasticpackagingfacts.org
log/multi-layer-pouch-packaging-a-sustainable-story-animated
https:
jambeck.engr.uga.edu/landplasticinput
Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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such high quality it can be used in food grade packaging applications. Cu
ently, no other recycling
method in the market can achieve this.
The company now faces a decision: should it (1) add production of recycled sachet plastic to the
company’s portfolio of businesses or (2) license use of the patented method? The CEO has asked you
to undertake a financial analysis of the options and present your recommendations in a short memo.
Option 1:
The recycling production option requires an upfront investment in plant and equipment of $20 million,
which will be depreciated to a zero book value on a straight-line basis over 5 years. The plant will
provide sufficient capacity to meet the company’s forecast plastic packaging needs over the period of
its life. After this, it is expected that the plant will have no salvage value and will be updated using new
and better technology. Financing for the plant and equipment will be via a new 5 year debt issue,
esulting in interest costs of $1.4 million payable at the end of each year.
Producing recycled plastic has several financial benefits for the company. First, sales revenue of the
company’s existing products, which will be packaged in the recycled plastic, is predicted to increase
due to consumer demand for environmentally responsible products. Excluding this benefit, the
company’s forecast sales revenue for the coming year is $200 million and this is expected to grow by
4% each year after that. The benefit of recycled packaging is expected to increase these sales forecasts
2% during the 5 year life of the project.
The second benefit is that the cost of plastic packaging for the company’s existing products will
decrease. The recycled plastic will be cheaper than buying virgin plastic due to lower energy costs and
avoiding a supplier margin. The reduced energy costs will shave 15% off total variable packaging costs,
cu
ently (without recycling) estimated at $22 million for the coming year and expected to grow by
3% per year after that. Avoiding a supplier margin will reduce total variable packaging costs by 10%.
However, the benefits of avoiding the cu
ent supplier margin will be offset by the need to pay a new
partner, Clean World Ltd, who will set up a plastic waste collection system to supply sufficient raw
material for the recycling plant. Apart from these changes, it is expected that variable costs and net
working capital will be equivalent to existing forecasts. However, an additional $2 million annually in
selling, administrative and general expenses directly related to the project (excluding depreciation)
will be incu
ed.
Option 2:
Option 2 involves licensing use of the patented recycling method to another company, Clean World
Ltd, which has shown interest in taking on the entire project, not just supply of raw material. Initial
negotiations between DuoLever and Clean World have reached some agreement on what the terms
of the a
angement would involve. Clean World would produce recycled plastic using DuoLever’s
method for the next 5 years and all output during that time would be supplied exclusively to DuoLever
for the same cost as DuoLever’s existing virgin plastic supply forecasts. This means that Clean World
would capture the energy savings associated with the new recycling method, along with a supplier
margin. The benefits for DuoLever would be no initial outlay for plant and equipment and locked in
packaging materials supply costs for the next 5 years. DuoLever would also retain the ability to market
the environmentally responsible characteristics of its recycled packaging and so retain the expected
Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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additional sales revenue benefits of Option 1. Annual selling, administrative and general expenses
would be just $1 million annually under Option 2, as no additional production administration would
e required.
Other information:
DuoLever has an 8% weighted average cost of capital and is subject to a 25% tax rate on its income.
Required:
Prepare (1) a spreadsheet financial analysis of the proposed options and (2) a memo to DuoLever’s
CEO that
iefly explains and justifies your chosen methods, inputs and any assumptions made,
summarises your findings, and presents your recommendations on the proposed options. Ensure you
not only address base case cash flows but also analyse potential uncertainty. Recommendations
should address the decision to be made, along with any further follow up or other matters the
company should consider prior to making a final decision.
Instructions:
Submit your spreadsheet separately in the provided spreadsheet link in the BCS2 section of the unit
site. By submitting the spreadsheet, you are confirming that it is entirely your own work. Save the
spreadsheet with your details in the file name using the following format (failure to do so could result
in your spreadsheet not being considered in marking):
Student ID_Full_name_ACC00716A3
For example: 13579246_Jennifer_Ha
ison_ACC00716A3
The memo will be submitted as a word document via a Turnitin assignment link in the BCS2 section of
the unit site and include your name, student ID, unit code (ACC00716), assessment number (A3) and
word count at the beginning of the document. The remainder of the document should be set up as a
formal memo and include an appendix with a screen shot(s) of your base case figures from the
spreadsheet. Within the memo body, you may provide tables and figures that are discussed in the text
and assist decision makers understand your methods, findings and their implications for decision
making. The word document submission must not exceed 1,000 words (excluding the screen shot
appendix and reference list).
This is an individual assessment exercise. The unit teaching team is very experienced at marking such
assessments and recognising the differences between individual and “group” work, as well as data,
facts, statements and ideas of others that have not been appropriately acknowledged. To avoid any
potential for academic misconduct investigation, ensure that every aspect of your work is your own
and that you acknowledge all sources you have directly drawn upon in your submitted work.
Quotations should be shown as such. We are not fussy about referencing style, just that you reference
when needed.
Assessment 3: Business Case Studies 2 ACC00716 S1 2019
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MARKING
CRITERIA Excellent Very Good Good Satisfactory Poor
Accurate
estimation of
elevant base case
cash flows and
decision criteria
(12 marks)
All relevant base case cash flows
have been accurately
incorporated into the analysis
and net cash flows and decision
criteria are co
ect. (12 marks)
Nearly all relevant base case
cash flows have been
accurately incorporated into
the analysis and decision
criteria are co
ect based on
your net cash flows (10
marks)
Most relevant base case cash
flows have been accurately
incorporated into the analysis
and decision criteria are
mostly co
ect based on your
net cash flows. (8 marks)
About half the relevant
ase case cash flows have
een accurately
incorporated into the
analysis and decision
criteria are mostly co
ect
ased on your net cash
flows. (6 marks)
Less than half the relevant
ase case cash flows have
een accurately incorporated
into the analysis and decision